Chunghwa Telecom Q3 2024 Earnings Call Transcript

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November 6, 2024

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to Junghwa Telecom Conference Call for the Company's Third Quarter 20 24 Operating Results. During the presentation, all lines will be in listen only mode. And 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 the 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, Assistant Vice President of Investor Relations.

Operator

Thank you. Ms. Cai, please go ahead.

Speaker 1

Thank you. I'm Angela Cai, Assistant Vice President of the Finance Department for Zhonghua Telecom. Welcome to our Q3 2024 results conference call. Joining me on the call today are Rongxi Lin, our recently appointed President and Audrey Xu, our new Chief Financial Officer. As usual, I would like to remind everyone to read our disclaimers and note the related forward looking statement on Page 2.

Speaker 1

Before I turn the call over to President Lin, I would like to briefly introduce our newly appointed President and CFO. President, Roshilin holds a PhD degree in computer science from National Yemin Zhao Tung University and has previously served as our Chief Business Officer, Chief Technology Officer and Chief Information Security Officer, possessing comprehensive experience in business development and technology advancements in the telecom industry. Our new CFO Audrey Xu holds her PhD degree in accounting and finance from Lancaster University and was serving as Professor of Accounting at the National Taiwan University. She was also the associate Dean of International Affairs and Director of GMBA of National Taiwan University. We warmly welcome our new executives, President Lin and Doctor.

Speaker 1

Hsu to the earnings conference. And now I will turn the call over to President Lin for the business updates, who will be followed by Doctor. Shi for the financial highlights. Afterwards, we will move on to the Q and A session. President Lin, please go ahead.

Speaker 2

Thank you, Angela, and hello, everyone. Welcome to our 3rd quarter 2024 results conference call. To begin, I would like to extend a warm welcome from all of Genentechan to our new CFO, Audrey Xu. We are happy to have her join our executive team and participate in today's call. And now please flip to Page 3 for our recent strategic achievements.

Speaker 2

In the Q3, we are pleased to announce our continued success in expanding our lead in Taiwan's mobile market. According to the regulator of communications in Taiwan, ZhongOut Telecom's blended 5 gs penetration in the 3rd quarter remained the highest among peers, which has positively contributed to our continued growth in our postpaid subscriber numbers from this year. We are glad that Joao Telecom continued to outpace the industry in terms of subscribers growth. In addition, we achieved a new single quarter revenue record for the 3rd quarter, the highest in the last 7 years. Meanwhile, we are especially pleased to see our total ICT revenue reach his 3rd quarter high since 2022 when we transformed from transformed our organization to a customer centric structure.

Speaker 2

Our proven success and effective strategy has driven our continued ICT industry leadership, furthermore, putting us farther ahead of our competitor. Going forward, we are confident in expanding our industry lead. Another area we are continuously developing is advanced networks and the technologies. In the Q3, we are proud to announce our successful collaboration with NTT Corporation in launching the world's first eye on, photonic communication link between Taiwan and Japan. This delivers high speed connectivity with ultra low latency and the power consumption perfectly suited for the AI driven future.

Speaker 2

In addition, as the exclusive one way but low earth orbit satellite service provider, we are happy to report that the coverage in Taiwan has reached 90% in the 3rd quarter and expected to achieve 100% in the 4th quarter. This expansion enhances our network resilience and the contributors to related revenue. Furthermore, we are making progress in transitioning our air cooled solution to liquid cooled solution to support NVIDIA AI servers, which will better enhance IDC's power usage effectiveness and also contributed to the offering of GPU as a services. Lastly, in our pursuit of ESG best practice, I am pleased to report that we have officially reviewed or received SBTI's verification for his net zero greenhouse gas emission target. This achievement make us the 1st operator in Taiwan to commit to realizing net 0 by 2,045 ahead of the global accepted 2,050 roadmap.

Speaker 2

In addition, we obtained carbon footprint verification for all of our service centers nationwide, setting us apart as the only telecom company in Taiwan to achieve this milestone. Now let's move on to the business overview of the Q3 of 2024. We are pleased to report another quarter of market share gains in the Q3 of 2024. Our overall subscribers share of Taiwan's mobile market reached to 37.8%, achieving a stable year over year increase. We are even more excited to see our industry number 1 5 gs subscriber market share reached to 38.8%, better than that of overall mobile subscriber share.

Speaker 2

In addition, our revenue share remained over 40%, hitting 40.3% as of the end of September, continuously exceeding our subscriber shares to reflect our healthy growth. As our postpaid subscriber net adds continued to outperform peers, along with growing 5 gs migration and the steady international roaming contributions. Our mobile service revenue recorded a 2% year over year increase, maintaining growth for 14 consecutive quarters. In the Q3, we are glad to see the average monthly fee uplift from 5 gs migration exhibit a 43% uptick, maintaining healthy momentum. Let's move on to the Slide 6 for an update of our outperforming fixed broadband business.

