Chunghwa Telecom Co., Ltd.

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Code for the company's second quarter 2022 operating results. During the presentation, whole 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 code 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, slash IR, under the IR calendar section. Now I'd like to turn it over to Ms. Angela Tsai, the Director of Investor Relations. Ms. Tsai, please go ahead.

Thank you. This is Angela Tsai, Director of Investor Relations for Zhonghua Telecom. Welcome to our second quarter 2022 result conference call. Joining me on the call today are Harrison Guo, our President, and Susan Chen, our Chief Financial Officer. During today's call, management will begin by providing an overview of our business in the second quarter, followed by a discussion of segment report or segment performance and the financial highlights. After, we will move on to the question and answer portion of the call. On slide two, please note our safe harbor statement. Now, I will turn the call over to President Guo. Please go ahead, President Guo.

Thank you, Angela, and hello, everyone. Welcome to our second quarter results conference call. I will now provide an update on our robust performance in the second quarter. Let's begin on slide 4 for an overview of our mobile business. In the second quarter, Taiwan mobile market continues its momentum as the three major operators focus on 5G migration, which benefits mobile service revenue growth. Market consolidation will be fulfilled in the near future, and we remain positive to the results as it will help the market maintain steady and profitable. Under this landscape, we were pleased to report our market shares in both revenues and subscriber number continue to increase year-over-year, reaching 39% and 36.2% respectively. We are confident that we will continue our market leadership going forward. Our market leading position is backed by our 5G network deployment that has advanced and stayed ahead of our peers. The Vietnam International Institute, SpeedChase, awarded us the first 5G operator in Taiwan for the first and the second quarter of 2022. Recognizing our leadership of 5G coverage and quality. As well as the speeches that was for 65 years in a row to affirm our comprehensive and modern work as number one in Taiwan. Slide five. presents the leading achievement of our mobile business. In the second quarter, total mobile service revenue increased by 6.1% year-over-year, attributable to growing subscriber number and 5G contribution, as well as an increase in text messaging messages due to COVID-19-related projects. In addition, as many countries relaxed their border restrictions for global business travelers and tourists. We were glad to see the international running revenue begin to pick up in the second quarter. As for our mobile subscriber numbers, excluding IOTCs, there is a 0.7% year-over-year increase. In addition, our Postpay approved growth rate reached 4% year-over-year, maintaining its upward trend for five consecutive quarters. Meanwhile, we observed an average 37% uplift in monthly fees, attributable to consumers who migrate from 4G to 5G. Taken together, we offer from our peers in terms of year-over-year change in the number of post-pay subscribers, mobile service revenue, and APU, suggesting that we remain the customer's first choice of telecom service provider in Taiwan, in spite of industry consolidation. Moving on to slide six, you may find an overview of our fixed urban business. In the second quarter, our fixed urban business continued its upward trend for 11 consecutive quarters. While subscriber numbers kept stable, fixed urban revenue and approval both achieved the year-over-year increase of 4% and 3% respectively, benefiting from digital opportunities in the new format. Notably, our subscriber number for services of 300 Mbps or higher maintains its high growth rate of 37% year-over-year. To respond to customers' demands in a more aggressive manner of high-speed demand in the work of digital lifestyle, including increasing video conferences, online learning, as well as internet, celebrating economy. We roll out a promotion package to incentivize high speed service adoption of 300 Mbps and 500 Mbps and above. We are excited to see over 70% of package adopters choose 500 Mbps service and above, reflecting the success of our strategy of enhancing up-sell through space upgrades. In view of the opportunity of the promotion strategy, we anticipate further growth of our output and the market share. Now, let's move on the performance of our customer-centric business groups. Slide eight presents Revenue of our consumer business group, our CDG. Consumer business group revenue in the second quarter increased by 3.3% year-over-year, reflecting our success in satisfying customer needs during the quarter. Mobile service revenue for the consumer group grew by 5.3% year-over-year, mainly due to increase in post-paid subscriber numbers and 5G migration. In addition, 6.9% service revenue increased by 1.9% year-over-year, attributable to digital opportunities under the new normal, including work-from-home, gaming, and video services. among others. In the second quarter, we saw that Taiwan's professional baseball league games and the Internet celebrity shows were especially well-received on MLB and HEMI videos. Sales revenue increased by 2.1% year-over-year despite the hampered supply chain. issues, ongoing COVID-19, and the typical seasonings ahead of the new iPhone launch. Slide 9 further illustrates our consumer business group highlights. In the second quarter, we continue encouraging subscribers to adopt our mobile six programs and Wi-Fi services out together. The well-received promotion program reported a 13.2% quarter-over-quarter growth. In particular, our home Wi-Fi device subscription number doubled on a year-over-year basis. boosting our subscription-based revenue and the popularity of home-centric applications. In regard to our video business, we are delighted to report subscriber numbers of Homology Plus family video, which are paid in monthly fee on a yearly basis, rather than one-time sign-ups, increased by 6.6% year-over-year, mainly due to the heavy video sign-up growth driven by journal offerings and international submissions. In the second quarter, we also announced our investment in local journals and movies to expand the video business. As we plan to continue our content investment strategy to further enhance subscribers' thickness, cutting into second half, we remain confident about video service performance. As many popular sports events are expected to take place, popularity does FIFA World Cup coming up in the fourth quarter for which we obtained exclusive or casting rights. Please turn to slide 10 for an overview of our enterprise business group performance. In the second quarter, enterprise business group revenue increased by 9%. year over year, mainly due to the increase in number of projects completed, particularly the large smart energy projects of solar farms and electrical enhancement. Our enterprise ICT business revenue increased by 31.7% year over year. Meanwhile, enterprise mobile service revenues continue to increase, attributable to 5G migration and increase the demand for texts and messages as a result of COVID-19. Digital transformation demand from enterprises and the schools continue to drop off with revenues from data communication and broadband access, which offset the decrease in enterprise voice revenue during the second quarter. Slide 11 illustrates our enterprise business highlights. We are pleased to report strong growth momentum of our emerging enterprise In the second quarter, our total enterprise and emerging application revenue increased by 43.5% year-over-year. As all of our major applications demonstrated strong year-over-year growth rate above 20%. increased by 70% year-over-year in the second quarter, serving as an important growth driver thanks to our success in small energy building and surveillance fields. In fact, in the consumer sector, AIoT applications are also well-received to carry out digital lives and booming in revenues, particularly from smart speakers and smart healthcare services. We remain confident of its future development. For ITC, cloud computing and information security businesses, we continue to see strong demands both domestic and global clients, and we are glad to report year-over-year revenue growth of 24%, 25%, and 29%, respectively. Additionally, 5G private network revenue doubled its growth year-over-year. Given by an increase in acquiring project members that in projects revenue as well as recurring revenue, we are pleased about the long run contribution for big data analysis revenue. We saw 125% year over year growth and that contributed to project revenue. During the quarter, we are pleased to announce the rollout of our advanced industry-lead portable 5G plug-in network solution, which supports satellite and mobile communications and serves as the exclusive portable solution in Taiwan. Working under both Long-Standalone and standalone architecture. We also integrate our 5G AIoT sensing devices, AR technology, domestic 5G Open RAN equipment and 5G private network to offer 5G AIoT smart healthcare services. It's a hospital in Kaohsiung applying of native reality technology for elderly care. Slide 12 illustrates our international business performance. In the second quarter, it is exciting to see our international business growth rapidly increase by 17.9% year over year. attributable to the growing demand for IPC and the cloud services from global clients, particularly online global OTT service providers. In addition, as the COVID-19 pandemic restrictions were relaxed and the cross-border activities continue to resurge, We were glad to see an international running inbound revenue and the international IOT revenue increase year over year. As we look to Southeast Asian markets, we are glad to share that we signed an MOU with Tongbei Hospital in Thailand during the second quarter. to develop smart hospital solutions. We introduced our technology of cloud, AI, medical IoT, and others, and expect to extend our successful 5G private network solution in the Asian region. Now, I would like to turn the call to Vincent for our financial highlights.

