Chunghwa Telecom Q1 2024 Earnings Call Transcript

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May 2, 2024

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's Q1 2024 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. Twirundertheircalendar section. Now I would like to turn it over to Ms. Angel 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 Financial Department for Chunghwa Telecom. Welcome to our Q1 2024 results conference call. Joining me on the call today are our Chairman, Harrison Guo President, Ivan Lin and Vincent Chang, our Chief Financial Officer. During today's call, management will begin by providing Chairman's message and our business overview in the Q1, followed by a discussion of our segment performance and the financial results.

Speaker 1

After, we will 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 I will turn the call over to Chairman. Chairman Guo, please go ahead.

Speaker 2

Thank you, Angela, and hello, everyone. Welcome to our Q1 2024 results conference call. In the Q1, we proudly announced our success in expanding our lead in Taiwan's telco market. Amidst the robust 3 player landscape, our revenue share in Taiwan's mobile market continued to steadily grow, climbing from 40.3% to 40.4% quarter over quarter, while subscriber share enjoying an increase from 37.6% to 37.7%, maintaining the growth trajectory after the market consolidation completed last quarter. Our financial performance also speaks for our business success.

Speaker 2

Total revenue in the Q1 hit a new high for the same period since 2017. Income before tax also reached for the same period since 2016. On the basis of excluding the one time item of the government compensation for ST2 satellite recognized in the Q1 last year. To invest our leadership and the long term growth, we have been establishing AI infrastructure to enhance our operations and seize opportunities in the AI megatrend. Our AI powered network solution have been successfully used to predict network degradation and optimize energy consumption to enhance our network efficiency and contribute to cost reduction.

Speaker 2

In addition, generative AI is another technology that we leverage on problem shooting to enhance service quality, response time and cost efficiency in operations, particularly in relation to network maintenance and the customer service. To capture AI explanation opportunities, we actively deployed our competency across cloud, edge and the terminals to bring computing resources closer to our customers with an intent to access AI applications. We also plan to establish AI data centers and develop GPU as a service, empowering industries to complete their AI transformations. To achieve this goal, we will team up with local and the global ICT partners to establish ecosystems for the AI powered future. Another value added deployment lies in the expansion of content investments.

Speaker 2

In addition to network and the platform strengths, we have been continuously investing in quality content to win subscribers over and thus are able to form the largest video platform in Taiwan. We are glad to announce that recently, we have acquired exclusive broadcasting rights of the 2024 Paris Summer Olympics Games and believe that this will significantly enrich our content broadcasting our content portfolio in the incoming quarter. Moreover, following the announcement made last December, we officially set up Zhonghua Digital Culture and Creative Capital, CD, CCC, in the Q1 to scale up our investment in video content and intellectual property management. In February, our Board of Directors further approved the investment in fund of cultural content industry managed by CDCCC. This fund will work as an important vehicle to upgrade cultural content industry and further integrate our network platform and the content IP to deliver quality content to users.

Speaker 2

Last, I'd like to share that we were saddened by the serious earthquake that happened in Taiwan in April. And in response, we offered complimentary communications to help disaster relief in Hualien by successfully leveraging low earth orbit satellite, LEO. Going forward, in addition to GEO, the GEO space and LEO, We also plan at MEO, the median earth orbit to our satellite portfolios this year to continuously strengthen our network resilience and further provide services to enterprise and the government customers. Now let me hand the call over to Ivan for the business updates on the Q1 of 2024.

Speaker 3

Thank you, Chairman Guo, and hello everyone. Now please speak to Page 5 for an update on our performance of the performing mobile business. As mentioned by the Chairman, Kuo, we maintain our leading position in Taiwan mobile market in the Q1 of the 2024 with the largest subscriber share of the 37.7%. Meanwhile, our revenue share continue to stay above the 40% hitting 40.4% by the end of the March. Further, widening our leading against our peers, our exceed revenue the share over the subscriber and the share was the 2.7% due to the exciting progress of the subscriber share games.

Speaker 3

In addition, 5 gs migration and international roaming continue to driving up our mobile service revenue and postpaid ARPU. And recording 5.1% and 3.4% year over year increased respective and mobile service revenue and ARPU also continued to maintain their growth for 16, 6 consecutive month and the cost consecutive to be the quarterly respectively. As the 5 gs continue to penetrate solid, we saw the average monthly feed update from custom who migrate from the 5 gs to the 5 gs good to 14 percent and 5% in the Q1. And it's rebooting and inspiring the upward trajectory. Let's move on to the Slide 6 for an update of our fixed broadband business.

