Chunghwa Telecom Co., Ltd.

Good afternoon, ladies and gentlemen. Welcome to Zhonghua Telecom conference call for the company's first quarter 2024 operating results. During the presentation, all lines will be in listen-only mode. When the briefing is finished, directions for submitting your questions will be given in the question and answer session. For your 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. Now I would like to turn it over to Ms. Angela Tsai, Assistant Vice President of Investor Relations. Thank you. Ms. Tsai, please go ahead.

Thank you. I'm Angela Tsai, Assistant Vice President of the Financial Department for Zhonghua Telecom. Welcome to our first quarter 2024 Result Conference call. Joining me on the call today are our Chairman Harrison Guo, Presidents Ivan Lin and Vincent Cheng, our Chief Financial Officer. During today's call, management will begin by providing Chairman's message and our business overview in the first quarter, followed by a discussion of our segment performance, and the financial results. After, we will move on to the question and answer portion of the call. On slide two, please read our disclaimers and notes concerning forward-looking statements. Now, I will turn the call over to Chairman Guo. Chairman Guo, please go ahead.

Chairman Guo Thank you, Angela, and hello, everyone. Welcome to our first quarter 2024 results conference call. In the first quarter, we proudly announced our success in expanding our lead in Taiwan's telecom market amidst the robust three-player landscape. Our revenue share in Taiwan's mobile market continues to steadily grow, climbing from 40.3% to 40.4% quarter over quarter, while subscriber share enjoying an increase from 37.7%, maintaining the growth trajectory after the market consolidation completed last quarter. Our financial performance also speaks for our business success. Total revenue in the first quarter hit a new high for the same period since 2017. Income before tax also reached a record high for the same period since 2016. On the basis of excluding the one-time item of the government compensation for ST2 satellites recognized in the first quarter last year, to invest our leadership in the long-term growth, we have been establishing AI infrastructure to enhance our operations and seize opportunities in the AI megatrend. Our AI-powered network solutions have been successfully used to predict network degradation and optimize energy consumption to enhance our network efficiency and contribute to cost reduction. In addition, generative AI is another technology that we leverage on problem shooting to enhance service quality, response time, and cost efficiency in operations, particularly in relation to network maintenance and the customer service. To capture AI explanation opportunities, we actively deployed computerity across cloud, edge, and the terminals to bring computing resources closer to our customers with an intent to access AI applications. We also plan to establish AI data centers and develop GPU as a service, empowering industries to complete their AI transformations. To achieve this goal, we will team up with local and global ICT partners to establish ecosystems for the AI-powered future. Another value added deployment lies in the expansion of content investments. In addition to network and the platform strengths, we have been continuously investing in quality content to win subscribers over and thus are able to form the largest video platform in Taiwan. We are glad to announce that recently we have acquired exclusive broadcasting rights of the 2024 Paris Summer Olympic Games and believe that this will significantly enrich our content portfolio in the incoming quarter. Moreover, Following the announcement made last December, we officially set up Zhonghua Digital Culture and Creative Capital, CDCCC, in the first quarter to scale up our investment in video content and intellectual property management. In February, our board of directors further approved the investment in fund of cultural content industry managed by CDCCC. This fund will work as an important vehicle to upgrade cultural content industry and further integrate our network, platform, and the content IP to deliver quality content to users. I'd like to share that we were saddened by the serious earthquake that happened in Taiwan in April. And in response, we offered complementary communications to help disaster relief in Hualien by successfully leveraging a low-Earth orbit satellite, LEO. Going forward, in addition to GEO, the geostationary orbit, and the LEO. We also plan to add MEO, the median Earth orbit, to our satellite portfolios this year to continuously strengthen our network resilience and further provide services to enterprise and government customers. Now, let me hand the call over to Ivan. for the business updates on the first quarter of 2024.

