CHT — Call Transcript 2018

May 28, 2018

1Q 2018 Operating Results

Citi Regional Tech Conference
May 31, 2018
TSE: 2412
NYSE: CHT

Notes:

Thank you. This is Fufu Shen, the Assistant Vice President for Chunghwa Telecom. Welcome to our first quarter 2018 results conference call. Joining me on the call today are Mr. Sheih, our President, and Mr. Kuo, our Chief Financial Officer.

During today’s call, management will begin by providing an overview of our business during the quarter followed by a discussion of operational and financial highlights, and then we will move on to the Q&A session.

Now, I would like to hand the call over to President Sheih, and please note our safe harbor statement on slide 2. President Sheih, please go ahead.

Disclaimer

STATEMENT REGARDING UNAUDITED FINANCIAL INFORMATION

The unaudited financial information under T-IFRSs in this presentation is preliminary and subject to adjustments and modifications. Adjustments and modifications to the financial statements may be identified during the course of the audit /review work, which could result in significant differences from this preliminary unaudited financial information.

NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This presentation contains forward-looking statements. These statements constitute “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar statements. Statements that are not historical facts, including statements about Chunghwa’s beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Investors are cautioned that actual events and results could differ materially from those statements as a result of a number of factors including, but not limited to the risks outlined in Chunghwa’s filings with the U.S. Securities and Exchange Commission on Forms F-1, F-3, 6-K and 20-F, in each case as amended. The forward-looking statements in this presentation reflect the current belief of Chunghwa as of the date of this presentation and Chunghwa undertakes no obligation to update these forward-looking statements for events or circumstances that occur subsequent to such date, except as required under applicable law.

This presentation is not an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering of securities to be made in the United States will be made by means of a prospectus that may be obtained from the issuer or selling security holder and that will contain detailed information about the company and management, as well as financial statements.

SPECIAL NOTE REGARDING NON-GAAP FINANCIAL MEASURES

A body of generally accepted accounting principles is commonly referred to as "GAAP". A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measure. We disclose in this report certain non-GAAP financial measures, including EBITDA. EBITDA for any period is defined as consolidated net income (loss) excluding (i) depreciation and amortization, (ii) total net comprehensive financing cost (which is comprised of net interest expense, exchange gain or loss, monetary position gain or loss and other financing costs and derivative transactions), (iii) other expenses, net, (iv) income tax, (v) cumulative effect of change in accounting principle, net of tax and (vi) (income) loss from discontinued operations.

In managing our business we rely on EBITDA as a means of assessing our operating performance. We believe that EBITDA can be useful to facilitate comparisons of operating performance between periods and with other companies because it excludes the effect of (i) depreciation and amortization, which represents a non-cash charge to earnings, (ii) certain financing costs, which are significantly affected by external factors, including interest rates, foreign currency exchange rates and inflation rates, which have little or no bearing on our operating performance, (iii) income tax and tax on assets and statutory employee profit sharing, which is similar to a tax on income and (iv) other expenses or income not related to the operation of the business.

EBITDA is not a measure of financial performance under U.S. GAAP or T-IFRSs. EBITDA should not be considered as an alternate measure of net income or income from operations, as determined on a consolidated basis using amounts derived from statements of operations prepared in accordance with U.S. GAAP or T-IFRSs, as an indicator of operating performance or as cash flows from operating activity or as a measure of liquidity. EBITDA has material limitations that impair its value as a measure of a company's overall profitability since it does not address certain ongoing costs of our business that could significantly affect profitability such as financial expenses and income taxes, depreciation, pension plan reserves or capital expenditures and associated charges. These non-GAAP measures are not in accordance with or an alternative for GAAP financial data, the non-GAAP results should be reviewed together with the GAAP results and are not intended to serve as a substitute for results under GAAP, and may be different from non-GAAP measures used by other companies.

Notes:

Committed to Improving Shareholder Value

Cash Return

Board of directors resolved to distribute NT$37.2 billion to shareholders
NT$4.796 per share
payout ratio 95.7%

NT$ bn
Note:
1 ADR = 10 common shares
The regular dividend has been calculated based on total share number 7,757,446,545.

