Earnings Call: Q2 2021

Jul 30, 2021

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's Second Quarter 2021 Operating Results. During the presentation, all lines will be on listen only mode. When the briefing is finished, the reactions 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 CHT IR website www.chd.com.tw/ir under the IR calendar section. Now I would like to turn it over to Ms. Angela Cai, the Director of Investor Relations. Ms. Cai, please go ahead. Thank you. This is Angela Cai, Director of Investor Relations for Zhenghe Telecom. Welcome to our Q2 2021 results conference call. Joining me on the call today are Harrison Guo, our President and Vincent Chen, our Chief Financial Officer. During today's call, management will begin by providing an overview of our business from the quarter, followed by a discussion of operational and financial highlights. After, we will move on to the question and answer session. I'd like to note our Safe Harbor statements. Now I'll turn the call over to President Guo. Preston Guo, please go ahead. Thank you, Wang Yirang, and hello, everyone. Welcome to our Q2 2021 Earnings Call. In the Q2 of 2021, 5 gs and the stay at home opportunities under COVID-nineteen level 3 alert continue to enhance our overall business performance. In our mobile business, we are pleased to report that our cumulative number of 5 gs sign ups exceeded 1,000,000 by the end of the quarter, which is ahead of schedule and expect to meet our guidance of 2,000,000 sign ups by the end of this year. We expect to maintain the growth trend as we roll out a variety of mid to low end 5 gs headsets, continue to develop 5 gs innovative applications and introduce our 5 gs enterprise network and vertical tiers. As expected, our postpaid ARPU turned positive on a year over year basis in the 2nd quarter, mainly due to the continued growth of possibly mobile subscribers and the 5 gs contributions and as customers who may be renewed contracts to adopt 5 gs services contributed an average of 21% uplift through their monthly fees. Moreover, to provide quality 5 gs services, we have accelerated our 5 gs deployment and have more than 8,000 base stations at this time. And we expect to approach 12,000 base stations by the end of this year. According to the 1st ever Taiwan 5 gs Speed Test Award Report in July, we received extensions of 30 5 gs and the best mobile coverage in the Q1 and the Q2 this year. We were in favor to maintain our leading status in Taiwan's mobile market. Next, COVID-nineteen also drove up demand for fixed broadband service in the 2nd quarter. Our high end subscriber net adds turned positive on a year over year basis in the 2nd quarter as a result of increased demand for work from home and online learning capabilities. Broadband ARPU continued its uplift as subscriber migration to our broadband of 300 megabits per second or higher continues to increase by approximately 52% year over year. Number of home WiFi devices increased by 6 50% year over year to support the popularity of our home centric applications. The number of MOD subscribers also increased quarter over quarter as we continue to introduce cutting edge technologies to enhance viewing experience. In July, we tested the Tokyo Open Orientation with 4 ks quality on our MOD process and platform. And we exclusively delivered the first ever VR simulation on home video. Our VR plus 5 gs Android services enable users to further engage in viewing contests using VR headsets and we have demonstrated the performance of our 5 gs technology for multi angle broadcasting during the events. We expect our media services to continue to grow in the digital convergence. Now allow me to walk you through each of our business lines. Turning to Slide 5, you can see an update of our mobile business. In the Q2, we continue to maintain our leading position in the mobile market with 38.8% of the revenue market share and 36% of the subscriber market share, excluding IoT SIMs. During the quarter, our mobile customer Net S and the postpaid Net S are both highest among the big three majors. And our trend line remains the lowest among peers. The increase of our mobile service revenue turned positive year over year with contributions with increasing postpaid revenue and the value added application revenue. We expect the relatively regional competition to continue, which we believe can further enhance our overall mobile performance. Please turn to Slide 6 for an update on our broadband business in the Q2. We were pleased that our growth in ARPU increased by 3% year over year, which reflects our success in migrating subscriber to adopt higher speed services and other benefits stemming from stay at home opportunities in the new normal. The number of subscribers that sign up for connection speeds of 300 megabits per second or higher increased by 52% year over year. While VPN searches revenue contributions from enterprise customers grew as well. In addition, we were encouraged to see that our signed subscriber net adds has begun to play positive after years of decrease. In response to customers demand for innovative applications requiring higher speed connection. We expect to roll out 2 gigabit per second service in the Q3. Coupled with the ongoing demand for digital transformation, we observe ongoing new normal. We are confident that we will maintain the overall upward trend in our OpEx business. In the Q2 of 2021, In the Q2 of 2021, subscriber numbers for both MOD IPTV platform and high Nvidia increased quarter over quarter as a result of growing demand for video service under COVID-nineteen alert. And we successfully continue to maintain our leading status as the largest