Chunghwa Telecom Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's 4th Quarter 2023 Operating Results. During the presentation, all lines will be in 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. Twir under the IR calendar section. And now, I would like to turn it over to Ms. Angela Cai, the Director of Investor Relations.

Operator

Thank you. Ms. Cai, please go ahead.

Speaker 1

Thank you. I'm Angela Cai, Assistant Vice President of Financial Department for Chunghwa Telecom. Welcome to our Q4 2023 results conference call. Joining me on the call today are our Chairman, Harrison Guo our President, Ivan Lin and Fisheng Chen, our Chief Financial Officer. During today's call, management will begin by providing the Chairman's message, our business overview, a discussion of our segment performance and the financial results, followed by management guidance for 2024.

Speaker 1

After, 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 Guo, please go ahead.

Speaker 2

Thank you, Angela, and hello, everyone. Welcome to our Q4 results conference call, and I would like to begin with our strong financial performance for 2023. We concluded 2023 with an EPS of TWD 4.76 while both revenue and EPS exceeded the high end of our full year guidance and hit 6 year highs. We are proud to beat the full year guidance and also commit to investors to give all our efforts for this year. During the Q1 of last year, Taiwan's telecom industry entered a new 3 player landscape, while Songhwa Telecom continues to be the largest tailcoat, followed by the other 2 players.

Speaker 2

Our market cap represents 50% of the industry market value. Our revenue share in Taiwan mobile market also exceeded 40%. In addition, we have the most 5 gs subscribers in Taiwan with more than 3,000,000, not to mention the overall mobile subscriber number. All the states highlight that our leading position far outweighs our peers. At the same time, we are happy to see the domestic industry evolution and believe that under the current structure, value creation for customers will continue to remain the industry focused And digital transformation will continue to develop and serve as one of the key strong growth drivers.

Speaker 2

Keeping our number one position, we reiterate our confidence in widening our leading against peers due to our solid strength and the growth momentum. In 2023, our mobile postpaid subscriber numbers continues its year over year growth throughout the whole year despite the total number of mobile SIMs in Taiwan decreased in 2023. We also achieved the highest mobile service revenue in the industry. Our success in attracting subscribers speaks for our network strength, including the most extensive mobile coverage, largest capacity and festive space, supported by our most numerous number mobile base station already in use. We believe our mobile subscriber gains and revenue growth in 2023 will continue and roll over to 2024.

Speaker 2

Our competitive advantage also come from our cross sector business wins, including our growing 60 broadband business, accelerating technology momentum monetization and ongoing investment in content and digital ecosystems. With our continuous efforts and the business development, we maintain optimistic about positive outlook for the next year ahead. Last, I am pleased to share that we are establishing a subsidiary in Germany in the first half of twenty twenty four, which will serve as the 4 runner for international business expansion in Europe. This marks a meaningful milestone of our international expansion. Now let me hand the call over to Ivan for the business update of the Q4 of 2023.

Speaker 3

Thank you, Chairman Gohr, and hello, everyone. Now please flip to Page 5 for an update on our outperform our outperforming in the mobile service. As of November 2023, we maintained our leading position in Taiwan's mobile market with the largest subscribers share of the 37.1%. Meanwhile, we were excited to see our revenue share reach a remarkable milestone. Existing 40% in the 3rd quarter and hitting 40.2% by the end of last November, further widening our data against our peers, our existing revenue, the share over the subscriber share increased to 3.1%.

Speaker 3

Why is the encouraging? In addition, our mobile service revenue in the 4th quarter, we quote 5 point 8%. And year over year, increase in maintenance growth for 33 consecutive month. While our postpaid ARPU report 4.3% year over year increase, continuing its competitive growth for 11th quarter. This increase and we are mainly on to the 5 gs migration and upsells, international roaming recovery and the increase of reported paid subscriber numbers.