Notes:

Business Overview

Notes:

Chunghwa Telecom Overview

Strong Market Position (a)
Operational Strategies
Streamline services and strengthen profitability
Capitalize and remain at the forefront of digital convergence trends
Leverage governments’ new southbound development policy
Broaden corporate governance initiatives
Continue to invest in talent and R&D

Domestic Fixed

1 Local

93.3% share by subs (10.63mn subs)
84.2% share by minutes

1 DLD

83.3% share by minutes

1 Broadband access

72.3% share by subs (b)(c) (4.48mn subs)
Mobile

1 Mobile subscribers

36.3% market share (d) (10.39mn subs)

1 Mobile revenue

37.6% market share (d)(e)
Internet

1 ISP

67.5% share by subs (4.13mn subs)
International Fixed

1 ILD

64.6% share by minutes

Chart

Category	Total Subs Mkt Share
CHT	0.373
TWM	0.255
FET	0.253
Others	0.119
Market share as of March 2018
CHT access circuits were not included
Excluding PWLAN subscriber numbers
Includes 3G and 4G
Revenues are based on T-IFRSs .

Notes:

• 雖然競業低價搶市，使行動用戶數市佔率降低0.6% yoy，但行動營收市佔率增加0.3% yoy。
• 行動用戶流失收斂，4Q17流失7.9萬戶 vs. 1Q18流失6.2萬戶
• 寬頻市場固守有成，客戶數淨增轉正，1Q18淨增1.7萬戶，YoY淨增1.3萬戶。
• 板橋IDC於2月初建置完第二期機房，728櫃已有70％被訂購或完銷；3月簽約投資 SJC2海纜。
• MOD持續成長動能，客戶數1Q18淨增10.3萬戶，SVOD年成長38.7%。
Thank you, Fufu and hello everyone. Welcome to our first quarter 2018 earnings conference call.
For the first quarter of 2018, the overall market remained competitive. In mobile business, we continued to retain our market leading position in both subscriber numbers and revenue. We’re pleased to see the continuous mitigation of subscriber loss, and we maintained the lowest mobile service revenue decrease year over year among three major telecoms in Taiwan.
In our broadband business, we are encouraged to see subscriber net-adds turn positive for the first quarter, which demonstrates the success of our strategy of promoting home-centric services that bundled broadband, Wi-Fi, MOD and IoT services to further solidify our broadband subscriber base. Meanwhile, MOD subscriber numbers and revenue continued to grow in the first quarter as we have been endeavoring to facilitate the overall TV operational environment and introducing popular content as well as OTT service.
Despite the decrease of ICT revenue year over year in the first quarter owing to some delays in project revenue recognition, we observed that revenue share from enterprise customers continued to increase, and thus keep enhancing our overall capabilities to provide ICT related solutions to enterprise customers. Our IoT platform continued to support the development of smart city, smart agriculture, smart manufacturing and other IoT related applications. We also furthered our efforts to increase network capacity by joining the construction of the Southeast Asia-Japan 2 consortium submarine cable (SJC2) in March. In February, our highest rated IDC in Banqiao completed the second phase of its construction and opened to customers. We are pleased to report that so far, 70% of the newly constructed space has been sold or reserved. Going forward, we will continue to leverage our advantages in IDC and CDN to cater to the growing demand of comprehensive internet services in the digital economy.

Number One Mobile Services Provider

Offer new 4G plans for mid-to-low and mid-to-high tier customers, raising threshold for unlimited data usage to move towards tier-pricing and fair usage policies
Promote VAS and new applications
Encourage second SIM subscription for usage with wearable devices and IoT applications
Grow enterprise customers revenues
Strategy
Mobile Internet Adoption

Continue raising threshold for unlimited data usage to move towards tier-pricing and fair usage policies
Re-allocate marketing resource to shepherd subscription toward high-end bundled plans
Strengthen subscriber acquisition and retention initiatives
Promote VAS and new applications
Grow enterprise customers revenues
Mobile Internet Subs as % of Postpaid Subs
Thousand
subscriber
Note : Subscribers with mobile internet plan subscription.
Highest Subs & Lowest Churn
Thousand
Note : Churn rate for postpaid subscribers

Notes:

