Chunghwa Telecom - Q1 2024

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's first quarter 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. Webcast replay will be available within an hour after the conference is finished. Please visit CHTIR website, www.cht.com.tw/ir under the IR calendar section. Now, I would like to turn it over to Ms. Angela Tsai, Assistant Vice President of Investor Relations. Thank you. Ms. Tsai, please go ahead.

Angela Tsai (Assistant VP of Investor Relations)

Thank you. I'm Angela Tsai, Assistant Vice President of the Financial Department for Chunghwa Telecom. Welcome to our first quarter 2024 results conference call. Joining me on the call today are our Chairman, Harrison Kuo, Presidents Ivan Lin, and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing chairman's message and our business overview in the first quarter, followed by a discussion of our segment performance and the financial results. After, we will move on to the question and answer portion of the call. On slide two, please read our disclaimers and notes concerning forward-looking statements. Now, I will turn the call over to Chairman. Chairman Kuo, please go ahead.

Harrison Kuo (Chairman)

Thank you, Angela, and hello, everyone. Welcome to our first quarter 2024 results conference call. In the first quarter, we proudly announced our success in expanding our lead in Taiwan's telco market. Amidst the robust three-player landscape, our revenue share in Taiwan's mobile market continued to steady, steadily grow, climbing from 40.3%-40.4% quarter-over-quarter, while subscriber share enjoying an increase from 37.6%-37.7%, maintaining the growth trajectory after the market consolidation completed last quarter. Our financial performance also speaks for our business success. Total revenue in the first quarter hit a new high for the same period since 2017. Income before tax also reached a record high for the same period since 2016.

On the basis of excluding the one-time item of the government compensation for ST-2 satellite recognized in the first quarter last year. To ensure 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. In addition, generative AI is another technology that we leverage on troubleshooting to enhance service quality, response time, and the cost efficiency in operations, particularly in relation to network maintenance and the customer service. To capture AI expansion opportunities, we actively deployed computing utility 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. 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 right of the 2024 Paris Summer Olympic 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 Chunghwa Digital Culture and Creative Capital, CDCCC, in the first quarter 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. 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 a low-Earth orbit satellite, LEO.

Going forward, in addition to GEO, the geostationary orbit and the LEO, we also plan add MEO, the medium 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 first quarter of 2024.

Ivan Lin (President)

Thank you, Chairman Kuo, and hello, everyone. Now, please flip to page five for an update on the performance of the mobile business. As mentioned by Chairman Kuo, we maintain our leading position in the Taiwan mobile market in the first quarter of 2024, with the largest subscribers share of 37.7%. Meanwhile, our revenue share continued to stay above the 40%, hitting 40.4% by the end of March. Further widening our lead against our peers, our excess revenue share over the subscriber share was 2.7% due to the exciting progress of the subscriber share gains.

In addition, 5G migration and international roaming continue to drive up our mobile service revenue and the postpaid ARPU, recording 5.1% and 3.4% year-over-year increase, respective. Mobile service revenue and ARPU also continued to maintain their growth for 16 consecutive months and 12 consecutive quarters, respectively. As 5G continues to penetrate steadily, we saw the average monthly fee uplift from customers who migrate from 4G to 5G amount to 14% and 5% in the first quarter, and it's a repeating and inspiring upward trajectory. Let's move on to slide six for an update on our fixed broadband business.

In the first quarter, we are great to see the accelerated growth in the fixed broadband sector due to our successful strategy to encourage speed upgrades. The fixed broadband revenue and ARPU increased by 3.8% and 2% respectively on a year-over-year basis, and both expanded the year-over-year growth margin compared with the slide of the previous quarter. Our sign-up of the service of the 300 Mbps or higher continued to be popular among our speed mix, with the 29% year-over-year increase in the first quarter, maintaining the double-digit growth. Now, let's move on to the performance of our customer-centric business growth.

Slide eight presents the performance of our CBG groups. In the first quarter, income before tax of the CBG increased by 3.7% year-over-year, mainly due to substantial growth of the telecom service. On a year-over-year basis, total CBG revenue increased by 1.7%, mainly driven by a healthy 4.2% increase of our mobile service revenue. Due to the continued 5G and the migration, postpaid subscriber increase and the roaming revenue. Fixed broadband performed well as its revenue growth increased to 4.6%, offset by the revenue decrease of the fixed voice.

