Chunghwa Telecom Q2 2024 Earnings Call Transcript

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August 6, 2024

Key Takeaways

  • In Q2 Taiwan mobile market share rose to 40.5% and subscriber share to 37.7%, with postpaid ARPU delivering the longest industry growth streak at 39 months.
  • Video platform subscriptions topped 3 million during the Paris Olympics debut week, strengthening the company’s lead in Taiwan’s streaming market.
  • CHT is leveraging its leading IDC footprint to build AI data centers and a GPU cloud service, and launching an “AI Factory” to produce custom AI models and agents for enterprises.
  • Q2 revenue reached the highest level since 2018 with a 1.2% y-o-y increase, EBITDA margin stayed near 40%, net income dipped 1% amid higher costs, and free cash flow rose 14.1%.
  • The group plans to list its managed security arm CHT Security this year and pursue further M&A targets to bolster ICT, cybersecurity, and cloud capabilities.
AI Generated. May Contain Errors.
Earnings Conference Call
Chunghwa Telecom Q2 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to the Zhonghua Telecom's Conference Call for the Company's Second Quarter 2024 Operating Results. During the presentation, all lines will be on listen only mode. When the briefing is finished, directions for submitting your questions will be given And for your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference ends.

Operator

Please visit CHT IR website, www.cht.com.twirundertheircalendar section. And now, I would like to turn the call over to Ms. Angela Tsai, Assistant Vice President of Investor Relations. Thank you. Ms.

Operator

Tsai, please proceed.

Speaker 1

Thank you. I'm Angela Tsai, Assistant Vice President of the Financial Department for Zhonghua Telecom. Welcome to our Q2 2024 results conference call. Joining me on the call today are our Chairman and CEO, Harrison Guo President, Eifan Lin and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing the CEO's message and our business overview of the Q2, 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 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 Q2 2024 results conference call. We are pleased to announce our continued success in expanding our lead in Taiwan's telecom market in the Q2. Amidst the 3 player market landscape, Our revenue share in Taiwan's mobile market continued to steadily grow from 40.4% to 40.5% quarter over quarter, while subscribers share enjoyed a slight increase to 37.7%, maintaining growth in the new market landscape. In addition, for the past 6 consecutive quarters, our postpaid mobile ARPU has demonstrated the highest year over year growth in the industry, showcasing our growth capability.

Speaker 2

With this contribution, our total revenue in the 2nd quarter reached a new high for the same period since 2018. In addition, our strategy of leveraging content investment to enhance our video performance has been successful. In August, during the 1st week of our exclusive 2024 Paris Olympic Games broadcast, We were pleased to see our video platform subscriptions surpass 3,000,000, a milestone that further expanded our lead among all the video platforms in Taiwan. As the games are more intense, we are optimistic about the overall performance of our Olympic Games broadcast. Another area in which we currently invest in is AI development.

Speaker 2

As Zhonghua Group hosts the largest IDC market share in Taiwan, we are well positioned to extend our leading IDC and the cloud experiences to construct AI data centers and the GPU cloud. We offer our enterprise customers to leverage the GPU cloud either to build their own sovereign AI or use our GPU as a service. In addition, targeting the best opportunities of AI driven applications, we are developing the CHT AI factory. This initiative aims to produce various customized AI models, AI driven operation process and the AI agents for enterprise customers, supporting them in their AI transformation. We believe this market has immense potential.

Speaker 2

Lastly, to strategically enhance our group's value, we are excited to announce that our subsidiary, Songhwa Telecom Security, CHT Security, the largest managed security service provider in Taiwan, will become a publicly traded company this month and will pursue its main board listing next year. This will be followed by our another subsidiary, International Integrated Systems Company, a benchmark company in Taiwan, focusing on opportunities related to government projects, smart city, fintech and digital healthcare. We also continue to seek potential M and A targets to create synergy and enhance our agility in driving growth and increasing market value. Now let's move on the business overview on the Q2 of 2024. Let's move on to Page Slide 4 Slide 5.

Speaker 2

We are pleased to report another quarter of market share gains in the Q2 of 2024. After the industry's market consolidation, our revenue share of Taiwan's mobile market continue to stay about 40%, hitting 40.5% as of the end of June. Further widening our lead against our peers on both year over year and quarter over quarter basis. Meanwhile, our subscriber share was 37.7%, achieving a stable year over year increase. Our excess revenue share over subscriber share was 2.8% due to the exciting revenue share gains.