Speaker 3

Since to 5 gs adoption, we see the average demand, see the uplift from customers who migrate from 4 gs to 5 gs, increased to 49% in the 4th quarter, further from the 44% in the 3rd quarter, maintaining and expanding our trajectory. Going forward, we expect overall 5 gs penetration in Taiwan will continue to steady development in the 2024 in 2024. We believe like the Zhonghua, we believe will benefit most given our number one position based 5 gs, quality and ranked by the well known international institutes. Let's move on to Slide 6 for update in our fixed open business. In the Q4, we are glad to see a positive performance in the fixed broadband sector is the revenue and ARPU increased by 2.6% and 1.1%.

Speaker 3

And respective, On a year over year basis, many attribute to the increased higher speed migration. Our size up for service of the 300 megabit per second or higher, continue to be in the proper rate amount and all speed mix since the second quarter of 2023. Is year over year growth in the 4th quarter achieved a 32% maintaining the double digit growth. It's worth noting that our speed profile optimization promote by the market incentive also work in upgrading space from below the 100 megabit per second to transition to higher speed. And above the 100 megabit per second.

Speaker 3

We see the 12% year over year increase in size ups for service at 100 megabit per second or higher. As the optimization strategy will go on in 2024, we are confident in seeing the upward trend of the 6th broadband ARPU continue going forward. 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 Q1, total CBG revenue rose by 4.4% year over year.

Speaker 3

The increase was mainly driven by the notable increase of our performing mobile service revenue at 5.3%, increase on year. Going to the continued 5 gs migration and the prospect subscriber increased the better than sales of iPhone 15 series and the stable growth of the fixed broadband revenue with 3.3% uplift on year, while fixed line revenue decreased. In addition, I would like to highlight our notable international roaming revenue in 2023, which increased by 270% year over year and has already the surge to existing pre COVID-nineteen labels. In addition to the busy international activities in 2023. Our popular global roaming package also contribute to the success.

Speaker 3

We covered 125 countries to offer customers with the convenience of using one package to enjoy transformational data roaming during one trip. We expect strong demand from customers will contribute. We'll continue to drive the growth of our roaming business in 2024. CVG income before tax decreased by 0.2% year over year. Owing to the asset impairment loss that accompanied with the phase out of the 3 gs network.

Speaker 3

Excluding a onetime factor, CVG income before tax increased by 3.6 percent on year. Slide 9 further illustrates our consumers business group highlight. In the 4th quarter, our multiple pay package continued to grow on a yearly basis. The subscriber numbers of the mobile and fixed broadband and the Wi Fi service altogether demonstrate 14% quarter over quarter growth. Enter 7th consecutive quarter of the double digit quarter over quarter growth.

Speaker 3

In terms of the individual and home centric application, we were happy to report subscriber against as well. Our video subscriber continued to grow steadily by 3.7% year over year, mainly due to the rich content provide on both MOD and Hamid Video, in particular, exclusive and award winning dramas. In addition, we observed an increasing demand for CVG Cybersecurity Service as the consumers have become accustomed to assessing the Internet across mobile and fixed broadband in the post pandemic era. In the Q4, our customer cybersecurity sign ups increased by 19 percent year over year and demonstrate a potential for further growth. Going forward, we will continue to develop consumer application to grow both application and telecom revenue in the sector.

Speaker 3

Please turn to Slide 10 for an overview of our enterprise business performance. In the 4th quarter, EVG revenue increased by 2.5%, primarily attribute to substantial 13% increase in other revenue driven by the equipment sales from subsidiaries and the launch of the high end mobile phones, contributing to a boost in sales revenue. Additionally, ICT Business revenue increased by 2.3% And prepared by a rising in the project revenue, sustained growth in cybersecurity service revenue and robust expansion in AIoT service revenue. In the forward mode, EVGMobile service revenues increased by 3%. Fieldbio 5 gs upselling and recovery of international roaming revenues.

