Chunghwa Telecom Co., Ltd. (NYSE:CHT) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company’s Third Quarter 2023 Operating Results. During the presentation all lines will be on listen-only mode. [Operator Instructions] 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 CHT IR website, www.cht.com.tw/ir under the IR Calendar section. And now I would like to turn it over to Ms. Angela Tsai, the Director of Investor Relations. Thank you. Ms. Tsai, please go ahead.
Angela Tsai: I’m Angela Tsai, Assistant Vice President of Financial Department of Chunghwa Telecom. Welcome to our third quarter 2023 results conference call. Joining me on the call today are our Chairman, Harrison Kuo; President, Ivan Lin; and Vincent Chen, our Chief Financial Officer. During today’s call, management will begin by providing Chairman’s message, our business overview and followed by a discussion of our segment performance and the financial results and then we will move on to the question-and-answer portion of the call. Slide 2, please read the disclaimers and note concerning forward-looking statements. Now without further delay, I will turn the call over to our Chairman. Chairman Kuo, please go ahead.
Harrison Kuo: Thank you, Angela, and hello, everyone. Welcome to our third quarter results conference call. Chunghwa Telecom has been committed to staying ahead in every aspect during the ongoing market consolidation. Before our business overview, I would like to highlight our dominant spectrum assets. One of our solid advantages to sustain our leading position and the growing momentum in post-merger landscape. Currently, we are the #1 when it comes to the ownership of the mainstream sub 6 gigahertz spectrum. All of the 290 megahertz sub 6 gigahertz spectrum is in use to provide fastest mobile speed for our customers, outstanding us in the industry. In addition, we have the most mobile-based stations nationwide. We are also the operator [indiscernible] with the largest mobile capacity and the widest coverage in Taiwan.
On top of that, our leading — our leading capabilities have exclusively completed the two-carrier aggregation of a 3.5 gigahertz and 2.1 gigahertz to provide fastest 5G services with theoretical peak speeds of 2 gigabits per second, far beyond the industry standard. In terms of high band of 28 gigahertz, we are now with 600 megahertz at hand, which is next to the unsold slots that can be used for satellite services. We are immediately ready for low-earth orbit satellite services. We will monitor the update of spectrum releases and is confident to make another consecutive spectrum at 28 gigahertz, contributing to the always broadband connected environment, we commit to customers. To sum up, we are confident to maintain our leadership going forward given our better spectrum assets and the outstanding network quality.
Another unique strength of ours and a significant highlight during the quarter was the expansion of our international footprint to Europe. We are proud to announce our strategic collaboration with EXATEL Telecom from Poland. This partnership allows us to join, exploring emerging business opportunities, develop network infrastructure and assist our clients in expanding their presence. This step marks a significant milestone, not just aligned with our strategy to replicate Taiwan’s success abroad, but also solidifying our overall success and the leadership in Taiwan’s telecom industry. Now I would like to hand the call over to President Lin for the business overview in the third quarter.
Chau-Young Lin: Thank you, Chairman Kuo, and hello, everyone. Now please flip to Page 5 for the update of our performing mobile business. In the third quarter, we successfully achieved a remarkable milestone by acquiring more than 14% of the revenue share in the Taiwan mobile market and widening our leader against our peers. At the same time, our subscriber share also outperformed in the industry by increasing to 37.1% incremental exit revenue share about our subscriber share reach [indiscernible]. We are confident in accelerating our lead in consolidation landscape due to our better revenue generation capability and healthier and custom structure. Let’s go back and review the outperform — outperforming metrics of our mobile business.
In the third quarter, our mobile service revenue delivered above 7% year-over-year. Increased maintaining its growth for 16 consecutive quarters owing to the upsell result from the 5G migration. International roaming recovered an increase of the postpaid subscriber numbers. In addition, the postpaid ARPU report 5.1% year-over-year increase. Continuing its consequently growth for the tenth quarter for customers who migration from our 4G to the 5G, we observed an average [indiscernible] that there’s some uplift in the later months mobile monthly fees, maintaining and expanding of trajectory. Last, I move on to Slide 6 for an update of our fixed broadband business. In the third quarter, we are glad to see the positive performance in the fixed broadband sector.
