Earnings Call: Q1 2021

May 4, 2021

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company's Q1 2021 Operating Results. During the presentation, all lines will be on listen only mode. When the briefing is finished, the directions for submitting your questions 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'd 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 Q1 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 this quarter, followed by a discussion of operational and financial highlights. After, we will move on to the question and answer session. On Slide 2, please note our Safe Harbor statements. Now, I will turn the call over to Preston Guo. Preston Guo, please go ahead. Thank you, Angela. Hi. Hello, everyone. Welcome to our Q1 2021 results conference call. Let's begin on Slide 4. In the Q1 of 2021, mobile business continued to be the main focus in the market. We set a target of accumulating 2,000,000 5 gs subscribers by the end of this year. And we are glad to report the number of our 5 gs phone apps are on track and potentially exceed our internal targets. As over 3, 4th of 5 gs subscribers and roughly 90% of iPhone 12 subscribers have adopted plans of $9.99 or above. We remain positive about achieving year over year growth of our mobile postpaid ARPU in the second quarter and expect the trend to continue as well. In addition, we with more than 6,300 5 gs base station completed during the quarter compared with the annual target of accumulating 10,000 5 gs base stations by the end of this year, our 5 gs network construction is well ahead of schedule. In the International Institute, our OpenSignals 5 gs experience reported in April. Taiwan was ranked in the top position in terms of 5 gs upload speed and the 2nd position of 5 gs download speed in the world. As Taiwan's leading telecom service provider, we remain committed to spearheading 5 gs deployment to enhance 5 gs user experience in Taiwan. Regarding our broadband business, we are pleased to see our pool uplift continue as a result of ongoing increase in higher price trend adoption. Subscriber migrate to our broadband of 300 megabits per second or higher, continuing to increase by approximately 58% year over year. Contributing to year over year broadband revenue growth for the 14 months in a row. The model of home WiFi devices also increased 3 52% year over year to supporting the popularity of our home centric applications. MOD business continue to roll out popular ticket to enhance overall performance. And we are pleased to see upsell in both SVOD services and channel services. 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 Q4, we continued to maintain our leading position in the mobile market. Excluding IoT things, as revenue market share increased to 39% and the subsequent share reached approximately 60%. Since the international volume revenue loss had a full impact by board on order markup due to COVID-nineteen in the Q2 last year. We remain optimistic and expect an overall year over year growth of mobile service revenue in the Q2 this year. Please turn to slide 76 for an update on our broadband business in the Q4. This quarter, we are pleased to see our broadband accrual increase by 3% year over year, and the other benefits staying from stay at home opportunities in the meaning of more. The number of subscribers that sign up for connection space of 300 megabits per second, our higher increase by 58% year over year. Our VPN service revenue contributions from enterprise customers grew as well. But we are confident that we will maintain the overall upward trend in our broadband business, despite the ongoing decline in the number of lower speed subscribers quarter over quarter. Looking ahead, we intend to encourage migration by roll out our higher speed services to further enhance overall ARPU and solidify our leading status in both household and enterprise market. Slide 7 illustrates our mobile business performance. In the Q4 of 2021, our MOD IPTV platform continues to be the largest video platform in Taiwan with more than 2,600,000 subscribers. Since the COVID-nineteen pandemic deployed majority large sports events and mobile releases, Our subscription momentum decelerated as a result. However, our MOD ARPU achieved a slight growth year over year as a result of the successful design of our product portfolio and the pricing schemes. During the quarter, we rolled out a new service of our product during the quarter, we rolled out a new service package SVODS Opus by aggregating several SVODS as a complete package, which resulted in a quarter over quarter decrease in the number of SVOD sign ups. After successfully approaching SVOD service upsell and the drop up SDOD revenue to increase quarter over quarter. In addition, our tiered price channel packages continue to be popular, which actually upsells as well. Going forward, we will continue to focus on strengthening customer contribution to enhance ARPU. We aim to explore new famous content and introduce the heart influencer channels to create new growth drivers. Please turn to Slide 8 for an update on our ICT business. Overall ICT project revenue in the Q4 increased by 20% year over year. Our imaging ICT service revenue increased year over year as well. IDC revenue and the cloud revenues increased by 14% and 16% year over year, respectively, mainly due to revenue recognition from some government related projects. Service KLT revenue increased 31% year over year, which was primarily due to smart campus projects. As ICT project revenue accounted for a greater portion of our total revenue