Speaker 3

Although 6 line revenue slightly decreased year over year, mainly due to voice declined, data communication revenue and broadband access revenue continued to grow. In spite of the revenue growth, EVG report 6.2% year over year, Decrease of its income before tax, mainly because of the fixed growth declined and asset impairment was related relating to 3 gs phase out. Excluding the one time impairment, the EVG's income before tax decreased by 4.8% 1 year. Mostly in Portland ICT Business, revenue continued to increase and profit margin keep improvement. Slide 11 illustrates our enterprise business highlight.

Speaker 3

In the Q4, our AIoT and Cybersecurity business demonstrated robust growth. While the total emerging enterprise business revenue of our major application decreased by 2.7 percent year over year due to the higher base of the revenue recognition in the peer year relating to e learning and FinTech projects. Specifically, cybersecurity business achieved 7.3% and growth in the 4th quarter and driven by increasing service demand from our enterprise clients And then timing upward for the as the consecutive quarter on a year over year basis, furthermore, our AIoT business also experienced a year over year increase on to revenue injection from a large project relating to smart energy and intelligent buildings. Furthermore, although our cloud service revenue and IDC revenue decreased on a year basis, Due to one time projects that we can recognize the last year that created a high revenue base, We are glad to see our recurring revenue over these two service delivered stable goals. 1 year over year basis, recurring revenue from international public cloud service by granted and it grows by 20%, where recurring revenue of IDC and growth 15% in the 4th quarter.

Speaker 3

In terms of application, in the Q4, we achieved a milestone by established Taiwan's most extensive 5 gs network slicing and verification fee in Kaohsiung to support innovation development and successfully delivered multiple innovative and cybersecurity and efficient and divided storage and the cloud solution and connecting to the diversity needs of our clients. Slide 12 illustrates our international business performance. In the 4th quarter, total revenue and income before tax of IBG increased about 33% and 30 9% year over year, respectively. The impressive growth was mainly fueled by the growth in demand for emerging business, include IDC and cloud service. From our global client, during the quarter, we see the ICT project completion and continue to find growing opportunities for global expansion.

Speaker 3

We are glad to announce that we signed an MoU with NTT cooperation in the 4th quarter and to accelerate the realization of the innovative optical and wireless network service. Looking forward, we are optimistic to see the growth momentum rollover into the 2024. In addition, the SJC2 International Under Seat Cable is expected to launch service this year. We're looking forward to capitalizing our undersea cable asset, I mean, growing opportunity from our from international OTT service providers. Now I would like to turn the call to Vincent.

Speaker 3

Thank you, President Ivan. Good afternoon, everyone. Now I will present a financial summary of our Q4 results in 2023 and financial guidance for 2024. Let's begin with Slide 14, income statement highlights. During the Q4 in 2023, total revenue increased by 4% compared to the same quarter last year, primarily attributed by growing ICT business revenue, sales revenue, mobile service revenue and broadband service revenue.

Speaker 3

Income from operations and net income decreased by 4.6 and 1.7% on year, respectively, mainly due to the impairment loss of telecom equipment caused by the phase out of 3 gs network and the impairment loss of investment property. Excluding the impact of aforementioned onetime impairment losses, income from operations and net income increased by 2.2% and 7.2% on year, respectively. For the full year results, total revenue increased by 3% year over year as a result of solid growth of our mobile, ICT and broadband services. Income from operations decreased by 1% due to the onetime impairment losses mentioned above. Excluding the onetime effect, income from operations grew by 0.6%, up net income increased by 1.2% on year.

Speaker 3

EPS rose from 4.7 to 4.76. It's noteworthy that both of our revenue and EPS reached a 6 year high and have maintained growth momentum for 4 consecutive years. Now move on to Page 15 for balance sheet highlights. As of December 31, 2023, total assets increased by 0.2% on year, mainly due to the increase in current assets, long term investments and other assets, which offset the decrease in intangible assets. Total liabilities decreased mildly on year, primarily attributable to the decrease in accounts payable.