The revenue and ARPU increased by 2% and 1%, respectively, on a year-over-year basis, mainly attributed to the increase of the higher speed service adoption in the third quarter and sign up for our service of the 300 megabit per second or higher, which is currently the mainstream among or speed mix and maintained its high growth rate of the 41% year-over-year. In addition to stable growth of the high-speed service adoption, we are to set up the speed upgrade of the lower service subscription to optimize our service profile. We launched our attractive incentives during the quarter and a successful encouraged customers with the speed below the 100 megabit per second to transition to the higher speed above the 100 megabit per second. As a result, we achieved an 11% year-over-year increase in size of fee for service 100 megabit per second or higher.
Now let’s move on the performance of our custom-centric business group. Slide 8 presents the performance of our CBG group. In the third quarter, the total CBG revenue increased steadily by 2.8%. Year-over-year, mobile service revenue rose by 6.8%, prepared by stable 5G migration and the increase of the postpaid subscription numbers, in particular, international roaming revenue continuing to recover and broaden contribution. Fixed-line service revenue decreased 0.7% due to the voice decline. And while fixed broadband revenue growth by 2.7% year-over-year, thanks to effective promotion. In addition, by the end of — by end of the third quarter, the popular iPhone 15 series demonstrated a 27% increase in sales volume compared with that of iPhone 14 series and the CBG and sales revenue in the third quarter increased by 3% year-over-year.
Despite CBG revenue increased about 3% year-over-year. If the income before tax kept because of the higher pace of the recognition of the government subsidiaries in the same period last year as well as the increase of the manpower and electricity expensive and purchase the renewable energy. Now I will further present our consumer business highlights. In the third quarter, our Multiple-Play package continues to be well received. The subscriber number of the bio 6 broadband and WiFi service altogether demonstrated 16.4% quarter-over-quarter growth. Home WiFi subscription numbers were increased by the 34.0 % year-over-year, along with the fixed broadband promotion package blowout during the quarter. In addition, our video subscription boost and delivered +5.8% year-over-year.
the increase mainly due to broadcasting of the existing Asian games on both MOD and Hami video, which also brought in revenue injection. As Harrison said, we will continue to invest in production — building a quality content and team up with the local content production and major international production and company — companies with the goal to strengthen our content assets, expand our video platform and prepare Taiwan and content introduction on to the global stage. Moreover, we also invest in KK Company technologies for innovative business models and service to further expand the digital ecosystem. Please turn to Slide 10 for an overview of our enterprise business performance. In the third quarter, EBG report 11.8% year-over-year decrease of its income before tax, mainly due to fixed voice decline of the enterprise path and clients and higher base result from the recognition of the government subsidies at the same period of last year.
A technician testing a consumer’s home device connected to the telecom service.
Those factors also resulted in a 4.4% year-over-year decrease of the total revenue of the EBG. In spite of ICT revenues and AIoT revenues decreased in the third quarter because of higher basis — higher base of the recognition of the largest smart energy project mobile service revenues continuing increase attributable to the 5G upselling and the recovery of international roaming revenue, fixed-line revenue slightly decreased year-over-year mainly due to the voice decline, as I mentioned, about where data communication revenue and broadband revenue continuing to grow as expected. Despite the above decrease this quarter, we maintain carefully the optimistic outlook on our enterprise, the business performance throughout 2023. Slide 11 presents our enterprise business highlights.
In the third quarter, our IDC and cybersecurity business and still demonstrated robust growth. — where the total emerging enterprise business revenue of our major applications decreased by 6.8% year-over-year due to higher basis led to smarter energy and smarter project revenue recognition last year. In terms of the details, IDC business, in particular, achieved a 13.7% growth owing to both growing project numbers of the long-term and the recurring revenue injection. And revenues from the cybersecurity also achieved 7.4% growth due to increase in the demand from our enterprise plan. Furthermore, despite our cloud service revenue decreased on a year-over-year basis due to one-time smart health project recognition last year. We are going to see that our recurring revenue from the international public cloud service continuing to grow strongly by about 20% with increasing and demand from clients.