Speaker 3

In the Q1, we are great to see the accelerated growth in fixed broadband sector due to our successful strategy to encourage and speed update upgrade and fixed broadband revenue and ARPU increased by 3.8% and 2% respectively. On year over year basis and both expanded year over year growth margin compared with light of the previous quarter. Our size up of the service of the 300 megabit per second over the higher continue to be popular amount of speed mixed with the 29% year over year increase in the Q1, maintaining is the double digit growth. Now let's move on to the performance of our customer centric business growth. Slide 8 presents the performance of our CVG groups.

Speaker 3

In the Q1, income before tax of the CVG increased by 3.7% year over year, mainly due to the sustained growth of the telecom service. On a year over year basis, total CPG revenue increased by the 1.7% mainly and driving by the healthy and the 4.2% increase of our mobile service revenue. Going to the continued 5 gs migration postpaid subscriber, they increased and roaming the revenue. Since broadband performed, whereas its revenue growth increased to 4.6%, offset by the revenue decrease of the fixed voice. Sales revenue decreased 1 point 5%, mainly due to the higher base in the Q1 last year.

Speaker 3

On to the deferred demand resulting from the supply chain issues. Slide 9, further illustrate our consumer business group to highlight. In the Q1, our multiple private packages continue to support CVG's growth and momentum. The subscriber, the numbers of the mobile and fixed broadband and the Wi Fi service go to geysers demonstrate in a 23.3 percent quarter over quarter growth, which achieved and it come secretively the quarter of the double digit quarter and over quarter growth. This is attributable to the way we received promotion package and value add service bundles.

Speaker 3

In terms of individual and HomeCentrix applications, We remain the largest video platform in Taiwan as the subscriber number of our video service status set. Notably, we subsisted for acquired the exclusive broadcasting the rights for the 2024 Olympics game in April, which we believe will bring in the subscription and revenue increase both MOD and Harmony Video. In addition, we are also exciting to see a 17% year over year increase in our CBG Cybersecurity Service and ScienceOps in the Q1 and mainly due to the increased demand from the service to a boat and fishing the website and block malicious connection. In addition, our service for filtering out adult content on the Internet and the setting time limit on the Internet as surfing has also being popular among the families and driving up the populated of our cyber security service. We expect the growth trend will continue and further contribute to our CVG performance.

Speaker 3

Please turn to Slide 10 for an overview of our enterprise business group performance. In the Q1, the EBG revenue and slightly decreased by 0.9%, primarily due to the recognition of the government and the compensation in the same period last year. Excluding the onetime item, EVG revenue increased by 1.9% on year. Additionally, our ICT business, the revenue increased by this and the 3.3% and mainly driven by the business expansion of the big data service, cybersecurity and AIoT and cloud service, all of which report and the mid to high single digit year over year growth or higher. Going forward, we will continue our B2B2X model to build up the ecosystem with key partners and further boost ICT performance.

Speaker 3

Furthermore, EVG mobile service revenue also demonstrate strong growth at a 3.7% on year, many prepared by the continued 5 gs upselling as well as the growth of the international roaming and the revenue. We observed the text message to the revenues also turned positive on year due to growth and growing enterprise marketing demand. Although the 6 nights revenue slightly decreased, data communication revenue and the bulk and the access revenue continued to growth, which offset the fixed voice that declined. Going to the fixed voice that declined in a higher basis higher base of the aforementioned one time item recognition last year, EVG and the report and 13.4% year over year decrease of the income before tax. However, excluding the one time effect, EBT, the income before tax decreased nano to 1.5% year over year.

Speaker 3

Slide 11 illustrates our enterprise business, the highlights. In the Q1, we will get we are glad to see our total enterprise emerging application revenue increased by 5.2% on year over year basis. Notably, big data analysis that delivered in the significant seventy percent year over year the growth due to the smart energy project injection and cybersecurity revenue and grew the year over year for the nice consecutive quarter end. And additionally, the AIoT business experienced

Speaker 2

6.5%

Speaker 3

growth on yield driven by revenue injection from the green energy project and our car service revenue increased by 5.8% with substantial growth of the international public cloud recurring revenue at the 13.6 0.8% on year. Although our IDC revenue decreased on a yearly basis due to the recognition of one time project in the same period last year. We are great to report our recurring revenue of IBC service delivered a stable growth at the 7.6%. This quarter, we successfully expand our national expertise into the global market with the position of our first to oversee the data center construction project. Furthermore, we are proud to announce that we are the 1st company in Taiwan to successfully introduce an automatic vehicle identification, AVI and the vehicle detection, VD system to monitor over time the parking in the freeway the service area, which we believe is the repeatable the success like could be an extent to other million.