Thank you, President Guo. Good afternoon, everyone. I will now walk you through an overview of our second quarter financial results. Let's start with slide 14, which provides highlights from our income statement. For the second quarter of 2022, total revenues increased by 5.7% on a year-over-year basis. mainly due to more ICT project completion and higher core business revenues from mobile and broadband services. Meanwhile, operating costs and expenses increased by 5.4%, only to an increase in manpower expenses and depreciation expenses from 5G network deployment. Income from operations increased by 6.6%, while net income increased by 8.1%, EPS increased by 0.01 to 1.25 compared to the prior year period. In addition, our EBITDA recorded a 5.5% increase year-over-year, while EBITDA margin remained stable in the second quarter. Please turn to slide 15 for balance sheet highlights. Compared to December 31, 2021, Total assets increased by $13.59 billion, or 2.7%, meaning only two increased cash and cash equivalents, as well as the increase in negotiable certificates of deposit to prepare for the dividend payments and the issuance of sustainable bonds. Total liabilities increased by $30.78 billion, or 25.3%, mainly attributable to increase in dividends payable. Debt ratio was approximately 29%, and net debt over EBITDA was minus 0.026. Suggesting our downside is strong and enables us to maximize shareholder interest amid economic uncertainty. Slide 16 illustrates our cash flow summary. Cash flows for operating activities for the first half of 2022 decreased by 0.9%, year-over-year to $27.43 billion, mainly due to income tax payments owing to an increase of net income. In terms of capital spending, as 5G cap tax peaked in 2021 with accelerated 5G construction, 5G and total mobile capacity for the first half of 2022 decreased year-over-year as expected. Moreover, free cash flows increased by 23.2% in the first half compared with the prior year period. All together, our strong balance sheet and operating cash flows allow us to steer through economic turbulence and support business expansion. On page 17, You may find a table that compares our financial results with forecasts. As you can see, in the second quarter of 2022, all performance majors exceeded our proposed guidance. Revenue led guidance mainly attributable to higher revenues for ICT business related to smart energy and AIoT applications. and as well as better performance of growth business resulted from growing subscription numbers and 5G migration. Operating costs and expenses were higher than our second quarter guidance due to higher project business costs. Data and net income bid forecast due to better than expected ICT growth margin and performance. That concludes our financial highlights. Let's go back to our President Harrison. Thank you, Vincent.

