Chunghwa Telecom Co., Ltd.

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's fourth quarter 2021 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 in the question-and-answer session. For information, this conference call is now being broadcast 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 slash IR, under the IR calendar section. I would like to turn it over to Ms. Angela Tai, the Director of Investor Relations. Ms. Tai, please go ahead.

Thank you. This is Angela Tai, Director of Investor Relations for Zhonghai Telecom. Welcome to our fourth quarter 2021 result conference call. Joining me on the call today are Harrison Gould, our president, and Susan Chang, 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 portion of the call. On slide two, please notice our safe harbor statement. Now I will turn the call over to President Guo. President Guo, please go ahead.

Thank you, Angela, and hello, everyone. Welcome to our fourth quarter 2021 earnings call. Before providing an update on fourth quarter performance, I would like to begin by highlighting the ongoing success of our strategic transformation that began in 2019. Three years ago, we launched a customer-centric strategic transformation plan focused on value creation to enhance our market position. Under this plan, we sought to improve our competitive advantage by strengthening our core businesses, deploying emerging services, optimizing our cost structure and further enhancing fundamentals, such as next-generation networks, IT infrastructure, and human resource planning. We concluded our three-year plan at the end of 2021 with several key achievements, including three years of consecutive growth in EBITDA margin, net income, and EPS, Mobile service revenue turned around since the second quarter of 2021, and the return rate significantly decreased from 2019 to 2021. In addition, the compound annual growth rate of broadband revenue increased by 2%, increasing the enhancement of our core business. In regards of emerging business, we are glad to see compound annual growth rate for both IGC revenue and the cloud revenue increased by 5%, while ICT business growth profit increased to 70%. By 2021, our backbone network was 100% software-defined network-ready. and the fiber-to-the-home coverage reached approximately 88%, demonstrating our enhanced core competence. The net promoter score, NPS, of our services also increased, which reflects the increase in customer satisfaction. Revenue and profit per hectare increased 6% and 15% respectively, attributable to increased operational efficiency as a result of cost structure optimization. Along with the strategic transformation, on slide four, you can see we have an organizational transformation effective on January 1st, 2022. we transformed our business groups under customer-centric structure. We expect our consumer business group to develop individual and home-centric business, such as mobile, Facebook, Wi-Fi, MOD, and OTT services. We aim to create value and better experiences for our customers. Former enterprise business-related units have been transformed into a single business group to streamline service delivery and create a synergy. In addition, the international business group has continued its outreach as we expand our business into overseas territories. Similarly, our technologically focused units have been transformed into three groups, forming a strong foundation to support innovation and provide solutions. In fact, our headquarters will continue to maximize its functions of devising, planning, and resource allocation. In sum, We expect the new organization structure to be more customer-centric and responsive as we aim to provide a better value creation opportunities for both customers and the stakeholders. Now please turn to slide six for an overview of business from the first quarter of 2021. In the first quarter, the mobile market in Taiwan remained steady as operators focused on 5G migration and development. By the end of 2021, our 5G penetration rate reached approximately 20%, as we expect that this rate to reach 30% by the end of 2022. As we continue to lead in network quality by accelerating 5G deployment at data-based locations, we remain confident on 5G customer migration and reaching our target, maintaining our leading position in 2022. In the first quarter, 5G migration continued to drive up-to-date we observed an average of 39% uplift in monthly fees attributable to customers who renewed contracts to adopt 5G services, particularly from the contribution of iPhone 13 bundle subscribers. Our excellent home-based infrastructure was well received in the first quarter as well. The number of home Wi-Fi devices continued to soar by 167% year over year. Broadband subscriber numbers turned positive during the quarter, while revenue hit a record high in December. As subscriber migration to our broadband services of 300 megabits per second or higher increased by 45% year-over-year. Our broadband approach also continued to increase year-over-year. In line with expectations, MOD approach also grew on a year-over-year basis as a result of successful upsell during the quarter. Looking ahead, we will strive to develop video services by providing more popular content and leveraging 5G to create immersive viewing experiences. We are pleased to announce our ICT business achieved its four-year revenue and margin by the end of 2021. In particular, the ICT project margin for 2021 continues to grow, which is reflective of our overall performance and demonstrating that our enterprise business is on track and expects to do well in the future. Allow me to walk you through each of our business slides. Turning to slide 7, you may find updates on our mobile business. In the first quarter, we maintained our leading position in the mobile market. As both revenue and subscriber market share, excluding IoT themes, increased to $1. 38.9% and 36.1% respectively. During the quarter, our mobile customer NetX and post-pay NetX both ranked highest among the big three majors. As post-pay subscriber numbers increased year over year, and the 5G migration enhanced adoption of high-price plans. Our mobile service revenue maintained its upward trend, resulting in a year-over-year increase of our post-pay approval. Looking ahead, we will guide our services with a key focus on our customers, rolling out popular bundled services for innovative 5G applications to further drive up 5G migration and mobile output. Please turn to slide 8 for an update on our broadband business in the first quarter. During the quarter, our high net subscriber net edge continue to increase year-over-year. And broadband subscribers, net X, turned positive year-over-year, which reflects the market's growing demand for fixed broadband. We were also pleased to see that our broadband accrual increased by 3% year-over-year. attributable to our success in migrating subscribers to adopt higher speed services. In addition, the number of subscribers that sign up for connection speeds of 300 megabits per second or higher increased by 45% year over year. Looking ahead, we are confident that we will maintain the overall upward trend in our broadband business, as we believe our digital transformation trend is most likely turning back. As our consumer business group prepares to develop smart solutions, we expect to introduce more popular home-centric services in the future to enhance customer user experience. Slide 9. It illustrates our MLD business performance. In the first quarter of 2021, MLD subscriber numbers decreased slightly. Their family video subscriber number increased by 20% year-over-year. Despite this, MLD revenue maintained its growth trend and increased 2% year-over-year. as a result of our pricing strategy. The SVOD OKS package that rolled out in the first quarter of 2021 quickly accumulated a great subscription number and successfully strengthened SVOD revenue growth for four consecutive quarters. Channel revenues continue to increase year-over-year, as 90% of subscribers opted for the highest price package among the tier pricing schemes. As a result, MLB APU achieved a year-over-year increase in the first quarter. Moving forward, we will make investments in content development, to further enhance our video service performance on different viewing platforms to maintain our leading position as the largest video platform in Taiwan. Please turn to slide 10 for an update on our ICT business. In the fourth quarter, both ICT project margin and the gross profit increased year over year as a result of our effort to take on projects with high returns, which is positive to our overall bottom line. Excluding the large project impact from 2020, IDC revenue in the first quarter increased by 20-20% year-over-year, mainly due to revenue recognition from financial projects, and the cloud revenue increased 3% year-over-year. Revenues from cybersecurity decreased year-over-year due to delays in project revenue recognition. However, we remain positive that the information business will grow at a double-digit rate in 2020. In 2021, sorry, 2022, in 2021, we were glad to see the 5G project network reach a billion-dollar value as a result of our recent efforts. such as introducing the first 5G small steel factory in Taiwan. In addition, we were proud to report some indicative ICT projects, such as building the first bus emergency signal control system in Taiwan, big data analysis programs for large public service companies, as well as the network test field for 5G open RAN vendors. Looking ahead in 2022, we are pleased to see that the number of orders taken has exceeded our annual guidance, many attributable to opportunities from the government, enterprises, retail stores, and the tourism industry. Now, I would like to turn the call over to our CFO, Vincent Chen, who will review our financial results.