Thank you, Chairman Guo. And hello, everyone. Now please speak to page five for an update on our approach of performing the mobile business. As mentioned by the Chairman Guo, we maintain our leading position in the Taiwan mobile market in the first quarter of the 2024, with the largest subscriber share of the 37.7%. Meanwhile, our revenue share continued to stay above the 40%, hitting 40.4% by the end of March. Further, and widening our leading again against our peers. Our excess revenue share over the subscriber share was 2.7% due to the exciting progress of the subscriber share gains. In addition, 5G migration and international roaming continue to drive up our mobile service revenue and post-pay are improved. Recruiting 5.1% and 3.4% year-over-year increased. Respective mobile service revenue and our pool also continued to maintain their growth. for the 16th consecutive month and the 12th consecutive quarterly respectively. As the 5G continued to penetrate fairly, we saw the average monthly feed uplift from customers who migrated from the 5G to from the 4G to the 5G grid to 14.5% in the first quarter. And it's a repeating and inspiring upward trajectory. Let's move on to the slide six for an update of our fixed broadband business. In the first quarter, we are great to see the accelerated growth in the fixed broadband sector due to our successful strategy to encouraging speed upgrade. And the fixed broadband revenue and our pool increased by 3.8% and 2% respectively. On year-over-year basis, and both expanded their year-over-year growth margin compared with light of the previous quarter. Our size of the service of the 300 megabits per second will highly continue to be popular amount of speed mix with the 29% year-over-year increase in the first quarter. Maintaining is the double digital growth. Now, let's move on to the performance of our customer-centric business growth. Slide 8 presents the performance of our CBG growth. In the first quarter, income before tax of the CBG increased by 3.7% year-over-year, mainly due to sustained growth of the telecom service. On a year-over-year basis, total CBG revenue increased by 1.7%, mainly driving by the healthy 4.2% increase of our mobile service revenue. Going to the continued FIG migration, post-pay subscriber increase and low mean revenue. This broadband performed, whereas its revenue growth increased to 4.6%, offset by revenue decrease of the fifth voice. sales revenue decreased 1.5%, mainly due to the higher base in the first quarter last year, only to the deferred demand resulting from the supply chain issues. Slide 9 further illustrates our concerns. A consumer business group highlighted, in the first quarter, our multiple plate packages continued to support CBG's growth momentum. The subscriber numbers of the mobile and fixed broadband and Wi-Fi service all together demonstrate a 23.3% quarter-over-quarter growth. which achieved a consecutive quarter of the double-digit quarter and over-quarter growth. This is attributable to the well-received promotion package and value-add service bundles. In terms of individual and home-centric applications, We remain the largest video press fund in Taiwan as the subscriber number of our video service . Notably, we for acquired the exclusive broadcasting rights for the 2024 Olympic Games in April, which we It will bring in a subscription and revenue increase of MOD and HMI videos. In addition, we are also excited to see a 17% year-over-year increase in our CBG cybersecurity service and science ops in the first quarter, and mainly due to the increased demand from the service to avoid an efficient website and block malicious connection. In addition, our service for filtering out adult content on the internet and setting time limits on the internet surfing has also been popular among the families and driving up the popularity of our cybersecurity service, we expect the growth trend will continue and further contribute to our CBG performance. Please turn to slide 10 for an overview of our enterprise business group performance. In the first quarter, the EBG revenue slightly decreased by 0.9%, primarily due to the recognition of the government and the compensations in the same period last year. Excluding the one-time item, EBG revenue increased by 1.9% on-year. Additionally, Our ICT business revenue increased by 3.3%. Many driving by the business expansion of the big data service, cybersecurity, and AIoT, and cloud service, all of which report a mean to high single-digit year-over-year growth or higher. Going forward, we will continue our B2B2X model to build up the ecosystem with key partners and further boost ICT performance. Furthermore, EVG mobile service revenue also demonstrates strong growth at 3.7% on year. prepared by the continued 5G upselling as well as the growth of the international looming revenue. We observed the text message revenue also turned positive on yield due to growing enterprise marketing demand. Although the fixed-life revenue slightly decreased, Data communication revenue and broadband access revenue continued to grow, which offset the fixed voice decline. On to the fixed voice decline and higher basis of the aforementioned one-time item recognition last year, EBG report and 13 0.4% year-over-year decrease of the income before tax. However, excluding the one-time effect, EBG income before tax decreased to 1.5% year-over-year. Slide 11 illustrates our enterprise business highlights. The first quarter, we were glad to see our total enterprise emerging application revenue increased by 5.2% on year-over-year basis. Notably, big data analysis delivered a significant 71.6% year-over-year growth. Due to the smart energy project injection and cyber security revenue include year-over-year for the last consecutive quarter and additionally the AIoT business experienced 6.5 growth on yield. Driving by revenue injection from the green energy project and our car service revenue increased by 5.8%, with sustained growth of the international public car, the recurring revenue is 36.8% on year. Although our IDC revenue decreased on a yearly basis due to the recognition of one-time project in the same period last year. We are great to report our recurrent revenue of IDC service delivered a stable growth at 7.6%. This quarter, we successfully spent our national expert expertise into the global market with the acquisition of our first overseas data center construction project. Furthermore, we are proud to announce that we are the first company in Taiwan to successfully introduce an automatic vehicle identification, AVI, And the vehicle detection VD system to monitor over kind of parking in the freeway, the service area, which we believe will be capable of success and could be an extent to other millions. And slide 12 illustrates our international business performance. In the first quarter, both the income before tax, and the total revenue for the IBG report, positive and double digital growth on a year basis at 23.5% and 13.3% respective. And the impressive growth was mainly by the growing demand for overseas ICT projects as our clients expand their global footprint, which offset the year-over-year decrease of the fixed-line revenue results from the service portfolio change. During this quarter, we partnered with Exaltel to launch the 5G zone in Warsaw, where our innovative 5G smart applications are showcased to attract business opportunities. It also serves as the foundation for local touch and business expansion in Europe. In addition, We not only won the 2024 Smart City Innovation Application Award for our Smart Transportation Solution and Democracy. We also won 2024 System Integration Award in Kaohsiung Smart City Export. for our successful overseas smart healthcare solutions, proving our success in the internet of the medical things globally. Now, I would like to turn the call to Vincent for our financial highlight.

