Chunghwa's CEO Discusses Q1 2011 Results

For your information, this conference call is now being broadcast live over the Internet. Webcast replay will be available within an hour afterwards the conference is finished. Please visit www.cht.com.tw/ir in accordance with the Investor section.

During today's call management will discuss business operational and financial highlights for the first quarter 2011. This will be followed by Q&A. Previously we continue, please note our Safe Harbor statement on slide one.

Thank you, Fu-fu. Hello, everyone. This is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our first quarter 2011 revenues results conference call. On slide number two, total consolidated revenue for the first quarter of 2011 amounted to NT$5.2 billion.

In addition to the increased fixed line revenue resulting from the shift in the pricing right of a fixed-to-mobile call from mobile operators to fixed Line operator, mobile VAS and handset sales were remaining as our key revenue drivers.

During the first quarter of 2011 we enjoyed persistent growth in our traditional telecom service business and continued to win additional ICT contracts. While the quarter we as well continued to offer clients configured cloud computing services and to consolidate and repackage solutions.

The first quarter 2011

Our total revenue for the first quarter 2011 was NT$52.5 billion, a 5.8% increase, compared to 2010, primarily due to an increase of fixed line revenue resulting from the shift in the pricing right of a fixed-to-mobile call from mobile operators to fixed network operators.

Slide number six shows our revenue for each business segment for the first quarter of 2011. In the domestic fixed line business, local earnings increased by 24.3% year-over-year, mainly due to the shift of pricing right for fixed-to-mobile calls.

The 13.2% decline in DLD revenue was due to mobile and VoIP (Voice over Internet Protocol) substitution, as then as reflecting the mandated tariff reduction.

Broadband access revenue, including ADSL and FTTx increased by 3% year-over-year, though ADSL access revenue decreased as more ADSL subscribers migrated to fiber solutions, the decrease was fully offset by growth in FTTx access revenue.

Mobile revenue increased by 2.8% year-over-year, mainly due to growth in mobile VAS revenue related to our smartphone promotion and handset sales.

Internet revenue rose by 3.6%, mainly due to Internet service growth, which was driven by the increase in broadband subscribers and the migration of ADSL subscriber to fiber solutions.

International fixed line revenue decreased by 4.5%, mainly due to the decrease in leased line revenue and satellite service revenue resulting from the expiration of ST-1 contract at the end of January 2011.

The breakdown of operating costs

Slide seven shows the breakdown of operating costs and expenses. The increase in operating costs and expenses in the first quarter 2011 was mainly due to the increase in interconnection costs and transition fee resulting from the shift in the pricing right of fixed-to-mobile calls, the higher cost of handsets sold and the early retirement expenses.

As show on slide number eight, cash flow from operating activities was NT$9.7 billion while the first quarter of 2011. The decrease, compared to the same period last year was mainly because starting from 2011 the company brought its billing period for monthly fee in line with that for communication charge.

Comparing with the first quarter guidance the higher net revenue mainly came from mobile VAS revenue and handset sales. The higher operating costs and expenses were because of the higher cost of handsets sold relevant to the popularity of smartphone.

Thank you, Dr. Yeh. Now let me take you through our business performance. Slide 11 shows the results for our broadband services. By the end of March 2011 Chunghwa had about 4.4 million broadband subscribers.

Our initiatives to encourage FTTx migration have yielded solid results, with FTTx subscribers as a percentage of total broadband subscribers increasing from 40.4% at the end of March 2010 to 48.1% at the end of March 2011.

The first quarter of 2011 FTTx revenue reached 63

In the first quarter of 2011 FTTx revenue reached 63.2% of total broadband access revenue. We as well received a growth of 3.6% in Internet services revenue year-over-year.

Moving on to slide 12, which shows the recent boost we have seen from the MOD subscribers growth. Till April 15th, we've accumulated 840,000 subscribers. We've enjoyed steady growth in MOD revenue as a result of strengthening our MOD offering in terms of content, marketing and interactivity.