As we continue to invest in developing the 5G private network, we acquired national culture projects to speed AR/VR technology in emerging performance and expand opportunities in offshore wind power field construction and application. In addition, we continue to expand our IDC with a high quality to cater to increase the demand, which further drives up the recurring revenue contribution to reflect our leading ICT capability. On Slide 12, I’m going to present our international business performance. In the third quarter, income before tax of IBG decreased by 3.6% year-over-year, owing to the non-operating expenses such as the foreign currencies and variation loss and the increase of utility expenses. Excluding the impact, IBG continued to experience positive year-over-year growth in profit.
Total revenue of the IBG increased by about 13% on the year, mainly driven by the going in the emerging business, including IDC and cloud service from global clients and record roaming revenue. For the international business highlights, we are delighted to share our footprint expansion in Europe and Thailand in July. We signed MOU with the EXATEL, a Telecom from Poland. The cooperation will be focused on emerging business include 5G and private networks and the smart city solutions. In September, we also signed an MOU with the Overbrook Hospital in Thailand for the cooperation of the telemedicine. We expect our service offering in overseas market into the U.S., Japan, Southeast Asia and Europe to continue to spread. Now I would like to turn the call to Vincent for our financial highlights.
Vincent Chen: Thank you, President Ivan. Good afternoon, everyone. I will now provide a financial summary of our third quarter results. Let’s begin with Slide 14, income statement highlights. During the third quarter, total revenues increased mildly compared to same quarter last year. The main reason is growing mobile service revenues offset decreased voice revenue and the recognition of a onetime government grant income from the same period last year. Income from operations and net income decreased by 5.9% and 2.9% on year, respectively, mainly due to an increase in electricity expenses and manpower costs. Overall, for the first nine months of the year, total revenues increased by 2.6% year-over-year, primarily fueled by strong growth of our mobile, ICT and broadband services, which offset declining voice revenue and the contribution of a one-time government grant income.
Net income grew by 2.1% on year, mainly due to our growing ICT business. EPS rose by 2.1% on year to $3.69 billion. The growth of EBITDA remained in positive trajectory and EBITDA margin remained at about 40%. Now move on to Page 15 for balance sheet highlights. As of September 30, 2023, total assets compared to the end of 2022, decreased by 2.1%, mainly due to the decrease in current assets, PPE and intangible assets, which offset the increase in other financial assets. Total liabilities decreased by 2.7%, primarily attributable to the decrease in accounts payable. Additionally, debt ratio decreased slightly and net debt over EBITDA remains 0. Taken together, these debt ratios demonstrated the robustness of our balance sheet. Page 16 provides a summary of our cash flows.
Our cash flows from operating activities remained robust, which increased by 5.7% on year. Capital expenditures decreased by 6.6% compared to the same period last year, of which mobile-related CapEx was reduced by 28.4% whereas non-mobile CapEx increased by 12.9%. The latter was primarily attributable to greater IDC investments. On top of that, Free cash flow was up by 14.9% on year. Collectively, our strong operating cash flows, along with the robust balance sheet enable us to be future-ready, and create sustainable and long-term value for our shareholders. On Slide 17, the table presents financial results against management guidance. During the third quarter, revenues slightly fell short of our expectation due to declining ICT business revenues, while net income and EPS meet our expectations, mainly driven by strong performance of mobile and broadband services.
For the first nine months of 2023, our revenue and profit matches with our forecast as a result of outperforming core and emerging businesses. That concludes the overview of our Q3 financial results. Let me turn the call over to Chairman Harrison.
Harrison Kuo: Thank you, Vincent. On Slide 18 is our awards and ESG recognitions received in the third quarter. In October, The Asset, a widely recognized business news and the research organization announced that we won the Jade Award, the highest level of The Asset ESG Corporate Awards for the third consecutive year. We are the only company in Taiwan to stand out from the cross-industry and the cross-country selections for our extraordinary ESG efforts. Moreover, we are glad to share that our efforts in ESG are widely recognized and received by investors as we are the only telco included as one of the top 10 constituents by Financial Times SE4Good Taiwan ESG index. Meanwhile, we were honored as the most outstanding company in Taiwan within the communication services sector by Asia Money, reflecting our high-quality telecommunication services, excellent governance and great ESG initiatives acknowledged by global investors.