Sales revenue decreased 1.5%, mainly due to the higher base in the first quarter of last year, owing to the deferred demand resulting from the supply chain issues. Slide nine further illustrates our consumer business group highlights. In the first quarter, our multiple product packages continued to support CBG's growth and momentum. The subscriber numbers of the mobile and fixed broadband and the Wi-Fi service altogether demonstrate 23.3% quarter-over-quarter growth, which achieved eight consecutive quarters of double-digit quarter-over-quarter growth. This is attributable to the well-received promotion package and value-add service bundles.

In terms of the individual and home entertainment applications, we remain the largest video platform in Taiwan, as the subscriber number of our video service stays the same. Notably, we successfully acquired the exclusive broadcasting right for the 2024 Olympic Games in April, which we believe will bring in a subscription and revenue increase of the MOD and Hami Video. In addition, we are also excited to see a 17% year-over-year increase in our key cybersecurity service and SaaS apps in the first quarter. Mainly due to the increased demand for the service to avoid any phishing website and block malicious, you know, connection link.

In addition, our service for filtering out adult content on the internet and the setting time limits on the internet surfing has also been popular among the families and driving up the popularity of our cybersecurity service. We expect the growth trend will continue and further contribute to our CBG performance. Please turn to slide 10 for an overview of our enterprise business group performance. In the first quarter, the EBG revenue slightly decreased by 0.9%, primarily due to the recognition of the government and the compensations in the same period last year. Excluding the one-time item, EBG revenue increased by 1.9% on year.

Additionally, our ICT business revenue increased by 3.3%, mainly driving by the business expansion of the big data service, cybersecurity, and AIoT and cloud service, all of which report a 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. Furthermore, EBG mobile service revenue also demonstrate strong growth at 3.7% year-on-year, mainly prepared by the continuing the 5G upselling, as well as as well as the growth of the international roaming and the revenue. We observed the text message revenue also turned positive year-on-year due to growing enterprise the marketing demand.

Although the fixed-line revenue slightly decreased, data communication revenue and the broadband and access revenue continued to grow, which offset the fixed voice decline. Due to the fixed voice decline and higher base of the aforementioned one-time item recognition last year, EBG reported a 13.4% year-over-year decrease of the income before tax. However, excluding the one-time effect, EBG's income before tax decreased 9.2 to 1.5% year-over-year. Slide 11 illustrates our enterprise business highlights. In the first quarter, we were glad to see our total enterprise emerging application revenue increased by 5.2% on a year-over-year basis.

Notably, big data analysis delivered a significant 71.6% year-over-year growth due to the smart energy project injection and cybersecurity revenue improved year-over-year for the ninth consecutive quarter. Additionally, the AIoT business experienced 6.5% growth year-over-year, driven by revenue the injection from the green energy project, and our cloud service revenue increased by 5.8%, with substantial growth of the international public cloud recurring revenue at 13.68% year-over-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 glad to report our recurring revenue of IDC service delivered stable growth at 7.6%.

This quarter, we successfully expand our national expertise into the global market with the acquisition of our first overseas data center construction project. Furthermore, we are proud to announce that we are the first company in Taiwan to successfully introduce an automatic vehicle identification, AVI, and vehicle detection, VD, system to monitor overtime parking in the freeway, the service area, which we believe is a replicable success that could be extend to other millions. Slide 12 illustrates our international business performance. In the first quarter, 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 13.3% respective.

The impressive growth was mainly fueled by the growing demand for overseas ICT projects 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 change. During this quarter, we partnered with EXATEL, a Polish telecom operator, to launch the 5G zone in Warsaw, where our innovative 5G smart application are showcased to attract business opportunities. It also serves as the foundation for local touch and business expansion in Europe. In addition, we not only won the 2024 Smart City Innovation Application Award for our smart transportation solution and [domestically], and we also won the 2024 System Integration Award in Kaohsiung Smart City Expo.

... for our successful overseas smart healthcare solutions, proving our success in the Internet of Medical Things globally. Now, I would like to turn the call to Vincent for our financial highlights.

Vincent Chen (CFO)

Thank you, President Ivan. Good afternoon, everyone. Now, I will present a financial summary of our first quarter results in 2024. Let's begin with slide 14, income statement highlights. During the first quarter in 2024, revenue was about TWD 55 billion, which hit an eight-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% year-over-year, respectively, mainly due to the high base from last year as a result of government compensation related to ST-2 satellite. Excluding this one-time item, year-over-year changes in income from operations 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 remained steady. Now move on to page 15 for balance sheet highlights. As of March 31st, 2024, total assets increased by 0.9% compared to the year-end of 2023. 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 zero. Page 16 provides the summary of our cash flows. For the first quarter in 2024, we generated solid cash flows as cash flows from operating activities grew by 26.1% compared to the same quarter last year.