Speaker 2

In the Q3, we expanded our cross tier upgrade promotion package to include 1 gigabits per second service offering. As a result, our subscriber net adds of 1 gigabits per second service doubled during this quarter. Moreover, the number of subscribers with speed of 300 megabits per second and above increased by 20% year over year, maintaining double digit growth and the total number of fixed broadband subscribers also rose. Thanks to our successful speed upgrade strategy. Our fixed broadband revenue and ARPU continued to increase by 3.4% and 1.5% over year, respectively, effectively contributing to our overall performance.

Speaker 2

Now let's get a close look at the performance of our business groups. Page A presents our performance of our consumer business group. In the Q3, total CVG revenue increased by 2.1% year over year, driven by several factors, including the increase of mobile service revenue due to 5 gs migration and the increase in postpaid subscribers. The steady growth of fixed broadband revenue and the increase of OTT revenue generated from our exclusive broadcast of the Paris Olympic Games. In addition, the launch of iPhone 16 series during this quarter further drove up the sales revenue by 1.3% and we anticipate that this momentum will continue into the 4th quarter.

Speaker 2

Although CVG delivered positive revenue growth in the Q3, its income before tax slightly decreased year over year, mainly due to the onetime forecasting rights fee of the Paris Olympic Games. Slide 9 further illustrated our CDG highlights. In the Q3, our multiple play packages, which combine mobile, fixed broadband and Wi Fi services altogether, continuing to deliver outstanding year over year growth of 65%, thanks to our high quality networks. In terms of applications, our video business demonstrated significant growth due to our exclusive forecast of the Paris Olympic Games during this quarter. Subscription to our video platform comprising of MOD and Harmony Video successfully succeeded 3,000,000, maintaining the largest video platform in Taiwan.

Speaker 2

Compared to the Tokyo Olympic Games, new signs up for Harmony Video increased 60%, while advertising revenue more than doubled. Overall, video business related revenue in the Q3 delivered double digit year over year growth, highlighting the success of our content investment. Other than video applications, our consumer cybersecurity subscription increased by 16% year over year in the 3rd quarter. Please turn to Slide 10 for an overview of our enterprise business group performance. In the Q3, EVG's total revenue increased by 5.9% year over year, mainly driven by our robust growth in ICT business, which saw a 22% year over year increase in revenue, mainly fueled by the strong performance of our emerging services.

Speaker 2

In terms of EDG core services, although we see the ongoing 5 gs migration and the fixed broadband speed upgrades provided some positive momentum to drive up mobile data revenue and the broadband data communication and the access revenue. It was not enough to fully offset the revenue decline of mobile voice and fixed line voice in the 3rd quarter. Consequently, the decline of voice services also result in the year over year decrease of EVG's income before tax. Slide 11 provides a detailed picture of our enterprise business highlights. We are excited to report that our ICT Emerging business outperformed in the Q3 with revenue increasing by 30% year over year.

Speaker 2

All our major applications demonstrated that a strong double digit and even triple digit year over year growth. Notably, 5 gs private network revenue surged due to the 5 gs O RAN project, while big data analysis revenue doubled, thanks to smart government initiatives. For our AIoT Cloud and IDC business, we are delighted to see year over year revenue increase of 44%, 24% and 21%, respectively. The gains were mainly due to the completion of AIoT projects in smart energy, smart surveillance and smart transportation as well as the continued growth in recurring revenues from cloud and IDC business. Cybersecurity revenue also achieved a 24% growth on year, making the 11 consecutive quarters of year over year increase.

Speaker 2

It is worth noting that in the Q3, we successfully developed the 1st 5 gs private network, Backpack, a smaller and lighter 5 gs private network capable of receiving satellite signals are quite useful in the remote area and fully complementing our overall network resilience. Additionally, we secure a flagship project to help a leading franchise franchised retailed in Taiwan to integrate network and equipment and offer services such as surveillance, cybersecurity and the cloud solution, etcetera. We value not only the secured revenue, but also the recurring contributions from maintenance and the consulting services after all. Lastly, in this quarter, we won another AMI smart energy construction project and further strengthened our position as the leading AMI project operator. With the largest market share of AMI services, we are well positioned to develop and deliver related maintenance and application service going forward.

Speaker 2

Slide 12 illustrated our international business performance. In the Q3, IVG's total revenue and income before tax increased year over year by 1.4% and 11%, respectively, mainly due to the vibrant demand for cloud and the IT solution in the international market, as well as contributions from our Japan subsidiary. Excitingly, our European subsidiary in Frankfurt, Germany began operations on July 30. This milestone underscores our efforts in the European market. Our strategy is to collaborate with European telecom operators and ICT service provider to promptly offer ICT solution to both Taiwanese and the European enterprise.