year over year. We will continue to enhance our overall ICT technology capabilities and that we're more selective to further increase the project margin. Now, I would like to turn the call over to Vincent, who will review our financial results. Thank you, President Guo. Good afternoon, everyone. I will now discuss our Q1 financial results. Please turn to Slide 10, which provides highlights on our income statement. For the Q1 of 2021, on a year over year basis, total revenues increased by 4.1% and operating costs and expenses increased by 3.7%. Income from operations increased by 5.5% and our net income increased by 6.4%. In addition, our EBITDA margin increased to 41.09% from 40.18% in the same period of 2020. Slide 11 provides a breakdown of revenue by business segment. In the Q1 of 2021, total revenue increased by 4.1% year over year, mainly due to the increase in ICT pad drive revenue and handset sales revenue, which offset the decrease in the revenue from voice and mobile services as a result of COVID-nineteen impact and voice over IP substitution. Moving on to Slide 12, Our operating costs and expenses in the Q1 increased by RMB1.37 billion or 3.7 percent year over year, mainly due to higher ICT project costs and cost of goods sold. Slide 13 shows that cash flows from operating activities for the Q1 of 2021 decreased by $3,340,000,000 or 25,800,000,000 dollars 25.8 percent compared to the prior year period, which was mainly due to a decrease of accounts payable and an increase of accounts receivable. As of March 31, 2021, the balance of cash and cash equivalents was $30,260,000,000 an increase of $13,490,000,000 or 81.4 percent relative to 2020. The increase was primarily attributable to the issuance of corporate funds. On Page 14, you will find a table that compares our financial results with forecast. As you can see, for Q1 2021, though our revenue was lower than our Q1 guidance, our performance measures including income from operations, net income, EPS, EBITDA and EBITDA margin all exceeded our forecast. Lastly, please turn to Slide 15. For 2021, we are budgeting $43,100,000 in CapEx, including spending on business focuses in 2021, such as accelerating the construction of 5 gs network, IDC and sub main cable. That's the end of my presentation. Over to you, Harrison. Now we open to the questions. Thank you. We're now beginning our question and answer session. Our first question is coming from Sarah Wong from Morgan Stanley. Go ahead please. Thank you for the opportunity to ask a question. So I have few questions. So first on the mobile side, just want to ask what's the apple to apple ARPU lift for the 5 gs adapters? Meaning, for example, before they migrate to 5 gs, when they were on 4 gs, the dollar amount they paid and then how the increase on the dollar amount they paid after they migrate to 5 gs? And then my second question is, so far, how is the fiber to the home penetration for our, say, broadband customers. So is that like possible to assume all the customers with sales be over like 100 MBKs would be on parter to the home? And then the third question is on the ICT project. So it seems the growth of the ICT revenue has been quite solid for the past few quarters. So would management please share with us how is the customer base look like? Are they mostly say government agencies or enterprises or what kind of industries they're from? And then do we have any target on, say, ICT revenue growth or revenue contribution for 2021? Thank you. Thank you for your question. Answer your question number 1, the mobile app through by the mobile app between as our postpaid mobile subscribers net adds continued to maintain positive in the Q1. And we see upsell among 4 gs users, while 5 gs continues to strengthen our adoption of higher price plans. We remain to expect our mobile subs revenue to be bottomed up in the Q2 of 2021 and the trend we are likely to continue. The second quarter about the further to the home penetration rate is approximately about 85%. And the ICT project, So regarding the ICT question, so for quarter 1, our ICT, the growth rate is about 20%. And in terms of the customer base, for the major customers we have in quarter 1 are basically from government agencies like the Tennessee government and some research institution. We expect the ITC revenue, it will say the revenue compared with last year will be probably above the percent. Because for this year, we'll be more selective in picking our ICT projects. So we expect the ICT margin will be higher than last year. That's my response. Got it. Thank you. Thank The next question is coming from Neil Anderson from HSBC. Go ahead please. Hello, good afternoon. I had a question related to 5 gs data usage and the network piece. Can you tell us what's the average data usage relative to 4 gs? And is that driving any changes in your network rollout? I presume at the moment you're still focused on coverage. But can you tell us how you're thinking about adding capacity later on in the rollout? Thank you. Neil, can you repeat your question? This is Luzhu. I'm not quite clear about that. Yes. So the first one relates to data usage, average data usage on your 5 gs subscribers so far? Is that very different from 4 gs or not so much? And then related to that in terms of network hotspots or areas where you've got a lot of traffic? How are you going to address those when you think about adding millimeter wave or additional sites to deal with that? Thank you. The average 5 gs data usage is actually larger than that of the average mobile data usage data usage, for sure. For