Speaker 3

Additionally, debt ratio decreased slightly and net debt over EBITDA remained 0. Altogether, we continue to maintain a strong balance sheet with great financial flexibility to fully support our operations and business expansions and swiftly adapt to fast changing macroeconomic climate. Page 16 provides the summary of our cash flows. For 2023, we continue to generate stable and solid cash flows from operations, while our operating cash flows were down by 1.8% relative to the prior year. The decrease was mainly due to income tax payments and settlement of accounts payable.

Speaker 3

Capital expenditures decreased by 2.5% on year, of which mobile related CapEx was reduced by 19.3%, whereas non mobile CapEx increased by 10.6%. The latter was largely attributable to greater IDC investment. On top of that, free cash flows decreased by 1 point 4% on year. Collectively, our robust balance sheet together with solid operating cash flows enable us to seize business opportunities amidst trends of digital and sustainability transformations and further create sustainable and long term value for our shareholders. On Slide 17, the table presents financial results against management guidance.

Speaker 3

In the Q4 of 2023, total revenue was about on par with our revenue projection. Profit related metrics fell short of our expectations, largely attributed to the higher maintenance and material expenses, impairment losses on the phase out of 3 gs network and investment property. For the full year results, our revenue and profit related measures mostly exceeded the high end target of our full year guidance, driven by our steady growing core business and improved margin of ICT business. That concludes the overview of our 2023 financial results. Moving on to Slide 18, please see our guidance for 2024.

Speaker 3

Looking ahead, total revenue for 2024 compared to 2023 is expected to increase by between 2.4% and 3.1%, primarily driven by gross momentum in our core business. Well received 5 gs services and speed up grades, promotion packages of fixed broadband are expected to continuously lift subscriber numbers and ARPU. ICT business also contributes as we expect growing emerging services to cater to customers' demand for digital transformation. Operating costs and expenses are expected to rise between 4% and 4.6% as a result of the investments in talents and infrastructure that supports future business development in core and emerging businesses. Given these projections, we expect our EPS to be in the range between 4.6 and 4.8.

Speaker 3

As for capital spending, we budget about $34,000,000,000 for 2024 as our 5 gs network is close to its full deployment and its number one quality has been consistently endorsed by open signal and speed test for consecutive years. Our mobile related CapEx is expected to decrease by 14% on year, which continue its downturn since 2021 for 3 consecutive years. Non mobile related CapEx, which consists of investments in fixed line network, IDC and submarine cables, is expected to increase by 24 0.7% on year to support business expansion in emerging markets in emerging business. Now I would like to turn the call over to Chairman Harrison for awards and recognitions.

Speaker 2

Thank you, Vincent. On Slide 19 is our awards and ESG achievement highlights in the Q4. In 2023, Zhonghua Telecom was recognized by the Dow Jones Sustainability World Index as number 1 of the world class telecommunication sustainability leaders as well as the emerging market index, reflecting recognition from investors for our ESG practices. We also received a AA ESG rating from MSCI. In addition, we will reaffirmed the highest AA credit rating by S&P Global Ratings, continue to our exclusive leading position among global telcos.

Speaker 2

Besides to enhance interest alignment between top management team and shareholders, we are the only telecom operator in Taiwan to follow the international best practice of implementing the incentive compensation clawback policy. In addition, as we implemented an internal carbon pricing mechanism of TWD 1600 per ton in 2023, We are delighted to report that internal currency collected for 2023 was approximately TWD 1,000,000,000. All interested to encourage carbon reduction initiatives and technologies. In the 4th quarter, we also completed carbon credit procurement to further utilize the product carbon neutralization. Meanwhile, we initiated the 1st environmental footprint sensors of network equipment in Taiwan to facilitate a low carbon supply chain.

Speaker 2

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 session. Our first question is coming from Neil Anderson of HSBC.