video platform in Taiwan. In addition, during the 1st week of broadcasting at the Tokyo Olympic Games, the viewership and the expected advertisement revenue in Taiwan has hit a record, exceeding that of 2018 FIFA World Cup, which is encouraging. MOD ARPU achieved 2% increase year over year as well, mainly due to the successful upsell in both VOD and channel services. Our SVOD as OPEZ package, sign up number almost doubled quarter over quarter and 89% of our tiered price channel subscribers choose the highest price packaging. Moving forward, we will continue to enhance video content and bundle our video services, including MOD and the home media. With fixed broadband and the 5 gs service to drive our home centric business performance and create a revenue stream. Please turn to Slide 8 for an update on our ICT business. Overall ICT project revenue in the Q2 increased about 10% year over year, mainly because of the recognition of revenue from public sector and the smart solar In terms of emerging ICT services, ITC revenue and the cloud revenue continue to grow by 11% and 27% year over year respectively. Cybersecurity revenue decreased by 7% year over year due to some project revenue delays. However, we expect to catch up during the second half of this year. Going forward, we will continue to enhance our overall ICT technology capabilities to cater to more emerging digital opportunities and be more selective to further increase project margin. Now I would like to turn the call over to our CFO, Vincent Chen, who will review our financial results. Doctor. Chen, please go ahead. Thank you, President Kuo. Good afternoon, everyone. I will now review our Q2 financial results. Please turn to Slide 10, which provides highlights from our income statement. For the Q2 of 2021, on a year over year basis, total revenues increased by 3.8% and operating costs and expenses increased by 3.2%. Income from operations increased by 5.9%, and our net income increased by 4.1%. In addition, our EBITDA margin increased to 41.9% from 40.5% in the same period of 2020. Slide 11 provides a breakdown of revenue of our business segment. In the Q2 of 2021, total revenue increased by 3.8% year over year, mainly due to the increase in handset sales revenue, mobile service revenue and fixed broadband revenue, which offset the decrease in the voice revenue as a result of VoIP substitution. Moving on to the Slide 12. Our operating costs and expenses in the 2nd quarter increased by $1,180,000,000 or 3.2% year over year, mainly due to the increase of depreciation and amortization expenses, cost of goods sold and marketing expenses. Slide 14 shows that cash flows from operating activities for the Q2 of 2021 increased by RMB 4,750,000,000 or 36.1 percent compared to the prior year period. This was mainly attributable to an increase in the collection of accounts receivable and an increase of accounts payable. As of June 30, 2021, the balance of cash and cash equivalents was RMB 32,140,000,000, an increase of RMB 12,990,000,000 or 67.8 percent relative to June 30, 2020. The increase was primarily due to the issuance of corporate bonds and an increase of cash flows from operating activities. On Page 14, you may find a table that compares our financial results with forecast. As you can see, for Q2 2021, our revenue almost met our 2nd quarter guidance and the performance measures including income from operations, net income, EPS, EBITDA and EBITDA margin all exceeded our expectations. Please turn to Slide 15. For 2021, we budget $43,100,000,000 in CapEx, including spending on business focuses in 2021, such as accelerating the construction of 5 gs network, IDC and submarine cable. In the Q2 of 2021, our 5 gs capital spending was on the track and in line with our schedule of 5 gs base station deployment. Therefore, we maintain our forecast that 2021 is our 5 gs investment peak. Now, I would like to turn the call over to President Guo to introduce our awards and recognitions. Thank you, Vincent. Lastly, Slide 16 illustrates our awards and the recognitions from the Q2, highlighting our distinction in 5 gs speed, mobile coverage, corporate governance, sustainability and social responsibility. Going forward, we will continue to leverage our infrastructure advantage to provide integrated services with our quality network to meet customer demand. Now we are open the floor for questions. Thank you. We're now beginning our question and answer Ladies and gentlemen, The first question is coming from Saiila from HSBC. Go ahead please. Hi, this is Saiila from HSBC. So I would like to ask about the target of base station, all the base station. So earlier it was mentioned that the target would be at 10 k by the end of the year. So now you have increased the target basis. 12,005 stations will be completed by the end of this year. Now we have more than S1,000 base stations. Thank you. Okay, thanks. Thank you. The next question is coming from Lisa Chen from Yuanda. Go ahead please. Yes. Sorry, I think I need to back to the HSBC's question about the original targets for the 5 gs base station for this year. I think that was our original target. I think we were not really clear about the question. I want to clarify the question. I think your question is about the original target for the 5 gs base station number this year, right? I think that the original number was 10,000. And now we are thinking about we will approach 12,000 by end of this year. Thank you. Thank you. Now we have in Lisa Chen from Yuanda. Go ahead please. Thanks for taking my question. We just have one question for could you give us more color for the Q3 or Q4 of this year's outlook? Okay. Thank you for your question. So