Speaker 2

Reflecting our healthy growth. As our postpaid subscriber net adds continue to outperform tiers, along with growing 5 gs maintain sorry, along with growing 5 gs migration and steady international roaming contribution. Our mobile service revenue and the postpaid ARPU recorded a 3.5% and 2% year over year increase respectively, maintaining their growth for 39 consecutive months and 13 consecutive quarters. In the 2nd quarter, the average monthly fee uplift from customers who migrated from 4 gs to 5 gs exhibited 39% uptick, maintaining sales momentum. Let's move on Slide 6 for an update of our fixed broadband business.

Speaker 2

In the Q2, the year over year growth of our fixed broadband revenue and subscriber number continue to increase by 4.4% and 0.6 percent respectively, expanding gross margin compared with that of the previous quarter. Thanks to our successful strategy of encouraging speed upgrade. 300 megabits per second or higher continue to be the mainstream service offerings. Its sign ups increased by 24% year over year in the 2nd quarter, maintaining double digit growth and resulting in the 2% increase of 6 broadband ARPU on a year over year basis, which is outstanding. Now let me send the call over to Ivan Lim for the performance of our Customer Century Business Group.

Speaker 3

Thank you, Chairman Guo, and hello, everyone. Now please click to Page 8 for an update on our CVG performance. In the Q2, total CDG revenue increased by 2.6 percentage year over year and driven by the increase of the mobile service revenue from ongoing 5 gs migration and more postpaid subscribers, steady growth or fixed broadband revenue and the strong sales of iPhone series due to effective the promotion. Although the CDG delivered promise in the business performance, its income before tax decreased by 1.6 percentage year over year, mainly due to the increase of the talent investment including steroid rights. Slide 9, further illustrates our consumer business growth highlights.

Speaker 3

In the second quarter, our multiple players package, which provide subscribers with the combination of our mobile fixed broadband and the Wi Fi service all together demonstrates 18 percentage year over year growth in line with the growth of the CDG's core business. In terms of the individual and the home centers applications, we saw 5.2 percent digit increase of our video platform questions, mainly from Hami video, standing from the pre promotion of the 2024 Paris Olympic Games in the Q2. In August, we introduced AR and the multi camera driver replacement function to broadcast the Summer Olympic Games for the first time, which successfully create exciting new building and experience for customers and attack new size ups. We expect subscriptions to continue rising as the games become the more intensive and leading to greater revenue and the contribution. In terms of the way we see the consumer cybersecurity service, we are pleased with its growth momentum as the size up increased by 15 point 3 percentage year over year in the Q2 making meaningful the revenue contribution.

Speaker 3

Please turn to Slide 10 for an overview of our enterprise, the business growth performance. In the Q2, EBG's total revenue decreased by 3.7 percentage year over year, mainly due to decreased ICT business, the revenue that resulting from last year's high base from large projects and the deferred of the revenue expect in the second quarter. Now with the standing these factors, our ICT business remained on the track as they expect. In addition, our road revenue from EDG's mobile service decreased and sliding excluding the impact of the prepaid card project. Mobile revenue from 5 gs roaming and the tax business continue to increase year over year.

Speaker 3

For EVG fixed line business despite the continued and steady the growth of the broadband assets to revenue and the data communication revenue from China to bid upgrade. The decline in the fixed voice revenue significant offset this gain. This was the main cause of the 9.6 percent year over year, the decrease in the EDG's income before tax for the 2nd quarter. Slide 11 illustrate our enterprise business highlights. In the second quarter, our IDC and Cybersecurity business continue to demonstrate robust growth.

Speaker 3

IDC revenue achieved 6.6 percentage growth year over year owing to growth the project numbers and long tire recurrent being revenue injection. Meanwhile, cybersecurity revenue is a little bit and a 6 point 9 percentage of the growth year over year and driving by the rising demand for consulting service and the network security products, particularly the Zero Trust related offering makes cybersecurity revenue achieved growth for 10 consecutive quarters in spite of the encouraging performance in IDC and the cyber security business. EVG, total emerging enterprise application revenue decreased by 5.9 percentage year over year in the Q2, mainly due to the aforementioned higher basis result from large ICT project in the same period last year is won nothing like although our car service revenue decreased year over year due to the one time project or recognition in the base superior. We are pleased to see our recurring revenue from international public cloud service continued to grow strong by 14% year over year. In addition, our limited rate priced at a premium in the Banqiao IDC designed for financial inductorate and the world saw up quickly after launch in Q2.