Speaker 3

And Slide 12, illustrate our international business and performance. In the Q1, both the income before tax and the total revenue for the IBG report, positive and a double digit growth on a year basis and at 23.5% and 13 0.3% respective. And impressive growth was the mainly and the food by the growing and demand for overseas ICT project as our clients expand their global footprint and which offset the year over year decrease of the fixed line revenue, the result from the service portfolio, the change. During this quarter, we partnered with Exartel, the board and telecom operator to launch the 5 gs zone in Warsaw, where our innovative 5 gs smart application are showcased to attract the business opportunities. It also service as the foundation for local touch and the business extension in the Europe.

Speaker 3

In addition, we now only the 2024 Smart City Innovation Application Award for our smart transportation solution and democracy. We also won 2024 System Integration Award in Kaohsiung Smart City Export for our successful overseas smart healthcare solutions, proving our successful in the Internet of the medical things globally. Now, I would like to turn the call to Vincent for our financial highlights. Thank you, President Ivan. Good afternoon, everyone.

Speaker 3

Now I will present a financial summary of our Q1 results in 2024. Let's begin with Slide 14, income statement highlights. During the Q1 in 2024, revenue was about $55,000,000,000 which hit an 8 year high for the same period. Compared to the same quarter last year, revenue increased by 1.4%, primarily driven by higher mobile service revenue, growing ICT business revenue and broadband service revenue. Income from operations and net income decreased by 2.2% and 2.6% on year respectively, mainly due to the high base from last year as a result of government compensation related to ST2 satellite.

Speaker 3

Excluding this one time item, year over year changes in income from operation and net income remained in positive territory, which demonstrates the healthy growth momentum of our core and ICT businesses. EPS for Q1 is 1.21. EBITDA and EBITDA margin remains steady. Now move on to Page 15 for balance sheet highlights. As of March 31, 2024, total assets increased by 0.9% compared to the year end of 2023.

Speaker 3

This increase was mainly caused by the increase in current assets and long term investments, which offset the decrease in property, plant and equipment. Total liabilities decreased by 4.1%, primarily attributable to the decrease in accounts payable. Additionally, debt ratio decreased by 1 percentage point and the net debt over EBITDA remained 0. Page 16 provides the summary of our cash flows. For the Q1 in 2024, we generated solid cash flows as cash flows from operating activities grew by 26.1% compared to the same quarter last year.

Speaker 3

The increase was mainly attributable to a decrease in settlement of accounts payable and payments for inventory. Regarding capital investment, the amount of CapEx declined by 6.9% on year, of which mobile related CapEx decreased by 50%, while non mobile CapEx increased by 9.1%. The latter was primarily due to FTTH deployment and asset vitalization. On top of that, free cash flows increased by 56.9 percent on year. Taken together, we maintain solid balance sheet and keep generating strong operating cash flows, both of which are underpinnings to support our business expansion and 2C's digital opportunities.

Speaker 3

On Slide 17, let's turn to the table that presents operating performance against our forecast. In the Q1 of 2024, revenue was about in line with our estimates. For performance measures, income from operations, net income, EPS and EBITDA all beat our forecast by a modest margin. The better than expected performance was primarily driven by the steady growth of core business and improved profitability of ICT Business. That concludes the Q1 financial results.

Speaker 3

Let me turn the call over to Chairman Harrison.

Speaker 2

Thank you, Vincent. On Slide 18, you can see our awards and ESG achievement highlights from the Q1 of this year. First, I'd like to report that relative to 2020, our revenue of the parent company increased about 5.7%, while the carbon emissions experienced a downward trend by decreasing 40% in 2023. The inverse relationship between revenue growth and the carbon emission trend highlights the effectiveness of our dual track approach to operations and sustainable development. Moving forward, we will intensify our carbon reduction efforts by enhancing energy efficiency with innovative technology and the usage of renewable energy.