Thank you, President Ivan. Good afternoon, everyone. Now I will present a financial summary of our first quarter results in 2024. Let's begin with slide 14, income statement highlights. During the first quarter in 2024, revenue was about $55 billion, which hit an eight-year high for the same period. Compared to the same quarter last year, revenue increased by 1.4%, primarily driven by higher mobile service revenues growing ICT business revenue, and broadband service revenue. Income from operations and net income decreased by 2.2% and 2.6% on-year, respectively, mainly due to the high base from last year as a result of government compensation related to ST2 satellite. Excluding this one-time item, year-over-year changes in income from operations and net income remained in positive territory. which demonstrates the healthy growth momentum of our core and ICT businesses. EPS for Q1 is 1.21. EBITDA and EBITDA margin remains steady. Now move on to page 15 for balance sheet highlights. As of March 31, 2024, total assets increased by 0.9% compared to the year end of 2023. This increase was mainly caused by the increase in current assets and long-term investments, which offset the decrease in property, plant, and equipment. Total liabilities decreased by 4.1%, primarily attributable to the decrease in accounts payable. Additionally, debt ratio decreased by 1 percentage point, and the net debt over EBITDA remained zero. Page 16 provides the summary of our cash flows. For the first quarter in 2024, we generated solid cash flows as cash flows from operating activities grew by 26.1% compared to the same quarter last year. The increase was mainly attributable to a decrease in settlement of accounts payable and payments for inventory. Regarding capital investments, the amount of CapEx declined by 6.9% on-year, of which mobile-related CapEx decreased by 50%, while non-mobile CapEx increased by 9.1%. The latter was primarily due to FTTH deployment and asset vitalization. On top of that, free cash flows increased by 56.9% on-year. Taken together, we maintain solid balance sheet and keep generating strong operating cash flows, both of which are underpinnings to support our business expansion and to seize digital opportunities. On slide 17, let's turn to the table that presents operating performance against our forecast. In the first quarter of 2024, revenue was about in line with our estimates. For performance majors, income fund operations, net income, EPS and EBITDA all beat our forecasts by a modest margin. The better than expected performance was primarily driven by the steady growth of core business and improved profitability of ICT business. That concludes the first quarter financial results. Let me turn the call over to Chairman Harrison. Thank you, Vincent.

On slide 18, You can see our awards and ESG achievement highlights from the first quarter of this year. First, I'd like to report that relative to 2020, our revenue of the parent company increased about 5.7%, while the carbon emissions experienced a downward trend by decreasing 40% in 2023. The inverse relationship between revenue growth and the carbon emission trend highlights the effectiveness of our dual track approach to operations and sustainable development. Moving forward, we will intensify our carbon reduction efforts by enhancing energy efficiency with innovative technology and the usage of renewable energy. Additionally, we are the first telecom company in Taiwan to receive approval from EV100 and committed to transitioning 100% of our corporate fleet to electric vehicles by the year 2030. We once again ranked in the top five of companies in S&P Global's Sustainability Yearbook 2024, and was honored with the highest leadership level. The A ranking recognition in both the CDB, Climate Change Assessment, and Supplier Engagement rating. In addition, We were the leading telco in Taiwan receiving top awards for most committed to ESG and best investor relations from Finance Asia. This accolade attests to our position as an international industry leader with outstanding performance in all aspects of sustainable development. Furthermore, we clinched the first prize for overall ESG performance for three consecutive years from Global Views Monthly. One of the most prejudiced ESG awards in Taiwan, which exempted us from competing in the same category for the next three editions. This outstanding outcome demonstrates a track record of long-term and stable performance in ESG evaluations and is featured on the annual honor roll. This concludes our prepared remarks. Thank you for your attention. At this time, I would like to open our conference call for questions.

