Title

Presentation

Operator: Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company’s fourth quarter 2022 operating results. . For your information, this conference call 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/ir under the IR Calendar section. And now I would like to turn it over to Ms. Angela Tsai, the Director of Investor Relations. Ms. Tsai, please go ahead.

Angela Tsai: Thank you. This is Angela Tsai, Director of Investor Relations for Chunghwa Telecom. Welcome to our Fourth Quarter 2022 Results Conference Call. Joining me on the call today are Harrison Kuo, our President; and Vincent Chen, our Chief Financial Officer. During today’s call, management will begin by providing an overview of our business in the fourth quarter, followed by a discussion of our segment performance and the financial highlights. After, we will move on to the question-and-answer portion of the call. I’d like to please note our safe harbor statements. Now I will turn the call over to President, Kuo. President, Kuo, please go ahead.

Harrison Kuo: Thank you, Angela, and hello, everyone. Welcome to our Fourth Quarter Results Conference Call. To begin, we would like to send our best wishes to our peers as their merger plans were approved by the NCC in January. We believe the resulting change of the market landscape is positive to the telecom industry in Taiwan as the health of the market development for the strength and the overall 5G adoption in Taiwan could consistently maintain its stable growth. Under the new landscape, we will continue our focus on building ecosystems and creating long-term value for customers. As the market leader in terms of network quality, service quality and the subscriber number in Taiwan, we are confident in remaining ahead of our peers in all these aspects going forward.

Now let’s turn to Page 4 for an update on our performance in the fourth quarter. In the fourth quarter, our mobile revenue share and subscriber share climbed to 39.5% and 36.6%, respectively, achieving another solid period of growth on both year-over-year and quarter-over-quarter basis. In addition, the year-over-year increase of both revenue share and subscriber share also progressed in the consecutive quarter, affirming our strong leading positions in Taiwan’s mobile markets, subtend by our notable growth momentum. Please turn to Slide 5 for a closer look and our mobile business. In the fourth quarter, our total mobile service revenue was up by 5.8% year-over-year, maintaining its year-over-year growth for 20 consecutive months, attributable to the upsale resulting from 5G migration and outperforming subscriber number increase.

As of penetrations progressed, we absorbed an average 41% uplift in mobile monthly fees, attributable to consumers who migrate from 4G to 5G. In addition, we are delighted to see the increase of roaming revenue and the prepaid revenue during the quarter. The mobilized cross-border activities also contributed to the increase of prepaid subscriber numbers. Together with strong growth of postpaid subscriber numbers as well as the lowest of churn rate among our peers, our total mobile subscriber numbers, excluding IoT SIMs increased by 3.5% year-over-year. In general, our postpaid ARPU achieved 3.3% year-over-year growth in the fourth quarter, maintaining its upward trajectory for the seventh consecutive quarter. We are also delighted to report that both SPEEDTEST and Opensignal have commodities as the fastest 5G service provider in Taiwan recently.

We are proud of the results, and we are continuing to provide first-class 5G network quality for customers to top up 5G migration. Moving on to Slide 6. You may find an update of our fixed broadband business. In the fourth quarter, our fixed broadband revenue increased by 3.7% year-over-year, and the subscriber number continues to grow as well. In addition, the accumulated setup for solid speeds of 300 megabits per second or higher increased by 51.9% year-over-year, mainly thanks to our promotion strategy which effectively accelerated our subscriber’s migration to service and to higher service speed. By 2022, we were excited to see more than 70% of the package offers of CYBG upgraded their service speed. Now more than 60% of the adopters signed up for solid speed of 500 megabits per second or higher.

Our fixed broadband ARPU thereby achieved 2.1% year-over-year growth in the fourth quarter, maintaining its upward trend for 14 consecutive quarters. In 2023, we will continue the momentum by rolling out another promotion strategy and further strengthen the incentives by lifting the upstream speed that tailed with 300 megabits per second studies from 100 megabits per second to 150 megabits per second, distinguishing ours from our peers. Now let’s move on to the performance of our customer-centric business group. Slide 8 presents the revenue of our Consumer Business Group or CBG. In the fourth quarter, total revenue of CBG decreased by 2.1% year-over-year in spite of the strong growth of our core business. Mobile service revenue grew by 7.1% year-over-year, propelled by the increase of postpaid subscribe numbers and the steady 5G migration.