Speaker 3

Reflecting the strong demand of IDC service in the meantime to need feature demand, we continue to invest in construction of AI data centers. I mean to offer a variable AI enabled function and GPU as a service. Looking into second half of the year, as the revenue deferred from the second quarter is expected to be recognized and with the healthy top line of orders, We remain confident in our full year ICT performance. Slide 12 illustrates our international business performance. In the second quarter, we are pleased to see another positive quarter result for IBG as its revenue and income before tax increased by 21.8 percentage and 8.2 percentage on a yearly basis, respectively.

Speaker 3

The many contribution contributors from oversee ICT business, which offset the slight decrease of the fixed line revenue, the resulting from portfolio change. During this quarter, leveraging our robust integrated ICT capabilities, we successfully secure overseas ICT projects from Taiwan High-tech Company to support their new plant construction in the Thailand and the mainland. In addition, Chunghwa's subsidiary CHP Securities and to expand in the Singapore, our subsidies based in Singapore, we are cooperate to promote our cloud security and network security business in the Southeast Asia. Now, I would like to turn the call to Vincent for our financial highlights. Thank you, President and Ivan.

Speaker 3

Good afternoon, everyone. Now I will present a financial summary of our Q2 results in 2024. Let's begin with Page 14, income statement highlights. Revenue for the Q2 of 2024 was around $54,000,000,000 the highest for the same quarter in 7 years. This is a 1.2% increase from the same quarter last year, primarily driven by higher mobile service revenue, increased broadband service revenue and growing ICT business revenue.

Speaker 3

Income from operations and net income decreased by 2.7% and 1% on year respectively, largely attributed to higher personnel and utility costs. EPS for Q2 is 1.27 dollars EBITDA margin continued to stay at about 40%. Overall, in the first half of the year, revenue increased by 1.3% compared to same period last year as a result of higher mobile service revenue, increased broadband service revenue, growing ICT business revenue and greater handset sales revenue. Income from operations and net income decreased by 2.4% and 1.8 on year, mainly due to the high base from one time government compensation related to ST2 satellite last year and higher personnel and utility costs. Excluding the one time item of government compensation, year over year changes in net income have remained positive, demonstrating the healthy growth momentum of our core and ICT businesses.

Speaker 3

EPS is 2.48 EBITDA and EBITDA margin exhibited stability. Now move on to Page 15 for balance sheet highlights. Total assets increased by 2.4% as of June 30, 2024 compared to the year end of 2023. This increase was largely attributed to higher current assets, mainly driven by other current monetary assets, which offset a decline in property, plant and equipment. Total liabilities expanded by 23.4% relative to the year end of 2023 and increased by 1.9% year over year.

Speaker 3

The rise was primarily due to dividends payable. Excluding the effect of dividends payable, debt ratio is 22.79%, indicating a healthy financial position. Page 16 provides the summary of our cash flows. Cash flows from operating activities increased by 3% on year mainly due to a rise in unearned revenue from ICT projects. Capital expenditures, CapEx experienced an overall 12.8% decline on year.

Speaker 3

Specifically, mobile related CapEx decreased by 51.1%, while non mobile CapEx increased by 6.7%, primarily due attributed to the deployment of FTTH and submarine cable. Additionally, free cash flows increased by 14.1% year over year. Taken together, our strong balance sheet and robust operating cash flows provide the foundation needed for business expansion and the pursuit of digital opportunities amid economic uncertainty. On Page 17, let's turn to the table that shows our operating performance relative to the guidance. During the Q2 of 2024, revenue was in line with our projection.

Speaker 3

Performance measures such as income from operations, net income, EBITDA and EBITDA margin all exceeded our forecast by modest margins. For the first half of twenty twenty four, revenue was above expected. However, income from operations, net income, EBITDA and EBITDA margin all outperformed our guidance. The better than expected results were primarily driven by the steady growth of core business and the enhanced profitability of ICT Business. This wraps up our financial results for the Q2.

Speaker 3

Let me hand it over to Chairman Harrison.

Speaker 2

Thank you, Vincent. On Slide 18, you can see our awards and ESG achievement highlights from the Q2 of this year. First of all, in our pursuit of global sustainability initiatives, we have successfully tested the greenhouse gas emission net zero targets review by SBTI in July. Our goal is to achieve the reduction of scope 1 and scope 2 greenhouse gas emission by 95% by 2,040 compared to the baseline year of 2020 in the long term. We have also published the ENGURO TNFD English report as the first Taiwanese telco in reinforcing our dedication to transparency and biodiversity in line with global best practices.