Vincent, please go ahead. Thank you, President Guo, and hello, everyone. I will now work through our fourth quarter financial results. To begin with, please turn to slide 12 for highlights on our income statement. For the fourth quarter of 2021, on a year-over-year basis, total revenues increased by 0.7%, while operating costs and expenses decreased by 3.7%. Income from operations increased by 5.8%, and our net income increased by 5.1%. In addition, our EBITDA margin increased to 34.82% from 33.45% in Q4 2020. Slide 13 provides a breakdown of revenue by business segment. In the first quarter of 2021, total revenue increased by 0.7% year-over-year, mainly due to the increase in revenues from headset sales and mobile service revenues. driven by the 5G migration and the iPhone 13 launch, as well as the increase of data communications revenue and broadband access revenue as a result of the demand of broadband speed upgrade amid the work-from-home trend and stay-at-home economy, which offset the decrease of ICT project revenue. Moving on to slide 13, our operating costs. and expenses for the fourth quarter decreased by $1.88 billion, or 3.7% year-over-year, mainly due to lower ICT project costs, partially offset by the higher cost of goods sold. As you can see in slide 15, Cash flows from operating activities for the first quarter of 2021 decreased by $0.66 billion, or 2.4%, compared to Q4 2020. This was mainly due to an increase in accounts receivable resulting from ICT projects. As of December 31, 2021, the balance of cash and cash equivalents was $39.82 billion, an increase of 9.4 billion, or 30.9%, compared to December 31st, 2020. The increase was primarily attributable to the issuance of corporate bonds. On page 16, you may find a table that compares our financial results with forecasts. As you can see, in the first quarter of 2021, All of our performance measures meet our proposed guidance. Revenue results can be attributed to higher revenues from mobile services, broadband access, and data communications. Moving on to slide 17, please see our consolidated guidance for 2022. Looking ahead, total revenue for 2022 is expected to increase by between 1.1% and 1.7% compared to 2021. Driven by the upsell going to 5G adoption, the output uplift from broadband upgrades, emerging revenue as well as ICT revenue coming from the expansion of emerging business in the digital economy. Operating costs and expenses for 2022 are expected to increase by between 2% and 2.2% as a result of an increase in maintenance and repair costs, as well as ICT business costs. Given these projections, we expect our EPS to increase up to 0.8% on a year-over-year basis. Please turn to slide 18. Our cap expense in 2021 was $35.3 billion, which was lower than the budgeted amount of $43.1 billion, mainly due to some IDC and sub-main cable projects that have been deferred to 2022. 5G cash outlay was higher than our budget in accordance with the accelerated deployment of 5G base stations in 2021. also marking the peak in 5G investment in recent years. Going forward, we expect the 5G capex to trend down. For 2022, we budget $36.8 billion in capex, which includes spending on our business focuses as well as future opportunities, such as constructions of 5G network, IDC, and sub-multi-cable. Now I would like to turn the call over to President Guo for our awards and recognitions.