Speaker 4

I have two questions, please. The first one is on revenue and specifically on the Enterprise Business Group and the Emerging Enterprise Application revenue. So that fell last year, I think, because you had a high base of onetime revenue in 2022. Do you face the same situation for this year? Or do you think that can return to growth with a large amount of recurring revenue without the one time factors?

Speaker 4

That's the first question. And the second one is on the guidance for the cost increase and the investment in gross business. Are you able to give any more color on your I assume most of that would be going to the Enterprise Business Group, but I also wonder how much is going to the International Business Group, given that you're opening up in Germany and I think other markets as well. So could you give any additional comments on that?

Speaker 3

Okay. So thanks, Neil, for your questions. So for the first question about the enterprise business, the revenue in the enterprise business segment, right? In 2022, we have a high base because we have several big projects. And for the 2024, whether we will face such situation again.

Speaker 3

So we think this situation will moderate. So we still for the ICT in the enterprise business group, we expect it's going to grow in quite a reasonable rate. So this is for the answer for your questions. The second one is the guidance for the cost increases, right? So what we will say is, as I just mentioned in the PowerPoint, for the 2024, we will keep investing in talents and infrastructures.

Speaker 3

And also, we will investment make investment in content because that will attract more subscribers, and that will help our to develop our own platforms and attract more customers and return more customers. So this is the area where we will put in our resources. So the cost in relation to contents will also go up. And some of the cost will go up is related to revenue. For example, like sales revenue, such that our cost of goods sold will also go up.

Speaker 3

And for the international business, actually, we will expect the international business segment will also go at very well because we have the footprint in Europe and we expect there will be more demand from our customers from overseas markets. Thank you.

Speaker 2

Understood. Thank you.

Operator

Thank you, Neil. Next question is from Sarah Won, UBS. Go ahead please.

Speaker 5

Thank you. I have two questions. First is on EBT revenue. So I think management just mentioned that the ICT revenue in Q4 increased as well as the margin. So just wondering why the income before tax, excluding the 3 gs impairment, still declined by mid single digit?

Speaker 5

And then second question is on the CapEx guidance for 2024. So I noticed that non mobile CapEx is guided to increase quite meaningfully. So could you elaborate more on where are the like key investment area? Thank you.

Speaker 3

Okay. So thanks, Sarah. For the EPG, right, so in fact, for the ICT business, for the revenue and also for the margin, actually it's improving. But why the overall segment profit declines? 1, as we just mentioned, the 3Q, the impairment and also the voice the long distance call.

Speaker 3

Yes, that also matters. And also, there's a recharge internally. We have the internal carbon fees that also affect the bottom line in the enterprise business segment? So that's for your question 1. So for your second question for the CapEx guidance, right, for the 2024.

Speaker 3

So basically, for the non mobile CapEx, because it increased a lot, that's mainly attributed to IDC. Because we have several construction ongoing, So that actually accounts for a big chunk of the investments. And also, as I just mentioned, the submarine cables and also for the fixed line network, that's also the regular items we have for the non mobile CapEx. Thank you.

Speaker 5

Got it. Just a quick follow-up on the IDC revenue. So in 4th quarter, the total IDC revenue decline, although the recurring IDC revenue increased. So just wondering, could you give an example of like what's the non recurring IDC revenue? Thank you.

Speaker 3

For the one time because some are the set up revenue for our customers. For example, for some switch office, the cloud switch office. So that's one of the examples.

Speaker 5

Got it. So theoretically for the IDC CapEx that will bring recurring revenue, right?

Speaker 3

Yes.

Speaker 1

Okay. Next question comes from our Internet. It's from Rob Lowe. Could you please elaborate more on the business plan for the German office? Does the company plan to team up with European Telecom Companies for business expansion?

Speaker 1

Or the company plan to expand the exposure to European ICT services, etcetera?