3G subscribers, as a percentage of the total has continued to increase and we expected to have 10 million mobile subscribers by end of this year. For the first quarter 2011 mobile VAS revenue increased by 38.6% year-over-year and now accounts for 20% of our mobile service revenue.

The highest year-over-year growth of 88%

Mobile Internet showed the highest year-over-year growth of 88%, making it the highest contributor to VAS revenue. We expect continued growth in mobile VAS as we focus on executing our VAS strategy to enhance user experience and create value-added services.

We are integrating 3G and Wi-Fi network to improve network efficiency and facilitate VAS usage. We are on the track of Wi-Fi access points construction and are expecting to accumulate 20,000 Wi-Fi access points by the end of 2011.

The success of our mobile strategy

Slide 14 shows the success of our mobile strategy. Our smartphones, which leverage a variety of applications are increasingly penetrating the premium customer segment.

Smartphones accounted for 39% of total handsets offered in the first quarter 2011 and we expect the penetration -- percentage to reach 35% to 45% depending on the market dynamics while 2011. As of March 31st mobile Internet subscribers, including mPro, data card and tablet users, had grown to 989,000, a 97% increase year-over-year. We anticipate that we'll have 1.2 million mobile Internet subscribers by the end of this year.

The ARPU side

On the ARPU side, you can see that smartphone ARPU is 108% higher than blended ARPU. Our comprehensive smartphone portfolio supports all mobile operating systems and spans most world-class brands, includes iPhone and HTC. And we have an MOU with HTC to form a strategic partnership, work at the same time on customized handsets and the share marketing resources.

We have as well been focusing on enriching content via customized value-added services with the launch last year of Hami Apps, which has over 2,000 applications and it supports the Android platform. We believe our efforts to enhance content will furthermore expand our customer base and solidify our leading market position.

On ICT business, our joint venture with Viettel established the largest IDC in Vietnam and we initiated a joint venture, Sertech in Xiamen to capture growing local business ICT needs. We have established a wholly owned subsidiary in China and will establish another one in Vietnam to function as ICT-related solution providers and leverage our ICT competence.

On Telecom business, through our subsidiaries in America, Hong Kong, Singapore and Japan, we provide quality competitive services, including international private leasing circuits, IP-VPN, IP transit, voice and data wholesale services, as so then as type I and type II services to multinational corporate clients. Recently, we began to cooperate with China Unicom to help expand its distribution channels and enlarge mobile VAS business scale.

Turning to slide 17, I'd like to show you our CapEx plan, which remains prudent. Total CapEx for the first quarter 2011 amounted for NT$4.4 billion, a 5% increase compared to the same period in 2010. Of the NT$4.4 billion, 77% was used for the fixed and Internet business, 21% was spent on the mobile business and the rest went on other capital expenditure. We believe that this indicates a healthy level of CapEx for long-term sustainable growth.

The regulatory update

Next is the regulatory update. We have five major regulatory updates to share with you, as show on slide 19. We have reported to you earlier the regulatory change on the mandated tariff reduction, the shift of fixed and mobile calls pricing right, the progress of the digital convergence related regulation and the extension of the 3G license. Please find more detail on this slide.

In addition to the former four regulatory updates, the NCC mandated us to submit a proposal by the third quarter of 2011 for combining island-wide telephone service tariffs into one local tariff. We are on the whole in negotiation with the NCC about this proposal.

That's all for our business operations. Now, I'll hand it over to Dr. Lu to take you through our strategy. Thank you.

Thank you, President, Chang. Previously entering into the last slide, let me add that President Chang skipped slide number 15 and let me say a few words about this page, new business initiatives for future growth.

We have been launching converged services to meet growing customer demand and the multi-screen services is expected to be available by the end of this year. Our development of ICT businesses are on track. We continued to gain contracts from corporate clients and expect revenue growth of 23% year-over-year for 2011.