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% year-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% year-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 to seize digital opportunities. On slide 17, let's turn to the table that presents operating performance against our forecast. In the first quarter of 2024, revenue was about in line with our estimate.

For performance measures, income from operations, net income, EPS, and EBITDA all beat our forecasts 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 first quarter financial results. Let me turn the call over to Chairman Harrison.

Harrison Kuo (Chairman)

Thank you, Vincent. On slide 18, you can see our awards and ESG achievement highlights from the first quarter 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. Additionally, we are the first telecom company in Taiwan to receive approval from EV100, and committed to transitioning 100% of our corporate fleet to electric vehicles by the year 2030.

Besides, we once again ranked in the top five 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 the supplier engagement rating. In addition-

... We were the leading telco in Taiwan, receiving top awards for most committed to ESG and the Best Investor Relations from FinanceAsia. This accolade attests to our position as an international industry leader with outstanding performance in all aspects of sustainable development. Furthermore, we clinched the first prize for overall ESG performance for three consecutive years from Global Views 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 a stable performance in ESG evaluations, and is featured on the annual honor roll. This concludes our prepared remarks. Thank you for your attention. At this time, I would like to open our conference call for questions.

Operator (participant)

Thank you, Chairman Kuo. Ladies and gentlemen, we will now begin our question and answer session. If you have a question for any of today's speakers, please press star one on your telephone keypad, and you will enter the queue. After you are announced, please ask your question, and when you are speaking, please speak louder or closer to the microphone. If you find that your question has been answered before it is your turn to speak, please press star two to cancel the question. You are also welcome to send questions via chat box on the webcast page. We will begin with the questions from telephone line and then move to the queries from the webpage. Thank you. Now, for the dialers, if you would like to ask questions, you may press star key and number one on your telephone keypad. Thank you.

The first question, Neale Anderson of HSBC. Go ahead, please.

Neale Anderson (Equity Analyst)

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. So would it be possible to give us any more detail and say which is the largest one on an absolute basis, and 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, 'cause 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.

Vincent Chen (CFO)

Okay. Thank you, Neale, for your questions. So regarding the contribution of the emerging application revenues, so basically, we don't disclose a detailed information. But what we will share is that the ICT contribute the most, and followed by cybersecurity and AIoT. So these are the key pillars. This is just for the first quarter. Yes. And for the revenue and margin trend on data center, okay, so what we'll say the revenue trend, what we see, because, you know, for the ICT, right, sometimes we will 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 ICT, the growth has been increasing.

As we mentioned, now the recurring revenue of ICT 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 ICT revenue, and it's on a healthy trajectory. Thank you.

Neale Anderson (Equity Analyst)

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

Vincent Chen (CFO)

Okay. So basically, for the margin, for the data center, per se. Actually, when we see ICT business, we take a holistic view to see this, because for client, using our data center, normally they will use our other sale, our 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, you know, their main business is on data center per se, but they don't provide integrated services to the clients. So what we'll see is, together with our subsidiary, Chief Telecom, actually, we are still the largest ICT 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.

Neale Anderson (Equity Analyst)

Thank you very much.

Operator (participant)

... Thank you. As a reminder, please press star one on your keypad if you would like to ask the question. Thank you.

Angela Tsai (Assistant VP of Investor Relations)

Okay, maybe we have the first question from the platform. It is about as the government announce the policy of raising the electricity fee, could Chunghwa Telecom management share the impacts to Chunghwa Telecom?

Harrison Kuo (Chairman)

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 3G networks all constantly contribute to energy savings. In addition, we have take some countermeasures to respond 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 the 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 carbon emission reduction, aiming to control the overall energy cost as well as to respond to ESG goals. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, please press star one on your keypad if you would like to ask the question, or you can submit your question via the chat box on the webcast page. Thank you. If you would like to ask a question, please press star one on your telephone keypad. Thank you. We are now in question and answer session. If you would like to ask the question, please press star one on your telephone keypad. Thank you. 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 Kuo for closing comment. Thank you.

Harrison Kuo (Chairman)

Thank you for your participation. Goodbye.

Operator (participant)

Thank you, Chairman Kuo. 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. You may now disconnect. Thank you and goodbye.