Speaker 2

Besides, I'd like to report that Zhongfa has been recognized among the top 2% of the world's most sustainable companies by Time Magazine and included in the FTSE for good Taiwan ESG Index for the 8th consecutive year. We have been consistently ranked in the top 5 by Taiwan Stock Exchange's corporate governance evaluation for the last time. This comprehensive achievement underscore the company's commitment to lead the telecom industry through sustainable governance. Moreover, I'm glad to share that we have been honored with 5 top awards from the Asian Excellence Awards for our exceptional leadership in sustainability and IR practices. Additionally, we won the Golden Prize for the Taiwan Sustainable Investment Awards this year as the sole telco awardee as we are the 1st Taiwanese telco to issue a bond in 2022 and fully utilize the rest of funds for initiatives for sustainability within 2 years.

Speaker 2

We will continue to mutually benefit with the environment, society and the stakeholders to achieve a sustainable vision. This concludes our prepared remarks. Thank you for your attention. At this time, I would like to open our conference call for questions.

Operator

Yes. Thank you. And ladies and gentlemen, we will begin our Q and A session. The first one to ask question Neil Anderson from HSBC. Go ahead please.

Speaker 4

Thank you. Good afternoon. I'd like to ask about the potential M and A that you mentioned on Slide 3. So could you give any more details about which sectors or areas you'd be looking at? And also which countries?

Speaker 4

I presume that you'd be looking at countries where you have an existing presence or edge. If you could say any more about that, that would be great. Thank you.

Speaker 3

Okay. So related to the questions on M and A, actually, we focus on the areas related to our 3 pillars of ICT business. ICT basically the AIoT, IDC and Cloud and Cybersecurity. But we are also open we are quite open minded and open to any areas that can enhance our core and our more business. And in terms of the country where we are looking at, as we are we also keep the option open.

Speaker 3

So we are looking for any suitable targets in any countries. But for cyber securities, perhaps we are more open to any target in other countries because of our CHT security. For our CHT security, we have an ambition to explore and expand our footprint overseas. Thank you.

Operator

Thank you. Ladies and gentlemen, we are now in Q and A session. Thank you. Thank you.

Speaker 1

I guess before the questions on the internet, now I have 2 I have 3 questions from the other from the Internet. Yeah. The first one is the CHT is about the CBG and EBG developments and the target for the second half of this year. That's one question. And another question is about the AI.

Speaker 1

The question is what are the CH what is the CHT AI factory? What is this used for? And how CHT to build up the GPU computability and how to construct the CHT AI factory? That's the second question. And for the yes, that's the 2 questions.

Speaker 1

Thank you.

Speaker 3

So the first question about the outlook for the CBG and DPG. So basically for both segments and we still maintain a positive outlook for the second half of the year. For the CPG because we have been able to effectively migrate our subscribers from 4 gs to 5 gs. So you can see for our mobile service revenue, it continues to grow. And for our broadband services, the growth rate for our broadband service revenue keeps at between 4% 5% and our subscriber base has been going up.

Speaker 3

So we believe our effective promotion package along with our strategy to promote our products that will help us to make sure our CPG performance will maintain its momentum. So this is for the CPG. And for the EPG, we still maintain a positive view for our EPG services. For EPG services, our focus is on the ICT business. Business, the revenue distribution between the first half and second half is about 40% 60%.

Speaker 3

So for the full year forecast for the ICT business actually we are quite confident that we can achieve the full year forecast. So that's our view on the performance for these two segments in the second half of the year. And about what's difference between AI and transition on IDC. I think AI data center require a lot of the GPU and the data to operate. It internal require high power supply, efficient cooling system and the load bearing flow and the high external bandwidth and the data security.

Speaker 3

So we have overcome this challenge with our extensive experience and confidence to deliver high quality product and service. We have been operating the high cloud service for long time, supporting the information systems of our enterprise, the clients, especially in solving and cloud applications. The GPU cloud we call is upgrade high cloud 2.0 is a new design version based on the original high cloud service featuring the number of GPUs and AI factories solid system to address the need of the AI driven information systems. Our top grade customer include both public and the private sector across in the various fields and require digital and AI transformation. To achieve AI transformation enterprise need to develop and several different key information systems such as the AI models.

Speaker 3

For example, a larger language model, the language and AI chat box or AI agents, which required a GPU computation, the software development and model training and so on. We have the consolidation of all these resource into a standard product mechanism we called AI factory.

Operator

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

Speaker 2

Thank you for your participation. Goodbye.

Operator

Yes. Thank you, Chairman Guo. 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.twirundertheircalendar section.

Operator

You may disconnect now. Thank you and goodbye.

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