Fixed Broadband and Internet Services

Performance
Strategy
Leverage network capability to offer high-speed upload service
Leverage Big Data capability for precision marketing and precision network construction
Leverage mobile, broadband and Wi-Fi capabilities to offer seamless internet services
Expedite CDN construction and OTT promotion to enhance digital convergence product competitiveness

NT$ mn
Note1 : Broadband ARPU is calculated as access plus ISP
Note2 : Revenue is calculated based on T-IFRSs
Note3 : Revenue starting from 2018 are calculated in accordance with IFRS 15
Fixed Broadband Subs
Thousand
4,485
4,479
4,467
4,472
4,472

Notes:

MOD/ IPTV Service

Performance
Strategy
Continue to enrich content, including movies, drama, TV series and cartoons for SVOD
Leverage the existing broadband and 4G mobile subscriber base to grow MOD subscribers
Carry OTT and 4K service on the platform to make MOD the smart home hub
Differentiate products by acquiring sports contents including eSports

Accumulated subscription for Q1 2018 grew 27.4% YoY
Accumulated revenue for Q1 2018 grew 25.2% YoY
Subscriber market share (CATV+IPTV) grew to 23.5% in Q4 2017

MOD subscribers and revenue
NT$ mm
thousand
thousand

SVOD：Subscription Video on Demand
Note : Revenue starting from 2018 are calculated in accordance with IFRS 15
| 電視／STB 狀態 | 動作 | 視為開機 |
| --- | --- | --- |
| 電視開+STB開 | 當天有瀏覽網頁(切換到下一層或收看VOD)或收看(切換)電視頻道的動作 | 是 |
| 電視開+STB開 | 當天沒有瀏覽網頁(切換到下一層或收看VOD)或收看(切換)電視頻道的動作，整天無動作。 | 否 |
| STB待機(橘燈) | 待機整天無動作 | 否 |
| STB待機，按STB電源鈕（開）（橘燈-->黃燈） | 目前MOD-2設計開STB電源後，會自動跳回首頁，且首頁右邊的廣告視窗會有頻道播放。在2007年以前，因為這個廣告頻道是沒有包含在log中的，所以，不會有記錄。目前三區都已經有把這個首頁廣告頻道加入統計。(HMI 設定BarkChannel首頁廣告 IP:224.1.4.102:11111 ) | 是 |
| 按STB重置鈕或STB205後方的開關鈕 | 會重新開機，約2~3鐘左右，有進入首頁的動作。 | 是 |
| 因STB換版,遠端重置STB | 視為"按STB重置鈕"。 | 是 |
日開機率=開機用戶數/全體用戶數
月開機率=Σ日開機率/天數
開機用戶數定義：1.當日開機≧30分鐘 2.期間有操作(ex.選台)

Notes:

Enterprise ICT Initiatives

Performance
Strategy
Leverage our advantage on network infrastructure, IDC, CDN, etc. to expand ICT business
Launch highest-rated cloud IDC to further explore business opportunities in finance, ISP and ICP/OTT industries
Offer ICT total solutions by integrating our capabilities on cloud, information security, big data analysis, IoT, AI, blockchain and customization
Cooperate with partners to develop an ecosystem to provide IoT services across various industries
Completed second phase rack installation of IDC in Banqiao with a 70% occupancy rate so far
Accumulated more than 500 thousand IoT connected devices

整合寬頻網路、資安及IDC服務等在地化優勢，扮演雲端運算產業推動者
與外部廠商共同合作，提供行業別雲端解決方案，例如雲算圖、證券雲、混合儲存雲等

Notes:

板橋IDC第二期728櫃於2月完工，簽約/預定之客戶已達70%，朝國際金融園區與亞太資訊匯流中心前進。
善用本公司在 網路、IDC機房、海纜、CDN的競爭優勢，發展企客ICT業務
國際級資料中心結合匯集海纜及超高速寬頻網路之優勢，爭取金融及ICP/OTT產業商機
結合Big Data、Cloud、資安、IoT、AI、區塊鍊與客製化應用專業能力，提供企業Total solutions
結合企業合作伙伴供同打造物聯網完整生態，以提供各種產業的物聯網服務
預計推出 NB-IoT e-SIM資費方案（040門號）。
強調產品標準化與標案獲利率，支持營收成長動能。

Please turn to slide 8 for an update on our ICT initiatives.