Speaker 2

Thank you for your question. For 2024, we will continue to expand international outreach by mainly following our Taiwanese clients' global footprint and replicate our successful used cases in 5 gs private networks and smart cities to overseas market. In addition, Europe will be a new focus in 2024 as we have seen growing ICT demands from clients' global expansion in Europe. Therefore, we plan to set up a subsidiary in Frankfurt to provide business support. And we don't rule out the possibility to increase offices in different locations in the Europe.

Speaker 2

Thank

Operator

And on the telephone, we have another question, which is from the Rogers Benjwani, JPMorgan. Go ahead please.

Speaker 6

Thank you very much. A couple of questions. First on, you mentioned that the increase in the non mobile CapEx in 2024 is mainly due to IDC CapEx. Can you just give us some idea about what proportion of the total CapEx is going in IDC in 2024 versus 2023? 2nd, do you expect the non mobile CapEx to remain at an elevated level after 2024?

Speaker 6

Or do you expect it to decline after that? Lastly, can you give us some more idea about your international business expansion? What exactly are the kind of projects you are targeting in international markets? Thanks.

Speaker 3

Okay. So for the first question for the non mobile, right? So actually, the ITC investment increased by about 10% and more. So that's the increase in the normal by our CapEx. And for the international projection and targets, so actually, we don't disclose figures, but we do have some orders in hand.

Speaker 3

That's why we deploy our staff and resources overseas. Thank you.

Speaker 6

Hi. Just a follow-up on this. So I'm not asking for numbers. I'm like, what is the kind of projects you are likely to do in the international markets going forward? Can you give us some idea of that?

Speaker 6

And also, you said the IDC investment has increased by 10%, but your non mobile CapEx is going up by 25%, which means that investment in non IDC areas is probably even higher. So can you give us some breakup of that? And also whether the CapEx is likely to remain at an elevated level beyond 2024 also?

Speaker 3

For the CapEx, right, so actually the undersea cable also increased a lot. So these are the 2 big ones. For the regular like fixed lines, actually it just increased at a steady rate. And so for the international part jobs, right, so basically we help our customers to deploy their not only the city, but also ICT business in Europe and in U. S.

Speaker 3

And Japan, yes, in these overseas areas. So currently, we cater to many Taiwanese clients and but also we are expecting there will be more foreign customers, clients to use our ICT services. So these are the main areas for the IPG. Thank you.

Speaker 6

Got it. Thanks. And can you also comment on whether the CapEx is likely to remain at elevated level beyond 2024? Or once your Subsea cables is commissioned, the CapEx will fall in 2025?

Speaker 3

Because for the 2025 and onwards, we haven't finalized the numbers. So we cannot give any indication or any prediction for the moment. Thank you.

Speaker 6

Okay. Thank you.

Operator

Thank you. We are now in question and answer session.

Speaker 1

Okay. Now we have another question from our chatbot. Could you please give us the outlook on the ICT business outlook for 2024?

Speaker 3

We will continue to cultivate in our 3 major, the $1,000,000,000 service. And many on the cloud IBC, cybersecurity and IoT service in emerging sectors. And we also work on 5 gs applications and AI solutions to capture to increasing demand. And looking forward to 2024, we maintain and culturally an optimistic outlook for our ICT business and as and are positive about achieving our full year's guidance as our continue to see healthy order intake and project completion, and we will continue leverage our ICT capabilities to further enhance our ICT margin. And given the order and check-in our pipeline, we expect the ICT revenue to deliver the positive growth on year in 2024?

Speaker 3

Thanks for your questions.

Operator

If there are no further questions at this point, I will turn it back over to Chairman Guo. Chairman Guo, please proceed.

Speaker 2

Thank you for your participation. Happy New Year. Goodbye.

Operator

Thank you, Chairman Guo. And ladies and gentlemen, we thank you for your participation in Chunghwa Telecom Conference. There will be a webcast replay within an hour. Please visit www.chd.com. Tw/ir under the IR calendar section.

Operator

You may now disconnect. Thank you and goodbye.

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