This concludes our prepared remarks. Thank you for your attention. At this time, I would like to open our conference call for questions.
Operator: Thank you, Chairman Kuo. [Operator Instructions] And our first question will be Neale Anderson of HSBC. Go ahead please Neale.
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Q&A Session
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Follow Chunghwa Telecom Co Ltd (NYSE:CHT)
Neale Anderson: Thank you. Good afternoon. I have a question relating to the government subsidies in the third quarter of last year. Is it possible to give the amounts that were booked? It looks like they were booked in both the Consumer business group and the Enterprise business group? I’m just trying to work out the pressure on profit from that because you also mentioned some other cost increases, electricity, et cetera. Thank you.
Chau-Young Lin: Okay. So regarding the government grant income, so that’s because of the satellite subsidy. So the amount is about $0.4 billion. So for this quarter — actually, last year same quarter because we record this amount. So that will affect our income on the bottom line for this quarter because of the higher base.
Neale Anderson: Thank you. And that’s split between the Consumer and the Enterprise business group. Is that correct? Are you able to give any detail on the split?
Chau-Young Lin: Yes, because the customer is mainly for the enterprise customer. So it affects heavily on the EPG performance. And this is a onetime effect.
Neale Anderson: All right. Okay, thank you. And if I could follow up though. So in the press release and also in your presentation, you mentioned in the Enterprise business group, there was a decrease of fixed voice after the pandemic. So could you give a little bit more detail on that? What’s happening there? Are people moving to IP-based services or businesses, I should say, moving to IP-based services and that’s resulting in lower revenue?
Chau-Young Lin: So basically, during the pandemic period, so the people stayed home, so they used more voice call to connect their relatives or their customers to help. But in the post-pandemic period, so people returned to work, and they are out of their home. And so they use more on the wireless or the broadband. Yes. So in the — during the pandemic period, so at that time, the voice revenue actually is still declining, but the rate actually is lower. It’s about like 4%, 5%. But now in the post pandemic, actually, the declining rate is greater. So that affects our revenue and also our income. Yes.
Neale Anderson: Got it. Perhaps just finally on the deal with the Polish operator EXATEL, is that to support Taiwanese businesses in Europe? Could you give a little bit more detail about how large or the geographic scope for that business. Is it Poland, specifically or is that the European partner and you’re aiming to service its business more broadly?
Chau-Young Lin: Okay. So we are still in talks with our counterpart, our partners, and we may collaborate in various areas. Yes, it’s not only in the ICT or maybe expand to other areas. And we don’t rule out the possibility to expanding the collaborations to our regional partners in Europe. We will keep you posted once we have more details and when the deal is more confirmed.
Neale Anderson: Understood, thanks very much for your help. Thank you.
Chau-Young Lin: Thank you.
Operator: [Operator Instructions] If there is no further questions at the moment, then now I hand the call over to the management team to take the questions from the webcast page line. Thank you.
Angela Tsai: Okay. Now we’ve received a question from the webcast. It’s about the joint class developments of their low-earth orbit satellite services. And is there any cooperation planned with a specific operator? Thank you.
Chau-Young Lin: Thank you for the website questions. The development of low-earth satellites primarily complements ground communication network, aiming to expand the overall communication network coverage and enhance our network resilience. We adopt an open approach and actively exploring cooperation opportunities with multiple international low orbit satellite operators, and we’re waiting to participate in domestic proof-of-concept projects. However, due to a nondisclosure agreement, specific details of the collaboration cannot be disclosed at this moment. We have obtained licenses for geo synchronized orbit satellites this year, one for medium-earth orbit and one for low-earth orbit. In addition to ongoing negotiations with satellite system operators, we are actively preparing for applying commercial frequency license, network setup and et cetera.