While fixed voice revenue continued to decline as expected. Our total fixed line service revenue of CBG still in a slight year-over-year increase, thanks to the successful upsell propelled by the speed upgrade promotion packages as well as the FIFA World Cup broadband — broadcast and the campaign in November. However, sales revenue decreased by 12% year-over-year, mainly due to the continued unstable iPhone supply during the quarter. Other revenue also decreased by 34.9% year-over-year, owing to the higher base resulting from the government subsidies for accelerated 5G construction in the fourth quarter of 2021. Slide 9 further illustrates our Consumer Business Group highlights. In the fourth quarter, our multiple-play packages continued to support the growth momentum of our CBG business.

The subscriber numbers of mobile, fixed broadband and WiFi services altogether demonstrated a 28% year-over-year growth. In particular, our home WiFi device subscription number grew more than 1.5x on a year-over-year basis, testing our subscription-based revenue and sustaining the popularity of home-centric applications. The number of our video subscription that comprised of MOD and Hami Video, which are paid in monthly fees on an annual basis, rather than one time sign up, grew by 8.9% year-over-year in the fourth quarter, with growth mainly driven by Hami Video, thanks to the popular FIFA World Cup taking place in November. We were also delighted to see the related advertising revenue was 5 points more than that of the loss of FIFA World Cup third — fourth year ago — years ago, demonstrating our success in presenting our popular content to customers.

Turning into 2023. We will continue the content engagement strategy with a focus on sports events and the exclusive channels to further enhance overall subscriber stickiness and contribution. Please turn to Slide 10 for an overview on our Enterprise Business Group performance. In the fourth quarter, EBG maintained its growth trajectory by demonstrating 2.9% revenue increase on a year-over-year basis, mainly attributable to the growth of our ICT business, particularly in IDC, service delivery, 5G networks and big data services. Also, our EBG mobile service revenue increased by 3.3%, driven by 5G upselling and the increase of customers. Other revenue also increased by 46.8% year-over-year, mainly due to the equipment sales driven from subsidiaries.

Additionally, we see the digital transformation trend and its opportunities continue to jump up data communication and broadband assets revenue to grow by 5.4% year-over-year, especially the speed upgrade demand from enterprise and schools although fixed line revenue kept flat year-over-year in the fourth quarter, affected by the decrease of revenue. Slide 11 illustrates our enterprise business highlights. In the fourth quarter, our total enterprise emerging application revenue increased by 8.8% year-over-year as most of our major applications demonstrated double digits year-over-year growth rate. 5G private network revenue delivered a multiple-fold growth, mainly due to the increased accumulated projects but in recurring revenues. In addition, we are evolving the 5G private network business model by providing leasing arrangements for enterprise to recurring revenue.

We were delighted to report that the 5G private network leasing arrangements gained popularity in the PCB industry in the fourth quarter and is expected to extend to other verticals going forward. For IDC, big data and cyber security services, we are delighted to see year-over-year revenue growth by 45%, 37% and 17%, respectively, owing to the increased demand of digital transformation and opportunities. In the fourth quarter, we successfully leveraged our big data analysis, information, security and blockchain technologies to deliver integrated solutions for the insurance industry. In addition to the Big Data platform, government for insurance regulatory oversight, we also helped the industry to consolidate our clients across different insurance companies, owning by the same policyholder to streamline reinvestment process.