In the second quarter, we became the first and only company among Taiwanese operators to adopt an internal carbon fee to help reduce carbon emissions and achieve our GHG reduction targets. We have also invested in an ESG venture capital fund, packaging clean energy, innovative projects, including cloud AI, 5G satellite, edge computing application services, and digital transformation and healthcare. We also received multiple recognitions from several stock exchange companies. for our corporate governance. We believe these new developments are key to our success and long-term growth, and we will continue to focus on ESG development going forward. Thank you for your attention.

Now I would like to open the floor for questions. Thank you. We will now begin 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 will enter a cue. 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 you wish to return 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. The first relates to the roaming recovery that you reported in the second quarter. Are you able to quantify how much of mobile service revenues that is and how much more could it grow by if it returns to levels prior to COVID? That's the first question. The second one relates to the slide on the enterprise applications, the emerging applications. So you're reporting strong percentage growth, and I guess that's partly because these are still starting from a low base. But which one of those do you see as having the greatest potential, please? Which could be the largest in a year or two? Thank you.

To answer your question, the contribution from the recovery to the second quarter, the major mobile business growth is not due to COVID-19. It's major from our customer migration and our customer base increase.

So if I may, let me add here. So if you look at the fact sheet provided by us, so for the post-pay subscribers, so we have a gross momentum. So the number, what you find is post-pay subscriber increase 18 months in a row. And also if you look at the post-pay R pool, actually our post-pay R pool actually have received the 13 months high. And our pool has increased 15 months in a row, one-on-one. So altogether, it actually shows there's a strong growth momentum in our mobile business. And perhaps we cannot deny that the COVID may contribute to our mobile business, but it accounts for a very small portion. So that's for your first question.

And the second question is, Our consumer and the enterprise and the international business group, all of them have the great potential in the future, in the one or two years. Because there are many smart solutions applications that are deployed in the next quarter or the next half, and we have seen that many of our successful applications from our consumer and the enterprise and the international field. So there are many business opportunities in all of our business segments.

Understood. Thank you very much.

Thank you. As a reminder, please press 01 on your keypad if you would like to ask the question. Please press 01 on your keypad if you would like to ask the question. If you have a question for any of today's speakers, please press 01. Thank you. The next question is coming from DBS. 01, go ahead, please.

Hi, thank you for the opportunity to ask a question. So just wondering how is the margin profile of the enterprise business segment? So we noticed that there are certain, say, cloud, the business goal is quite rapid. So what's the margin profile of these new initiatives, and what's our review on the overall EBITDA margin, say, in the long term? Thank you.

So for the gross margin for our enterprise segment is about 20 plus percent, and it's quite stable, yeah. Yeah, we think with the new like AIoT, 5G, private network, we think the growth will be moderate, will be increasing, will jump up, in fact. But it's hard to say at this point what kind of growth it's going to be in the long term to intermediate term.

I see. Thank you.

Thank you. Ladies and gentlemen, we are now in question and answer session. If you have a question for any of today's speakers, please press 01. Thank you. As a reminder, press 01 or 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. Please go ahead. Thank you for your participation. Goodbye. Thank you, President Guo. Thank you for your participation in Zhonghua 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.