Speaker 2

We have already secured ICT projects from the high-tech industry in the European market. In August, we also joined the IoT World Alliance, opening up potential opportunities in the Internet of vehicles and other transnational IoT projects. Now I would like to turn the call to Audrey for our financial highlights.

Speaker 3

Thank you, President. Good afternoon, everyone. I'm pleased to share a summary of our financial results for the Q3 of 2024. Starting with our income statement highlights on Page 14. In the first two columns, you will see that for the Q3 of 2024, our revenue exceeds $55,000,000,000 marking a 7 year high for this period.

Speaker 3

This is a 3.6 percent increase from the same quarter last year. This was primarily driven by the significant growth in our ICT business. Our income from operations and net income saw slight declines of 0.8% and 1% respectively. It is important to note that these shifts were largely due to 2 main factors. First, higher main power costs have impacted our income.

Speaker 3

This expense reflect our strategic investment this year in maintaining a skilled and motivated workforce, which is essential for sustaining our operational momentum and driving future growth. Secondly, we experienced increased growth pressurized fees for the Olympic Games. Securing valuable content is critical step in enhancing our service offerings and supporting our long term growth objectives. Despite this higher cost, our earnings per share for the quarter stood at 1.16, showcasing the underlying strength of our core operations. Now, if we move to column 5 to 7 of the table, you look at the 1st 9 months of 2024, revenue grew by 2.1% year over year, driven by continued strong performance in ICT, mobile and broadband services.

Speaker 3

Income from operations and net income decreased by 1.9% and 1.5% year over year, mainly due to the high base from last year's one time government compensation related to ST2 satellite. Additionally, higher manpower, which were also noted earlier, underscore our investment in maintaining a talented workforce. And as you all know, utility costs have also raised then notably impacted by the Taiwan government's decision in April to raise electricity price. The increase has contributed to our higher operational expense. If we exclude the one time government compensation related to satellite last year, you will find that the net income growth remains positive year over year, underscoring the healthy momentum of our core and ICT operations.

Speaker 3

The continued growth in revenue reaffirms the importance of strategic investment in future growth, such as investing in our employees and expanding content offerings. For the 1st 9 months, our earnings per share reached 3 point 6 4 and the EBITDA margin remains stable, demonstrating our resilience and commitment to long term value creation. Now moving on to Page 15 for a review of our balance sheet highlights. First, as of September 30, 2024, total asset decreased by 2.7% compared to the year end of 2023. The decrease was largely attributed to the decline in property, plant and equipment.

Speaker 3

Next, total liability decreased by 4.7% relative to the year end of 2023, primarily due to the decrease in accounts payable accrual salary and current tax liability. Additionally, our debt ratio continue to reflect a strong financial position. The debt ratio decreased slightly and net debt over EBITDA remains at 0. This conservative debt position aligns with our company policy of minimizing financial risk and ensuring financial flexibility. A low debt level not only underscores our commitment to fiscal responsibility, but also enhancing our resilience against economic uncertainties position us for long term value creation.

Speaker 3

So turning to now let's turn to Page 50, which provides the summary of our cash flows. First, cash flows from operating activities saw a slight decrease by 0.3% year over year. This was primarily due to the timing of the income tax payment with a significant portion of income tax being deferred to the Q4 of last year. So this is purely because of this tax issue. And if we go to the capital expenditure CapEx, it declined by 15.1% year over year, reflecting our strategic focus on disciplining spending and prioritization of high impact investment.

Speaker 3

The reduction is part of our approach to optimize capital allocation, ensuring that resources are directed towards projects that yield the highest return. Notable, the free cash flow increased by 8.7% compared to the previous year, highlighting the strength of our operational efficiency and effective financial management. The robust free cash flow enhancing our financial flexibility, enabling us to pursue strategic growth opportunities and it can support shareholder return and reinforce our long term sustainability. Now let's move on to Page 17. Let's turn to the table summarizing our operating performance relative to our guidance.

Speaker 3

In the Q3 of 2024, revenue closely met our target for the period. Peak performance indicator, including income from operations, net income and EBITDA were all in line with our focus, showcasing our ability to achieve consistent results. Looking at the 1st 9 months of 2024, revenue remained aligned with our expectations. Importantly, income from operations, net income, EBITDA and EBITDA margin outperformed our guidance. This stronger than expected results were driven by steady growth in our core business and improved profitability in our ICT operations, reinforcing the effectiveness of our strategic initiatives.

Speaker 3

So now I conclude my financial review for the Q3 and our prepared remarks. So thank you for your attention and we are now pleased to open the conference call for questions.

Operator

Thank you, Doctor. Our first question will be coming from Sarah Wong, UBS. Go ahead please.