Thank you, Vincent. Slide 19 illustrates our awards and recognitions from the fourth quarter, highlighting our distinction in mobile service, 5G speed, and private 5G network service. as well as domestic and international recognition of our ESG practice and sustainable operations. We are delighted to see our 5G services receive awards and accolades. The state has recognized Zonghua as the fastest 5G and fastest mobile network in Taiwan during the third and fourth quarters of 2021. Similarly, we achieved the fastest 5G download speed and upload speed and regarded as the best in user experience across gaming, video, and voice APP services in Taiwan. As we aim to expand our 5G private network solutions to the Southeast Asian market, we appreciate the Wenan International Institute first and foremost for awarding us the best private 5G network for customer value leadership in Taiwan. International Institutes as well as those in Taiwan, have acknowledged our ESG performance with top awards in the first quarter, which further encourages our endeavors. Going forward, we aim to leverage our telecom capabilities and carry out digital empowerment to help companies a company's digital transformation further achieving carbon footprint reduction. Thank you for your attention. Now I would like to open the floor for questions.

Thank you. We are now beginning our question and answer session. If you have a question for any of today's speakers, please press 01 on your telephone keypad and you enter a queue. After you are announced, please ask your question. When you are speaking, please be louder or closer to the microphone. If you find that your question has been answered before it is your turn to speak, please press 02 to cancel the question. Our first question is coming from HSBC. Neil Anderson, go ahead, please.

Thank you. Good afternoon. Two questions, please. So the first one relates to the 5G network coverage, and I was wondering if you have any how it is for this year in terms of the number of base stations or population coverage that you can share with us. The second question is on 5G service adoption, and I'm interested to hear, now that you've had 5G in the market for some time, if you can share your thoughts on which areas, which business customers are likely to adopt 5G first. Thank you.