Thank you Chairman Guo and ladies and gentlemen. We will now begin our question and answer session. If you have a question for any of today's speakers, please press star 1 on your telephone keypad and you will enter the queue. After you are announced, please ask your question. And 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 star 2 to cancel the question. And you are also welcome to send questions via chat box on the webcast page. We will begin with the questions from telephone line and then move to the queries from the web page. Thank you. Now, for the dialers, if you would like to ask questions, you may press star key and number one on your telephone keypad. Thank you. The first question, Neil Anderson of HSBC. Go ahead, please.

Thank you. Good afternoon. Thanks for the presentation. I have a few questions relating to slide number 11, please, the emerging enterprise application. So with the percentage numbers, it's a little bit hard to get a sense of the absolute contribution and growth in these business areas. So would it be possible to give us any more detail and say which is the largest one on an absolute basis and where you which business area you think has the capacity to be, again, larger in a few years' time, again, on an absolute basis rather than percentage-wise. And the other question is relating to the revenue and the margin trends in the data center and the cloud business, because we're getting something of a mixed picture from other telcos in this area, so it would be great to get your views on that. Thank you.

Okay, thank you, Neil, for your questions. So regarding the contribution of the emerging application revenues, so basically we don't disclose detailed information, but what we will share is that the ITC contribute the most and followed by cybersecurity and AIoT. So these are the key pillars. This is just for the first quarter. Yes. And for the revenue and margin trend on data center, okay, so what we'll say the revenue trend, what we see, because you know for the IDC, right, sometimes we all have the one-time set-up service revenue, but we focus more on the recurring revenues, and we attach a greater weight on this. So what we can share is that for the recurring revenue of our IDC, the growth has been increasing. As we mentioned, now the recurring revenue of ITC for this quarter, year-over-year change is almost 8%. And we think actually the recurring revenue makes up a big chunk of the total ITC revenue. And it's on a healthy trajectory. Thank you.

Thank you. Any comment on the margin side or competition in the IDC and the cloud?

Okay, so basically for the margin, for the data center, actually when we see IDC business, we take a holistic view to this. Because for client using our data center, normally they will use our services. So when we look at the profit, we will take a holistic view. This is unlike our competitors because their main advantage is, or their main business is on data center per se, but they don't provide integrated services to the clients. So what we'll see is together with our subsidiary chief telecom, actually we are still the largest IDC service providers, and we are... way ahead of our competitors, and we are very confident that we can maintain our lead in this line of business. Thank you.

Thank you very much. Thank you. As a reminder, please press star 1 on your keypad if you would like to ask a question. Thank you.

Okay, maybe we have the first question from the platform. It is about as the government announced the policy of raising the electricity fee, could Zhonghua Telecom management share the impact to Zhonghua Telecom?

Okay, thank you. We don't anticipate a significant impact from the increase in electricity fees. As we have continued to invest in energy efficiency. For example, our centralized REN architecture and the retirement of 3G networks all constantly contribute to energy savings. In addition, we have taken some countermeasures to respond to the electricity cost increase as well. For the energy intensive services like IDC, we have factored the electricity fee issue into our service contracts, including transferring the markup of the electricity fees to our clients. So for us, the electricity fee increase is generally manageable. In the long run, we will still continue to invest in the initiatives of carbon emission reduction, aiming to control the overall energy cost, as well as to respond to ESG goals. Thank you.

Thank you. And ladies and gentlemen, as a reminder, please press star 1 on your keypad if you would like to ask a question. Or you can submit your question via the chat box on the webcast page. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. Thank you. We are now in question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Thank you. Ladies and gentlemen, we thank you for your questions. If there are no further questions at this point, I'll turn it back over to Chairman Guo for closing comment. Thank you.

Thank you for your participation. Goodbye.

Thank you, Chairman Guo. We thank you for your participation in Chung Ha Telecom's conference. There will be a webcast replay within an hour. Please visit www.cht.com.tw under the IR calendar section. You may now disconnect. Thank you and goodbye.