In the first quarter of 2018, our ICT revenue decreased year over year owing to some delays in project revenue recognition. The IoT platform continued to demonstrate the latest solutions, including applications in smart agriculture, smart manufacturing and smart transportation, and the number of our overall IoT-connected devices has exceeded 500 thousand as well. Our highest-rated Banqiao IDC finished its second phase rack installation in February and currently enjoys a satisfactory occupancy rate of 70% so far.
Going forward, we remain committed to leveraging our competitive advantages in network infrastructure, IDC and CDN to offer reliable, customized and comprehensive ICT solutions to enterprise customers. We also aim to develop new opportunities in our innovative business lines with advanced technologies, such as AI, blockchain, and information security, and seek partnerships to establish a comprehensive ecosystem in this sector.
Now, I would like to hand over the call to Mr. Kuo for our financial results.

Financials Overview

Notes:

Thank you President Sheih. Now I will go through our financial results in details, beginning on slide 10.

Financials: Income Statement Highlights

	Consolidated
(NT$bn)	Q1 2018 (Upon the adoption of IFRS 15)	Q1 2017 (Before the adoption of IFRS 15)	Growth ?%	2017 (Before the adoption of IFRS 15)	2016 (Before the adoption of IFRS 15)	Growth ?%
Revenues	53.63	54.53	(1.7)	227.51	229.99	(1.1)
Operating Costs and Expenses	42.62	42.99	(0.9)	180.71	181.39	(0.4)
Income from Operations	10.94	11.53	(5.1)	46.70	48.11	(2.9)
Net Income2	8.73	9.59	(9.0)	38.87	40.07	(3.0)
Net Income Margin3 (%)	16.78	18.05	-	17.60	17.93	-
EPS	1.13	1.24	(9.0)	5.01	5.16	(3.0)
EBITDA	18.91	19.61	(3.6)	78.60	80.58	(2.5)
EBITDA Margin (%)	35.26	35.96	-	34.55	35.04	-
Note:
Financials are prepared in accordance with T-IFRSs. Figures for Q1 2018 are unaudited.
Net income attributable to owners of the parent.
Net income margin is based on consolidated net income (including net income attributable to NCI).
EBITDA = operating income + Depreciation & Amortization.
The calculation of growth rates is based on NT$mn.

Notes:

Financials: Business Segment Revenues

(NT$bn)	Q1 2018	Q1 2017	Growth	2017	2016	Growth
			%			%
Domestic Fixed	15.80	16.78	(5.8)	71.14	72.51	(1.9)
Local	6.94	7.39	(6.1)	29.60	31.65	(6.5)
DLD	0.61	0.65	(6.6)	2.65	2.88	(8.0)
Broadband Access	4.59	4.73	(3.0)	18.68	19.03	(1.8)
MOD	0.77	0.61	25.2	2.55	2.36	8.3
Mobile	26.78	26.66	0.5	109.38	110.80	(1.3)
Mobile Voice	6.38	8.49	(24.9)	32.60	37.29	(12.6)
Mobile VAS	9.66	10.60	(8.8)	43.22	41.50	4.2
Sales of Mobile Handsets, and Data Cards	10.45	7.29	43.3	32.20	30.85	4.4
Internet	6.99	6.90	1.2	28.92	27.92	3.6
Data Communications	5.27	5.31	(0.9)	21.37	20.73	3.1
Application VAS	1.19	1.04	14.5	5.20	5.14	1.2
International Fixed	2.97	3.15	(5.7)	13.55	14.88	(8.9)
ILD	1.40	1.71	(18.4)	7.38	8.83	(16.4)
Leased line	0.51	0.49	4.9	1.95	1.80	8.0
Others	1.10	1.05	4.8	4.53	3.87	17.0
Total	53.63	54.53	(1.7)	227.51	229.99	(1.1)
Note:
Financials are prepared in accordance with T-IFRSs. Figures for 201 are unaudited.
The calculation of growth rates is based on NT$ mn.
Businesses shown under each segment are highlighted; therefore, sum of the highlighted revenues is not equal to the total.