Slide 12 illustrates our international business performance. In the fourth quarter, our international business group revenue decreased by 7.1% year-over-year, mainly due to the higher base of other revenue recognized in the fourth quarter of 2021 related to ST-2 compensation. Excluding the non-recurring impact, IBG revenue in the fourth quarter maintained its growth momentum and increased by 19.7% year-over-year, mainly driven by emerging business revenue and the fixed broadband revenue due to strong demand for IDC and the cloud services from global clients. In December, our technical support center in Malaysia has officially started operating for — to fully support business expansion in the Pacific home market. Now I would like to turn the call to Vincent for our financial highlights.

Vincent Chen: Thank you, President, Kuo. Good afternoon, everyone. I will now walk you through our fourth quarter financial results. Let’s start with Slide 14, income statement highlights. For the fourth quarter of 2022, while revenue generated from our core business increased by 2.3%, total revenue decreased by 0.7% on a year-over-year basis, mainly attributable to decreased sales revenues resulting from the shortage of handsets. Net income decreased by 2.2%, primarily due to sales decline and the grant of government subsidy for the acceleration of 5G deployments in Q4 of 2021. Meanwhile, our EBITDA margin increased to 35.05% from 34.82%. For full year results, we were glad with total revenue increased by 3% compared to 2021, driving by growing core business, including mobile, ICT and broadband services.

Income from operations and net income grew by 4.2% and 2.1% on year, respectively, mainly due to our robust core business and growing ICT business. EBITDA margin rose from 39.59% to 39.80%. Now move on to Page 15 for balance sheet highlights. Total assets at the end of 2022 increased by 2.1% on year, mainly driven by the increase in cash and cash equivalents as a result of cash proceeds from issuance of sustainable bonds as well as decreased negotiable certificates of deposits. Total liabilities increased by 6.5%, primarily attributable to increase of bonds payable and revenues and deferred government grant income. Our balance sheet remains strong and that debt ratio stays below 25% and net debt over EBITDA is 0. Page 16 presents the summary of our cash flows.

Cash flows from operating activities increased by 1.4% on year mainly due to higher net income arising from our strong operating performance. As for capital expenditure, the amount of mobile and nonmobile CapEx combined decreased by 10.7% on-year, of which mobile-related CapEx was reduced by about 18% year-over-year as 5G capital spending was peaked in 2021. Additionally, relative to 2021, free cash flows increased by 12.4%. Overall, our robust cash flows together with strong balance sheet enable us to still see expanded uncertainty and focus on long-term value creation. On Slide 17, we provided a table that compares our financial results with our financial guidance. In the fourth quarter of 2022, key performance measures such as revenue, net income and EBITDA meet or beat our financial forecasts.

For the full year results, all performance measures exceeded our guidance with operating income and net income within our projections by a modest margin. Turning to Slide 18. Please see our guidance for 2023. Looking ahead, total revenue for 2023 compared to 2022 is expected to increase by between 2.1% and 2.8%, primarily driven by growth momentum in our core business that benefit from 5G migration and broadband upgrades. ICT business also contributed as we expect growing emerging services to meet customers’ demands for digital transformation and its opportunities. Operating costs and expenses for 2023 are expected to rise by 4% as a result of net investments impairment and infrastructure that supports future business development in core and emerging businesses.

Given these projections, we expect our EPS to be in the range between TWD 4.45 and TWD 4.65. As for capital spending, we budget TWD 35.32 billion for 2023. Mobile-related CapEx accounts for 1/3 and represents an expected decrease of about 13% on year. Non-mobile related CapEx, which comprise of investments in fixed line network, IDC and supplement cables is expected to increase by 32% on year to support business expansion in mentioned business. Now I would like to turn the call over to President, Kuo for our awards and recognitions.

Harrison Kuo: Thank you, Vincent. We have always considered ESG while operating our business, and the next page demonstrates our ESG efforts. Our ESG efforts have been widely recognized by both domestic and international organizations and rating agencies such as Dow Jones S&P Global, Forbes and The Asset. Before I expand our influence, in the fourth quarter, we launched a Green ICT Supply Chain, joining hands with 45 key suppliers to power net zero emissions. We also partnered with KIPP inspired school of Taiwan to reach out to cities that have a relative lack of teaching resources to help facilitate online meaning. We believe these new developments are key to our success and the long-term growth, and we will continue to focus on ESG development going forward. This concludes our prepared remarks. Thank you for your attention. And this time, I would like to open up our conference call for questions.