Speaker 4

Thank you for the opportunity to ask a question. So actually I have two questions. First is that I understand that the high base last year from government subsidy and also higher electricity actually put pressure on our net profit growth. But just want to be more specific that why profit before tax declined for Consumer and Enterprise segments? Any other like sector specific reasons?

Speaker 4

This is my first question. And then second is on the Enterprise segment, the emerging enterprise application revenue is growing quite fast. May I ask what's the contribution to the total enterprise revenue? Thank you.

Speaker 3

Okay. Thank you, Sarah. So for your first question, I think if my answer is correct, you asked whether why the profit reduced and revenue increase. As I mentioned that there are a couple of main reasons. The first reasons, I mean that I think the compensation of the satellite is one of the main reason.

Speaker 3

And other than that, I think as you know that our policy this year that we the corporate have a new decision to improve the talent pool. So the employee cost increased dramatically. So it's across all segments. So this is the second main factors. And the third factors, as you already know, that electricity cost is a major portion in our company, in particular in like a data center or term in a lot of the across the enterprise segment.

Speaker 3

And I think that utility cost also takes compared to last year, I think it also represent a similar portion. So and the 4th one is that I think for consumer segment, Olympics video content also represent another reason that as I mentioned that investment in the video content is also our company's strategic purpose. And so as you know that most of the long term investments will end up in expense in income statements. So that is the reason that when you read the income statement, you may see the profit reduce a bit. But to us, we do not take it as a loan expense, we take it as a strategic investment for the future.

Speaker 3

Thank you.

Speaker 4

Got it. Thank you. Very clear. And then just a quick question like the emerging enterprise application revenue, like what's the percentage contribution to total enterprise revenue? Thank you.

Speaker 1

Hi, Sarah. About the enterprise emerging application revenue and the total ICT revenue, we don't separately announce the percentage of our enterprise emerging application revenues versus the ICT total revenue. Yes.

Speaker 4

Got it. Thank you.

Operator

Thank you.

Speaker 1

Okay. I think I can present a question we received from our platform. The question is about that, how the company can what's the company's strategy to increase the revenue the revenue increase strategy for going forward? And another question is about the net profit decrease for the 3 sectors. About the sectors, the net profit decrease, the reasons for the decrease for the CVG and EVG, I think our CFO just answered the question.

Speaker 1

So now we will discuss our revenue strategy, revenue interest strategy.

Speaker 3

I think there are a couple I think, again, that as one of the purpose of the corporation is to maximize shareholder return. And I believe that the profit is always the fundamental main purpose. So our executive team have already have worked hard to focus on couple of the areas to improve our profits in the future. So the number one is that we try to focus more on high margin products or service. So

Speaker 2

in

Speaker 3

the future that we will try to discontinue or scaling back low margin offerings, which reduces revenue but improve profits. And so this is one area we will try to focus and we will exit from non profit markets or customer segments. And secondly, as you know that our the size of the company is quite huge. So streamline operation is also important strategy for our new CEO and President. So our company will undertake an effort to improve operational efficiency, such as automating process, incorporating AI and or renegotiating supplier contract, etcetera.

Speaker 3

So we try to streamline operation is quite important to help us to improve our profitability. And third, for the revenue part, as you can see for our mobile segments that we keep going continuing to grow year on year. And one main reason is because we launched a couple of the programs, something like that points and rewards redemptions. And as you see, loyalty points is quite important to allow customers to earn rewards over time. And this can often be redeemed for discounts on their bills.

Speaker 3

And this can help improve the customers and the users. And secondly, we will have a lot of the bundling package. Many loyalty program will bundle additional service such as streaming, subscription, music, cloud storage or even IoT device into a single plan to create more value for the customer. And 3rd, as you know that we have a lot of we launched the iPhone 16, so the discounts and subsidies on 5 gs device. So we believe that these are still a big potential for CHG to increase the 5 gs penetration rate.

Speaker 3

So if we continue to implement the strategy in this loyalty program or the founder service, we believe that we can keep increased revenue and also profits.

Operator

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

Speaker 3

There's another question about what kind of the low profits of the service that will be launched. As you know that most of the iPhone sales revenue is low is negative profit. Why? Because it is under the bundle program, because one of the main purpose is not just it is under the bundle the program. So it is not you may see it.

Speaker 3

So it is not really low profits. I mean that under the IFRS fifteen, we look at on the contract basis, we do not look at on the per separate basis. So if we don't really launch any low profit. So what I want to emphasize is that for most of our enterprise segments and consumer segments, we will try to streamline operations and to see if there is any product that we can improve the operations and to reduce the cost and we believe there is a lot of potential.

Operator

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

Operator

If there are no further questions, I will turn it back over to President Lin. Thank you.

Speaker 2

Okay. Thank you very much for your participation. Thank you very much.

Operator

See you. Thank you, President Lin. 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.

Operator

You may now disconnect. Thank you and goodbye.

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