for the second half of the year, because despite the outbreak of pandemic, but we still see very exciting results from our mobile services revenues, also the broadband revenues. So although we will expect some turbulence ahead in the second half, but we are confident that our revenue generation, the stream will on the track and we'll keep the momentum going and we are confident that we can meet our forecast for the second half, yes, also for the full year. Thank you. Thank you. The next question is The next question is coming from Sarah Wong from Morgan Stanley. Go ahead please. Thank you. I have three questions. So first question is that, is there any change in our full year revenue profit guidance? And then the second question is that regarding the 5 gs base station target number. So we previously target 10,000 now it's 12,000, but the total CapEx budget remain unchanged. So may I ask if there's a change in the CapEx structure or the price per position is lower than expected? And then my third question is on ICT. So would you management, would you please provide some outcome ICT, say, in terms of revenue growth or as a percentage of revenue contribution for, say, next year or next 1 or 2 years? Thank you. So for the first question regarding the full year revenue profit guidance, we still maintain our focus at this point. So although our performance is better than expected, but because of the uncertainty of the pandemic, so we still want to stay in a more cost sensitive manner, yes, make for your So for your second question on the 5 gs bus station line and also the our CapEx budget. So although we increased our target of the number of base station from 10 ks to 12 ks, We don't revise our package CapEx for 5 gs. This is because for the 5 gs for the equipment, right, as time goes by, the cost will be lower. Yes. And also, we test we deploy our 5 gs network in a more precise manner. We use the big data. So that will serve out some money and some capital expenditures. Thank you. As for the third question about your IPTV MOD services, I think there was a reason to know the Tokyo Olympic Games. I think we are pretty good. And our current M and A, the 2nd quarter M and A services revenue, I think it's also pretty ICT. Okay, I'm sorry. I talked about ICT business, okay. I think the outlook for ICT, ICT growth, of course, when you mentioned about the percentage of ICT contribution, So this year, we already mentioned earlier, I think in the early quarter, we mentioned about this year similar the percentage compared to last year's little bit lower. But for this yes, for the next year, we'll also for the year after next year, we believe it will continue to increase for sure. Yes, last year because we have some big public government projects, so the number the revenue size is a bit of large. But continue for the next coming years with the ICT side, the business will continue to grow. And so the percentage accounted for our consolidated revenue should be increased. I think this should be out of question. But the percentage for this year only accounted for double digit for sure, yes. Sorry, just to clarify, the double digit is for the growth rate, right? For the growth rate, not really for let me check. For the growth rate, we are already double digit for the Q2, yes, for the Q2. For the whole year, also double digit, yes. I see. And then 50 percentage But let me say that, I think for the this year, I think in the original, this year we mentioned about this year, because our budget is in the ICT, our total project revenue, we mentioned in our guidance, already mentioned about the project revenue was little bit lower compared with year, the total consolidated revenue for the ICT revenue should be around like when you're talking about the gross number, should be like really double digit for sure. Only when I'm talking about gross number, I think the accounted for like 12% for the total consolidated revenue. But the gross number, low this new gross number should be a little bit lower than that of the WICT revenue number should be lower than that of last year. If you exclude the large project happened last year, the membership growth, okay? I think that we already explained earlier this year. Hope this explains your question. Yes, got it. Thank you. Thank you. And ladies and gentlemen, we are now in our question and answer The next question is coming from Neil Anderson from HSBC. Go ahead please. Hi there. Good afternoon. Just a question on the mobile revenue outlook, please. Presumably, you saw some benefit year on year from roaming being weaker also last year in Q2. So from here on, how do you see the outlook for 5 gs revenue and the full mobile revenue? Do you think that will continue to improve? Do you think it will accelerate or stay fairly steady? Thank you. Thank you for your asking. The 5 gs revenue, we anticipate the gross momentum will continue. Thank you. So on a percentage basis, could you give any indication of where you think that might reach? It's currently 3% year on year growth? Is it possible to give any indication of where you think that will be by the end of this year? To answer your question, this information is proprietary and we don't want to introduce any irrational competition if we disclose such information. Thank you. Got it. Understood. Thank you. Thank you. Currently, we don't have further questions. I will turn it back over to Preston Guo. Go ahead, please. Thank you for your participation. Goodbye, everyone. Thank you, President Guo. Thank you for your participation in Chunghwa Telecom's conference. There will be a webcast replay within an hour. Please visit www.cht dotcom.twirundertheircalendar