Speaker 2

Additionally, we are the 1st telecom company in Taiwan to receive approval from EV100 and committed to transitioning 100 percent of our corporate fleet to electric vehicles by the year 2030. Besides, we once again ranked in the top 5 of companies in S&P Global's Sustainability Yearbook 2024 and was honored with the highest leadership level. The A ranking recognition in both the CDP climate change assessment and supplier engagement rating. In addition, we were the leading telco in Taiwan receiving top awards for most committed to ESG and Best Investor Relations from Finance Asia. This accolade attest to our position as an international industry leader with outstanding performance in all aspects of sustainable development.

Speaker 2

Furthermore, we clinched the first price for overall ESG performance for 3 consecutive years from GlobalViews monthly. One of the most prestigious ESG awards in Taiwan, which exempted us from competing in the same category for the next three editions. This outstanding outcome demonstrates a track record of long term and stable performance in ESG evaluations and is featured on the annual honor roll. This concludes our prepared remarks. Thank you for your attention.

Speaker 2

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. We will begin with the questions from telephone line and then move to the queries from the web page. Thank you. The first question Neil Anderson of HSBC.

Operator

Go ahead please.

Speaker 4

Thank you. Good afternoon. Thanks for the presentation. I had a few questions relating to Slide number 11 please, the emerging enterprise applications. So with the percentage numbers, it's a little bit hard to get a sense of the absolute contribution and growth in these business areas.

Speaker 4

So would it be possible to give us any more detail and say which is the largest one on an an absolute basis and where you which business area you think has the capacity to be again larger in a few years' time again on an absolute basis rather than percentage wise? And the other question is relating to the revenue and the margin trends in the data center and the cloud business, because we're getting something of a mixed picture from other telcos in this area. So it'd be great to get your views on that. Thank you.

Speaker 3

Okay. Thank you, Neil, for your questions. So regarding the contribution of the emerging application revenues, so basically we don't disclose detailed information. While we will share is that the IDC contribute the most and followed by cyber securities and AIoT. So these are the key pillars.

Speaker 3

This is just for the Q1. Yes. And for the revenue and margin trend on data center, okay. So while we'll say the revenue trend, what we see, because you know for the IDC, right, sometimes we all have the one time setup service revenue, but we focus more on the recurring revenues and we attach a greater weight on this. So what we can share is that for the recurring revenue of our IDC, the growth has been increasing.

Speaker 3

As we mentioned, now the recurring revenue of ITC for this quarter, while year over year change is almost 8%. And we think actually the recurring revenue makes up a big chunk of the total IDC revenue and it's on the healthy trajectory. Thank you.

Speaker 4

Thank you. Any comment on the margin side or competition in the IDC and the cloud, please?

Speaker 3

Okay. So basically for the margin for the data center, actually when we see IDC business, we take a holistic view to this. Because for client using our data center, normally they will use our other services. So when we look at the profit, we will take a holistic view. This is unlike our competitors and because their main advantage is or their main business is on data center per se, but they don't provide integrated services to the clients.

Speaker 3

So what we'll see is together with our subsidiary, Chief Telecom, actually we are still the largest IDC service providers and we are way ahead of our competitors and we are very confident that we can maintain our lead in this line of business. Thank you.

Speaker 4

Thank you very much.

Operator

Thank you.

Speaker 1

Okay. Maybe we have the first question from the platform. It is about that

Speaker 2

as the government announced the policy of raising the electricity fee, could Chunghwa Telecom Management share the impact to Chunghwa Telecom? Okay. Thank you. We don't anticipate a significant impact from the increase in electricity fees as we have continued to invest in energy efficiency. For example, our centralized RAN architecture and the retirement of 3 gs networks are all constantly contribute to energy savings.

Speaker 2

In addition, we have take some countermeasures to response to the electricity cost increase as well. For the energy intensive services like IDC, we have factored the electricity fee issue into our service contracts, including transferring markup of the electricity fees to our clients. Thus, for us, the electricity fee increase is generally manageable. In the long run, we will still continue to invest in the initiatives of our carbon emission reduction, aiming to control the overall energy cost as well as to response to ESG goals. Thank you.

Operator

And ladies and gentlemen, we thank you for your questions. If there are no further questions at this point, I'll turn it back over to Chairman Guo for closing comments. Thank you.

Speaker 2

Thank you for your participation. Goodbye.

Operator

Thank you, Chairman Guo. We thank you for your participation in Chunghwa Telecom's conference. There will be a webcast replay within an hour. Please visit www.chd.com.tw/ir under the IR calendar section. You may now disconnect.

Operator

Thank you and goodbye.

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