See also 20 Least Populated States in America and 13 Best Value Dividend Stocks to Buy .

Operator: . And our first question is coming from Neale Anderson of HSBC.

Neale Anderson: Two questions, please, both on the mobile side of the business. You mentioned that you’re pleased with the recovery in roaming and prepaid. Is it possible for you to quantify the contribution that made. And if you expect that to continue to increase through 2023. The second question relates to 5G. Obviously, a large number of customers have now moved to 5G tariffs. So what level of revenue growth do you expect this year on the 5G side? And also, what level of contribution do you expect from some of the new corporate services you mentioned such as the 5G private networks?

Harrison Kuo: Thank you, Neale, for your questions. For the first question about the prepaid, right, so briefly, we don’t provide numbers on our prepaid in terms of revenue or subscriber space. But with the total reopenings so it was back to growth in revenue and subscription will grow in prepaid subscribers. And this is quite positive because we have seen there is a huge demand for overseas travels, and we will also grow out the promotion packages to our customers and not only the outgoing but also the incoming travelers. And for your second question about 5G, right? So basically, this year — sorry, last year, we’re very pleased about our performance about our mobile business. So for the — not only for the revenue — total revenue growth in mobile business but also uplift from the margin migration.

So we don’t disclose openly about our internal data, we’re still quite optimistic, and we believe in terms of the progress of our 5G penetration rate, actually, the market has been developed in a positive and steady manner, and we believe that will contribute to our revenue modestly.

Neale Anderson: Got it. Could I just follow up on the roaming side? So I understand you don’t disclose the exact numbers. But in the fourth quarter, was it pretty much back to pre-pandemic levels in terms of roaming service revenue?

Harrison Kuo: So it is now going back to the impact — not yet to pre-pandemic level yet, but we expect we’ll recover about like 70%, 80%, yes, for this year. Yes.

Operator: . And the next question is from Sara Wang of UBS.

Sara Wang: So I have two questions. First is that how is the margin of the enterprise ICT business? And then my second question is that I understand the ICT or enterprise business still requires investment. So we do see increase in OpEx and CapEx in 2023. So any time line or expectations for the ICT business through the earnings quarters or how shall we think about EBITDA and net margin going forward?

Harrison Kuo: Okay. So for the margin for the enterprise business, right? So it’s about — I think it’s about 20% or so, yes. So it depends on the individual projects. It’s about that level. What’s encouraging is actually our ICT margin has gone up last year. And also for the time line for us to provide the margin and EBITDA numbers, right, so we will provide it starting from first quarter next year — this year, yes, 2023.

Sara Wang: Got it. And then the 20% margin is gross margin, right?

Harrison Kuo: Yes, we only provided the net margin, yes, not the income margin, yes, not the gross margin.

Sara Wang: I just want to confirm. So the 20% number is net margin for enterprise ICT business?

Harrison Kuo: For the enterprise, right? So the net margin is about 20%. So that’s the information we currently disclose for now.

Operator: . Next, we’ll have Neale Anderson of HSBC for questions.

Neale Anderson: I had a follow up on the supply chain. I know some of the delays. So you mentioned that the handset revenue was down a little bit due to weaker handset suppliers. And I think some of the CapEx was also deferred into this year. Do you — is that improving? How much visibility do you have on that? Do you expect to see continued issues this year? Or can you see that improving?

Harrison Kuo: So basically, the supply chain interruption issue has been reviewed recently. But to the extent of whether how soon or to what extent it goes back to the normal level, we are still unsure. So it depends on the situation.

Operator: . And if there are no further questions, I will turn it back over to President, Kuo. Please proceed. Thank you.

Harrison Kuo: Thank you for your participation. Goodbye, everyone.

Operator: Thank you, President, Kuo, and we 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.