example, like for the Q1 this year, the average 5 gs data user, like 33 gigabyte versus the average mobile data user like 24. I think that's the difference. Ladies and gentlemen, we are now in question and answer session. The next question is coming from Neil Anderson from HSBC. Go ahead please. Hi there. Thanks for letting me ask a follow-up. I have a question relating to the ICT business. And whether you can give us any insight on what sort of return level you're targeting on your investment in the ICT business? I ask this because we don't have any visibility on profits at the moment. It's quite hard also to distinguish the level of investment. So it would be helpful to get your view on what you're targeting in the next year or 2 in terms of return on investment in that segment? Thank you. I think we've been working on the ITG project for many years. And of course, we've seen that we've been trying to increase the profit margin every year. In between, we also like to bundle our own product into this project in order to increase the margin as well. So you can see that year over year, it's actually improving a lot. So I think that's how we are doing. And in between also, I think we would like to model this in different kind of project, try to figure out how to increase individual to enhance the whole process. I think we've been doing okay. And hopefully, we know this will facilitate in later years, for sure. Let me add one point that in the enterprise side, we actively develop a 5 gs commercial 5 gs network solution for industries for smart manufacturing application, the smart factory for the leading semiconductor company, the ASE Technology Holding joint growth with Qualcomm and Zhenhua had been launched last year. And we will continue to develop projects in the semiconductors and other industries. And as you know, we will team up with our partners for various verticals to develop 5 gs service via B2B2X business model. Our focus include a small small transportation, small agriculture, smart healthcare, autonomous driving, etcetera. That's occurred in different verticals. Thank you. Thank you. Thank you. The next question is coming from Sarah Wong from Morgan Stanley. Go ahead, please. Thank you. So I have another two questions. So first on the Q4 results. So like first congratulations on the solid results. You all exceeded our expectation. So can management share or what's the biggest bid in terms of results versus our hesitation? Like which area are we see actually higher growth than our previous hesitation? And then second question is still on the ICT. So for our 2021 guidance, either revenue or net profit, are we factoring in any upside potential 5 gs enterprise applications? Or in other words, do we see some monetization of business models for the early 5 gs enterprise applications? Okay. For the Q1 results, right, so as you can see on Page 8, For Page 8, I said that, so what type of meeting our expectation is the revenues for our emerging business such like IDC, cloud and cyber securities. So as you can see, the growth is pretty much over 10% to 30%. So that's really positive news to us. And for your second question is with regards to enterprise application and the enterprise we are working on, on the enterprise network. So at this point, we respect the level of privacy of our customers. So we are unable to disclose their names. Got it. Just in terms of the revenue or profit contribution factor in the 2021 guidance, or do we factor in any like incremental revenue from those 5 gs enterprise applications? So because we are still on the very early stage for the private network, Yes, so the proportion actually is quite small. Yes. Got it. Thank you. Thank you. The next question is coming from Peter Milligan, Deutsche Bank. Go ahead please. Yes, good afternoon and thanks for the call and for the good results. My question is really about the CapEx for 2021, in particular, the Internet CapEx of $8,800,000,000 which is about 5 times as much as the previous 2 years. Can you just remind us what's the reason behind the increase in that part of CapEx in 2021? And would you expect revenues to come from that in 2021? Or would it be a longer dated CapEx? Thank you. Okay. So for the CapEx side, so the question is why in 2021, the CapEx has gone up, right, relative to prior periods. So the reason is that for the 5 gs network, we will want to enhance and accelerate our deployment of 5 gs network. So that's one of the reasons. And also we see a lot of demand from customers with regards to our IDC cloud services. So that's why we kind of spend some money on the from the submarine cables. So that's why we work with our international partners to build more soft green tables. So in terms of your second question, right, do we expect revenue to come in 2021? We will say yes and no. Yes, some for some of the capital expenditures, we can see profits in near term. But for some capital investment, we will see it in the longer term, yes. So when I look at the Internet part of the CapEx, the $8,800,000,000 that would be mainly data center build. Is that correct? Or is there a lot of other things you're also expanding very sharply in 2021? Yes, you are right. So, Lendly data center, IDC. Okay. Thank you very much. Thank you. The next question is coming from Jack Hsieh, Sinopec Securities. Go ahead please. Hello. Did you hear Sorry. Go ahead, please. Okay. Thank you. And thanks for giving me the chance to ask the question. I have two questions three questions. My first question is about I mean, just our EBITDA margin is growing, but also with the