Notes:

Please refer to slide 11 for revenue breakdown by business segments.
The decrease in total revenue for the first quarter 2018 was mainly due to the decrease in voice revenue and ICT project revenue, which offset the increase of handset sales revenue. However, the decrease of voice revenue and increase of handset sales revenue are both mainly affected by the adoption of IFRS 15.

2018年第1季合併營業收入為536.3億元，較2017年同期減少9億元，1.7%，主要因語音收入與國內ICT及其他業務收入減少，抵銷行動銷貨收入的增加。

Financials: Costs & Expenses

	Consolidated
(NT$bn)	Q1 2018 (Upon the adoption of IFRS 15)	Q1 2017 (Before the adoption of IFRS 15)	Growth ?%	2017 (Before the adoption of IFRS 15)	2016 (Before the adoption of IFRS 15)	Growth %
Operating Costs	34.60	34.62	(0.0)	146.84	147.55	(0.5)
Operating Expenses	8.02	8.37	(4.2)	33.87	33.84	0.1
Marketing	5.89	6.28	(6.2)	25.36	25.52	(0.6)
General and Administrative	1.20	1.17	2.8	4.63	4.54	2.0
R&D Expense	0.93	0.92	0.5	3.88	3.78	2.7
Total	42.62	42.99	(0.9)	180.71	181.39	(0.4)
Note:
Financials are prepared in accordance with T-IFRSs. Figures for Q1 2018 are unaudited.
The calculation of growth rates is based on NT$ mn.

Notes:

Financials: Cash Flow

	Consolidated
(NT$bn)	Q1 2018 (Upon the adoption of IFRS 15)	Q1 2017 (Before the adoption of IFRS 15)	Growth ?%	2017 (Before the adoption of IFRS 15)	2016 (Before the adoption of IFRS 15)	Growth %
Net Cash Flow from Operating Activities	7.39	10.65	(30.6)	70.93	64.95	9.2
CapEx	4.39	4.61	(4.8)	26.87	23.52	14.3
Free Cash Flow	3.00	6.04	(50.3)	44.06	41.43	6.3
Cash and Cash Equivalents at the end of period	31.59	38.01	(16.9)	28.83	31.10	(7.3)
Note:
Financials are prepared in accordance with T-IFRSs. Figures for Q1 2018 are unaudited.
The calculation of growth rates is based on NT$ mn.
Free cash flow is calculated by subtracting CapEx from Net Cash Flows from Operating Activities.

Notes:

Operating Results vs. Forecast

	Consolidated
(NT$bn)	Q1 2018?(A)	Q1 2018?（E）	Achieving ?%	2018 (E)	Achieving ?%
Revenues	53.63	53.94 ~ 54.16	99.0 ~ 99.4	231.47 ~ 232.97	23.0 ~ 23.2
Operating Costs and Expenses	42.62	42.11 ~ 42.72	99.8 ~ 101.2	182.07 ~ 184.24	23.1 ~ 23.4
Income from Operations	10.94	11.22 ~ 12.04	90.9 ~ 97.6	47.17 ~ 50.84	21.5 ~ 23.2
Net Income2	8.73	8.84 ~ 9.52	91.7 ~ 98.8	37.25 ~ 40.31	21.7 ~ 23.4
EPS	1.13	1.14 ~ 1.23	91.7 ~ 98.8	4.80 ~ 　5.20	21.7 ~ 23.4
EBITDA	18.91	19.26 ~ 20.09	94.1 ~ 98.2	79.11 ~ 82.79	22.8 ~ 23.9
EBITDA Margin (%)	35.26	35.71 ~ 37.09	-	34.18 ~ 35.51	-
Note:
Financials are prepared in accordance with T-IFRSs. Figures for Q1 2018 are unaudited.
Net income attributable to owners of the parent.
EBITDA = operating income + Depreciation & Amortization.

Notes:

Effective and Efficient Capital Expenditure

Capital Expenditure
Budgeted capex for 2018: NT$33.1bn
Continue to focus on core businesses for future investments
FTTx
4G
IDC/ Cloud
Service Platforms
NT$ bn
33.1
27.0
25.0
23.5
4.6
4.4

Notes:

Q&A

Notes: