Chunghwa Telecom Co., Ltd.

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's third quarter 2022 operating results. During the presentation, all lines will be on listen-only mode. When the briefing is finished, the reactions before submitting your questions will be given in the question-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 CHTIR website, www.cht.com.tw.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 Zhongha Telecom. Welcome to our third quarter 2022 result conference call. Joining me on the call today are Harrison Guo, our president, Vincent Cheng, our chief financial officer. During today's call, management will begin by providing an overview of our business in the third quarter, followed by a discussion of our segment performance and the financial highlights. After, we will move on to the question and answer session. On slide two, please note 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 third quarter results conference call. I will now provide an update on our robust performance in the third quarter. Let's begin on slide four for an overview of our mobile business. In the third quarter, we see the positive development of Taiwan's mobile market as operators chose 5G migration in a steady manner, focusing on creating value for customers, which we believe is good for healthy market competition. Looking into quarter four, the mobile market in Taiwan is expected to remain steady any potential economic uncertainty. In terms of market position, we are pleased not only to maintain our leadership in Taiwan's mobile market, but also successfully to achieve year-over-year growth in terms of both revenue and subscriber share for four consecutive quarters. In the third quarter, we increased our revenue share to 39.4% and the subscriber share to 36.5% on a year-over-year basis, respectively. Our well-positioned revenue share is larger than the subscriber share, suggesting that our customer-centric business strategy is proven successful. We are confident that we can maintain our leadership position going forward. Please turn to slide five for a closer look at our mobile business. In the third quarter, our total mobile service revenue increased by 4.2% year-over-year, attributable to the outperforming subscriber number increase and the upsell resulting from 5G migration. Mobile subscriber numbers, excluding IoT themes, increased by 2.6% year-over-year, partly due to the increase of both postpaid and prepaid themes. In particular, our prepaid numbers grew significantly. reflecting our success in enhancing sales in the segment of foreign workers. In addition, our Chong Wei continues to remain the lowest among our peers. Our postal pay approved reached 1.8% year-over-year growth in the third quarter, maintaining its upward trajectory for six consecutive quarters. Meanwhile, we observed an average 32% uplift in mobile monthly fees attributable to consumer migration from 4G to 5G. With our most extensive network deployment and the solid fundamentals, we are confident in our ability to maintain leadership in Taiwan's mobile market in the face of competition resulting from industry consolidation. Moving on to slide six, you may find an update of our fifth broadband business. In the third quarter, our sixth broadband business continued its upward trend for 12 consecutive quarters. In terms of our pool growth, as total subscriber numbers increased by 0.5% year over year, we are expected to see the speed of adoption increase at a faster pace. Thanks to our effective promotion package, Shuzai Beijing, in the third quarter, 75% of Shuzai Beijing adopters upgrade their service speed. In addition, more than 60% of the adopters sign up for service speeds of 500 megabits per second or higher, paired with upstream speeds about 250 megabits per second, which distinguishes us from our peers. Meanwhile, the accumulated sign-up for service speeds of 300 Mbps or higher increased by 43.7% year-over-year in the portal, mainly attributable to those who migrated their services from service speeds of 100 Mbps or below. In terms of financial performance, our fifth broadband revenue and approved year-over-year growth in the third quarter, indicating increases of 3.3% and 2.4% respectively. Now, let's move on to the performance of our customer-centric business groups. Slide eight presents the revenue of our consumer business group, our CDG. As each business line of consumer business group delivered positive results in the third quarter, total revenue of consumer business group increased by 3.8% year over year. Mobile service revenue of consumer business groups grew by 5.4% year-over-year, mainly due to the increases of post-pay subscriber numbers and 5G migrations. Six-line service revenues remained flat year-over-year, while we are delighted to see successful upsells prepared by the . However, revenue continues to decrease, even though the decline has . In addition, sales revenue of consumer business groups increased by 5.4% year over year in the third quarter, mainly due to early launch of iPhone series in September with better sales of iPhone 14 high-end models. Slide 9 further illustrates our consumer business group highlights. As we continued our efforts in promoting a multiple play package to enhance consumer business groups overall performance. In the third quarter, the number of subscribers signed up for our mobile broadband and Wi-Fi services all together demonstrated a 33.8% quarter-over-quarter growth. In particular, our home Wi-Fi device subscription increased by 75.3% year-over-year, contributing to subscription-based revenue and taking the way for our home-centric applications. In the third quarter, our investment in original streaming content helped us successfully maintain our status as the largest video platform in Taiwan. Attracted by the exclusive from us, we invest our subscriber numbers for video services, including MOD and the humming video, charging monthly fees instead of one-time sign-ups, achieving 7.4% year-over-year growth. exceeding 2.7 million. As the FIFA World Cup is coming up in the first quarter, we are ready to bring our customers the most exciting experiences. We obtained the exclusive right to broadcast 64 World Cup games and will combine 5G and AR technology to deliver super attraction, which we believe will significantly boost our video service sign up in the fourth quarter. Please turn to slide 10 for an overview of our enterprise business group performance. In the third quarter, Enterprise Business Group maintained its growth trajectory by demonstrating 5.1% revenue increase on a year-over-year basis, mainly attributable to the robust growth of our ICT business. Enterprise ICT business revenue increased by 10.4% year-over-year, mainly due to our emerging growth engines, particularly IEC, cybersecurity, and cloud services. Other revenues of enterprise business groups also increased due to the grant of 5G government subsidies and the launch of iPhone 14. Additionally, Although digital transformation demand continued to drive up data communication and the broadband access revenues, especially demand for speed updates from schools, our 6-9 revenue in the third quarter decreased slightly year over year. Slide 11 illustrates our enterprise business highlights In the third quarter, our total enterprise emerging application revenue increased by 16.1% year-over-year, as most of our major applications demonstrated strong performance by exceeding 20% year-over-year growth. 5G private network revenue delivered multiple-fold growth, mainly due to the increased accumulated projects that bring in recurring revenues. For big data analysis, cloud and IDC services, we are delighted to see year-over-year revenue growth of 73.3%, 26.4%, and 26%, respectively. all into the completion of some government-related projects, while cybersecurity revenue reached 28.4% growth. Slide 12 illustrates our international business performance. In the third quarter, our international business group revenue continued to increase by 22.6% year-over-year. maintaining its growth momentum attributable to the rising demand for IBC and the cloud services from global clients. In addition, other revenues increased as well, mainly due to the contribution from subsidiaries in Vietnam and Thailand. In September, our 5G private network project in Thailand announced its launch of operations. Proving our success in introducing smart manufacturing services abroad, we plan to replicate this successful model and continue to cultivate the Asian market. 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 our third quarter financial results. Let's start with slide 14, income statement highlights. For the third quarter of 2022, total revenues grew by 5.2% on a year-over-year basis, mainly due to increased ICT contract completion and higher revenues from core businesses, such as mobile services and broadband access. Meanwhile, operating costs and expenses increased by 4.7%, all into higher manpower expenses and depreciation expenses from 5G network deployment. Income from operations increased by 6.7%. Net income and EPS remained stable compared to the prior year period. Additionally, our EBITDA recorded a 5% YOY increase, and IPICA margin remains stable in the third quarter. Now move on to page 15 for balance sheet highlights. Compared to December 31st, 2021, total assets decreased by 1.9%, mainly owing to decreased cash and cash equivalents for dividends payment and the acquisition of property, plant, and equipment. Total liabilities is lowered by 1.9%, primarily attributed to payment of accounts payable for equipment and suppliers, which offset the increase of bonds payable. We continue to maintain a healthy balance sheet as our debt ratio stays at about 24% level, and net debt over EBITDA is zero. Page 16 presents a summary of cash flows. Cash flows from operating activities decreased by 1.6% on-year. mainly due to the settlement of accounts payable. As for capital expenditure, mobile-related capex, including 5G, decreased year-over-year, as 5G capital spending reached peak in 2021. Additionally, free cash flows increased by 8.3%, compared to the same period last year. Taken together, our healthy balance sheet and strong cash flows enable us to manage economic uncertainty and support business development through challenging times. On slide 17, we provide a table that compares our financial results with our financial guidance. In the third quarter of 2022, all performance measures with respect to revenue and profitability exceeded our financial forecast. Revenue-based guidance may be attributable to better-than-expected performance of core businesses as a result of growing subscribed numbers, 5G migration, and broadband business. Operating costs and expenses were higher than our third-quarter guidance due to higher costs of research for smart devices and depreciation expenses. EBITDA and net income top our forecasts. due to the steady growth of core businesses and the improved profitability of emerging businesses. That concludes the overview of Q3 financial results. Let me turn the call over to our President Harrison.

Thank you, Vincent. The next page demonstrates our ESG efforts. In the third quarter, we announced to participate in the Global Renewable Energy 100 initiative to demonstrate our resolution to transition to 100% renewable power by 2040. In addition, we secured the single largest corporate power purchase agreement in Taiwan this year. which allows us to realize the use of 100% renewable electricity for our IDCs in 2030. Additionally, we worked with world-famous Taiwanese badminton player Dai Tzu-Ying to initiate three planting projects aiming to plant trees 15,000 trees in the next three years. China's ongoing ESG efforts have been recognized globally, receiving multiple awards from international institutes and organizations. Going forward, we will continue to develop our ESG practices to satisfy the union sustainable development goals and to promote the greater good for our local and the global communities. Thank you for your attention and the support. At this time, I would like to open up our conference call for questions.

Thank you. We're 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 will enter a queue. After you're announced, please ask your question. When you're speaking, please be louder but 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 Neil Anderson from HSBC. Go ahead, please.

Thank you. Good afternoon. Two questions, please. The first relates to the international business growth. That was quite strong. Can you give us any color on how big you think that market can become and whether you can sustain this type of 20% plus growth? The second question is a general question on cost. I'd be very interested to know if you're seeing any cost inflation pressures in any areas of your business, such as energy, wages, et cetera. Thank you.

So for the first question about the margins from the International Business Group, We don't disclose the margin yet, but roughly for all of the margin, easy time margin of our business groups, it's in the range of 30% to 42%, so it's around this range. And we are quite confident that because we see there is a demand from the overseas digital transformation, And also, there is IDC demand locally. So we believe the margin can be sustainable. So your second question about the cost pressures from inflation. So basically, we do face the pressure because the government raised the electricity rate a few months ago. Luckily, because we have been undertaking The Energy Savings Initiative two or three years ago. So the energy savings are our operations kind of offset the rising utility bills. So that's my answer.

Thank you very much. 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. As a reminder, press 01 on your keypad if you would like to ask a question. The next question is coming from Dale Wong from UBS. Go ahead, please.

Hi, thank you for this opportunity to ask a question. So I actually only have a very quick question. So in third quarter this year, we see that both EBITDA and operating income saw quite good growth, but net profit remained flat. Just wondering what's the gap here on the non-operating items?

So if I understand your question correctly, so basically, Sarah, you are talking about why for EPS, actually, it remains flat, right? But for our IPTA, actually, there is a YOY growth of 6%, 7%, right? 6% to 7%, right? So that's because of our non-operating business. Because we have made several investments in venture capital. And some of our investments actually in the last year, same period, because of the full market. So we have recorded valuation gains. But because for this year, there's a market correction. So there's a valuation adjustment. So that heavily affects our non-operating income.

Got it. That's clear. Thank you.

Thank you. Thank you. The next question is coming from Neil Anderson at HSBC. Go ahead, please.

Thank you for letting me ask another one. Could I ask about the 5G uplift and how you expect that trend, particularly next year? So it's still quite high, 32%. Do you think that can be sustained into 2023? Thank you.

For the 5G, right, so this will disclose more detailed information in early January or February in the next results call.

Okay, thank you.

Thank you. Ladies and gentlemen, as a reminder, press 01 on your keypad if you'd 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. Bye-bye.

Thank you. Thank you, President Guo. Thank you for your participation in Chonghua Telecoms Conference. There will be a webcast replay within an hour. Please visit www.cht.com.tw on the IR calendar section. You may now disconnect. Goodbye.