increase of the mobile devices sales also increased. So could you give us about more color about the reason why the EBITDA margin can grow, given the mobile device revenue growth? This is my first question. And my second question is about we have informed we have collaborated with some customers on the commercial patent network. And I just realized from the news and some news have informed the CHT may have the private commercial private network revenue in 2021 maybe above or maybe $1,000,000,000 or $2,000,000,000 Is that correct? Or how many of revenue were related to the pricing network in 2021? And this is my second question. My third question is about could you give us about some information about 5 gs base station numbers until now or maybe until May or even until June. Because the governments, they will give the subsidy that will relate to the number of base stations deployed on the market. And I'm interested how many as they expect to base station we have deployed until now? Thank you. This is my question. Thank you. So for the first question, right, so why is our margins high? Because of the we just mentioned, right, because for the Q1, there's an increase in our ICT revenue. And also, there is a lot of contribution from our application via value added services and also broadband revenue also increases. So that's why our EBITDA margin increased. And so for the second question with regards to the private enterprise network, right. So the revenue we cannot disclose at this point. And also because one reason is that because our customers don't want us to disclose their identity. So it's not nice for us to disclose. And also for the revenue because it's at a very early stage. So many of them are still at the POC stage. So we are unable to come at this point. So for the 3rd question regarding the number of base stations. So actually, the construction of the 5 gs network progresses as planned. So by the end of this year, we will hit more than 10,000 base stations. And now it's over 6,300 base stations already. Yes, as in the end of the Q1. Yeah. And in terms of the government subsidies, so basically, $15,500,000,000 and we'll get the portion we pay roughly 1 third, in our business spectrum cost. Got it. Thank you. And it's very helpful. And just follow-up 2 bottom questions. So first, the following question is about, so if we get the subsidy from the government, will that subsidy will how does the subsidy will affect the income statement? Will this will affect the cost or will affect the EBITDA margin? Thank you. Okay. So the downward subsidy, right, so how should we account for it? So basically, once budget is approved, then we will record it as a deferred revenue, then we will always amortize it over the useful life of the 5 gs base station. So does that mean that will be included to the revenue segment? Is that true? So the net revenue will be accounted for in the second quarter or will be accounted for in the second half of the year? Thank you. We will incur to once NCC approved. Okay. So does the NCC has the NCC approved now or we're until to the in the second half of the year. Okay. So it's not up to our decision. So we will wait for the NCC to decide this time, yes. Okay, got it. Thank you. And my second follow-up question is part of we just informed the commercial pricing network now and we cannot disclose our customers' information. But I'm just interested because we got the news from the media. They had informed about a commercial private network revenue. Maybe we're up to the more than $1,020,000,000 So could you give us some more details or even color about how many the commercial private network revenue in the 2021 will be above the $1,000,000,000 or $2,000,000,000 the 2021? Thank you. We have no idea about the number you just mentioned. So we are unable to comment at this point. Okay, got it. Thank you. It's very helpful. Thank you. Thank you. The next question is coming from Jack Hsu, Sinopash Security. Go ahead please. Also, thanks for many thanks for another chance to ask questions. I'm also interested with the ICT revenue, the revenue segment. We have just some question is about the IDT revenue. But I just want to clarify, is the ICT revenue is almost the same with enterprise revenue or that's done can differ? Thank you. So for ICT revenue, right, so they are mostly enterprise revenue. Got it. So how many I mean, how many definitely how many percentage of the revenue is related to with the ICT? We mentioned about last year the ICT Because last year, we had a lot of large government related project incurred. So it's like 13%, more than 13%. And this year, we mentioned in the Q1, in January, when we mentioned about the guidance for this year for ICT, which we mentioned about the percentage will be a little bit less because this year, the bid project will be a little bit less. So I think this year we anticipate like 12% kind of portion. So the ICT will be the 13% last year, and that will be the 12% deleter in the 2021. Is that correct? Yes, it's correct. Okay. Got it. Thank you. And so just one follow-up question. We just mentioned we will sum the budget about the data center deployment. So, because I just missed the information, can you give us the information how many our CapEx will relate to the IDC data center deployment in the 2021 story? Thank you. So for Internet, our total capital expenditure is $8,800,000,000 And in that section, mostly for IDC. Okay. Thank you for your participation. Goodbye, everyone. Thank you, President Kuo. 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. Goodbye.