I think talking about, you know, 5G network coverage in terms of population, you know, network coverage, you know, because, you know, we mentioned this is a lot of different, you know, kinds of ways to calculate it. So it's really difficult for us to really get the number. But since, you know, we are a leading brand, you know, I would say that, you know, Unless, you know, 90% of the population coverage we can give, you know, the number. But you have to understand that, you know, there's different ways to calculate it. But for sure as far as we are leading brands, I think earlier, you know, in the presentation we mentioned that, you know, we actually rewarded a lot of, you know, internationally, you know, domestically in the world, you know. So we are pretty, you know, confident we have a pretty good, you know, network quality. Thank you.

To answer your question, number two, at the end of 2021, we have more than 12,000 base stations out in wide. And for the 5G market, the government and the enterprise business segment will be the deploy first and the vertical smart solutions will be deployed very soon as we accumulate one and a half year from customer feedback. Thank you.

Thank you.

Thank you. The next question is coming from UBS. Sarah Wong, go ahead, please.

Thank you for the opportunity to ask a question. So my question is regarding guidance for 2022. So it seems the implied growth is lower than 2021. for revenue, EBITDA, and net profit, and especially for net profit, it's geared towards negative growth. So may I ask what's the key reason here? Thank you.

So basically, when we prepare our budget, we take a proven approach in the sense that We try not to be overly optimistic. We try to be cautiously optimistic. Also, we only focus on, not only, we basically focus on the income from operations and recurring items. So that's why for some of the games on investments, actually we try not to be too emphasizing on these items. So that's why when we look at the forecast numbers, it's up between 4.4 and 4.65. But having said that, it doesn't mean our target is to hit 4.4. Actually, we are still – we'll try very hard, and we will strive to hit the highest boundary of our forecast.

Got it. Thank you.

Thank you. As a reminder, press 01 on your keypad if you would like to ask a question. Ladies and gentlemen, we are now in question and answer session. If you would like to ask a question, please press 01. Thank you. The next question is coming from UBS. Sarah Wong, go ahead, please.

Thank you again. So just one quick question on ICT business. So we have been exposing the growth rate for several quarters. So when I ask what's the percentage in terms of contribution to total revenue and then how's the margin profile of the overall ICT revenue?

So currently for the ICT business, it accounts for 12% of our total revenues. And for the gross margin, it's about a double digit. It's about a 10% plus. And we expect the gross rate will still be moderate.

Thank you. And then so going forward, are we also like counting 5G enterprise projects inside this ICT webinar? Yes.

Got it. Thank you.

Thank you very much. The next question is coming from Deutsche Bank. Go ahead, please.

Hi, good afternoon. My question is about the impact of mergers that we have seen proposed in the market. Do you have any views on how that may impact you or the industry in the medium term and what opportunities and or challenges you see? Okay.

Peter, could you repeat your question? Sure.

Yeah, I was asking about the merger in the market that's been proposed between T-Star and Taiwan Mobile. What challenges and opportunities do you see presenting to Chung Wa as a result of that merger, and whether you think there will be other industry impacts from it?

We think the decrease of the number of mobile operators will be really helpful for a healthy market in the midterm. And we think Songpa has the largest 5G plus 4G spectrum resources. to serve our enterprise and retail customers and the current milestone of our network structure. That is very important. Currently, we have built more than 12,000 5G base stations, as I mentioned earlier, including more than 10,000 consecutive 90 megahertz stations 3.5 gigahertz is the largest spectrum which provides excellent user experience. As for the 5G private network, we have been opening quite a few projects for leading companies and government entities in Taiwan. for smart solutions like smart manufacturing, et cetera, as I mentioned earlier. Our 5G ecosystem is relatively mature and ready in terms of devices, equipment, et cetera. Actually, it takes time to integrate many works and not mention to see images of such integrations. Thank you. That's great. Thank you.

Thank you. As a reminder, please put a 01 on your keypad if you would like to ask the question. When you are speaking, please be louder or closer to the microphone. Thank you. Ladies and gentlemen, please press 01 on your keypad if you would like to ask a question. Now please press 01 on your keypad if you would like to ask a question. If there are no further questions, I will turn it back over to President Guo. Go ahead, please.

Thank you for your participation, and happy Chinese New Year.

Goodbye. Thank you, President Guo. Thank you for your participation in Chonghua Telecom's conference. There will be a webcast replay within an hour. please visit www.cht.com.tw slash IR under the IR calendar section. You may now disconnect. Goodbye.