Starting 2011, we are cooperating with domestic ICT-related associations and independent software vendors to seize the business opportunities from the growing Cloud Computing demand and are expecting to construct more than 12,000 virtual machines by the end of 2011.

With our experience, market leadership and continued investment in research, Chunghwa is so then positioned to furthermore solidify its leading position as an information and communications service provider.

Now, please turn to page 21. Our business strategy and policy remains focused on pursuing growth by maintaining our operational focus on broadband, VAS, research and integration and enhancing cooperation with subsidiaries to expand our overseas business and enlarge the scale of our operations.

We will as well accelerate network upgrades and integration, as then as taking advantage of industry alliances to develop market-leading products and services and capture new service opportunities.

To ensure, we maintain the high-quality human capital necessary to execute on our business strategy and policy. We endeavor to create an environment in which employees can achieve their maximum potential.

The same time

At the same time, we continue to implement stringent cost control initiatives to support the development of our business. Underscoring everything we do is our unwavering commitment to corporate social responsibility, which manifests itself in our continued efforts to enhance corporate citizenship.

And my second question is about if we take off the regulation change, fixed-to-mobile pricing right change impact, can you share with us what's the growth for mobile voice and local call revenue for the first quarter?

The regulation

And my last question is about the regulation. As President Chang mentioned, we are still pursuant to this agreement negotiation with government about a single tariff for island-wide phone service. However can you share with us if there is any affirmation about a potential impact from this regulation change? Thanks.

We talk this previously because the depreciation and the CapEx now is coming close and in other words a source of the funding for the past capital reduction. And as well we look then and there one or two years or like as not longer, there are some new investment needs. In short we have to think about whether we have the extra ability to do the capital reduction. Yeah. So our priority is to allocate the capital for the future business growth. Thanks.

Your then and there question about the fixed-to-mobile changes, the impact for total revenue is about NT$107 billion for the first quarter. However I have mentioned the first quarter is only two months. Thank you.

And as well on your business in terms of expanding out your Wi-Fi hotspots, you said you are targeting out to have 20,000 hotspots by the end of the year. Am I correct in thinking that in Taipei City they're going to have a free Wi-Fi zone? I'm just wondering what the percentage of hotspots you have in the Taipei area will be and how that will be affected by that business change? Thank you.

The second is

And the second is, we are install our Wi-Fi over the public areas, for instance, the convenient stores, hub, train stations and we try to find everywhere, even our public phone booths to install it. Thank you.

Sorry, just to follow up on that. Will the Taipei government -- city government be using your current network installed or will they be using another enterprise network? I believe they used to backhaul on the Wi-Fi who's now owned by Firestone. Will that all in all be the case or will Chunghwa have an possibility to provide services there too?

Thank you to take my questions. I have a question about your page 11 and 12 about these MOD and these broadband service development. Can you elaborate the - what's the current competition environment in these broadband service afterwards this cable a lot acquisition happened in last year? Especially, I notice that if we look the page 12, the MOD subscriber growth is quite low in this quarter and you want to achieve this 1 million MOD subscriber target.

Is it nevertheless possible for you and for the broadband ARPU whether this migration to the FTTH are by and large now and I think these two are linked MOD subscriber growth and FTTH are linked at the same time? Thank you.

The broadband competition

The broadband competition, the majority comes from the cable operators because they are using their systems to provide quite a lower tariff compared to ours. So what our strategy is? We upgrade our speed, we try to differentiate with them. Furthermore that, we as well offer some value-added services, just as our music programs. So all our clients can enjoy our music programs.

Besides, we have -- we bundle our card service perhaps on the, I think the first -- the second quarter, we will offer the card pack. We call it the card pack. That's something like a drop box service to our -- every broadband customer. So that's what we are doing that's about broadband. As to the MOD, the first quarter, I think, your question is, let me

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. Nevertheless, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.