CHT Third Quarter 2008 Results Conference Call Script October 30, 2008 at 6:00 A.M. (EST)

Transcription

1 CHT Third Quarter 2008 Results Conference Call Script October 30, 2008 at 6:00 A.M. (EST) Fufu: Thank You. This is Fufu Shen, Investor Relations Director of Chunghwa. Welcome to our third quarter 2008 results conference call. Today we have Dr. Lu, our Chairman and CEO, and Dr. Shieh, our CFO, on the call. Dr. Shieh will review our financial results and business operations and Dr. Lu will review our business outlook. At the end of the presentation, we will be happy to take your questions. Now, I would like to turn the call over to Dr. Lu, our Chairman and CEO. Dr. Lu, Chairman and CEO: Thank you, Fufu. Hello, everyone, this is Shyue-Ching Lu, Chairman of Chunghwa Telecom. Thank you all for joining our third quarter 2008 earnings result conference call. First please note our safe harbor statement on slide 1. Then, I would like to report that the foreign exchange derivative contract that we entered into with Goldman Sachs in September 2007 expired on October 21, 2008, when the NT dollar versus US dollar exchange rate hit 32.7, in accordance with the Contract terms. As a result, all previously incurred mark-to-market unrealized losses under the Contract will be fully written back at the end of October, including recognized losses of NT$580 million in In addition, we will have a non-operational gain resulting from the net profit from the Contract due to the cumulative NT$30 million cash inflow from all settlements that occurred since the purchase of the Contract. Furthermore, you may aware that we offer an early-retirement program in September. There were 160 employees participated in the program and will leave the company on November 1st Despite the ERP compensation of NT$170 mn to be recognized in the fourth quarter, we will benefit from the saving of their two month salary for November and December this year. I d like also to update you on our capital reduction program. At the Extraordinary Shareholder Meeting on August 14, two resolutions were approved by our shareholders:

2 One is to increase the Company s capital stock by 20% from our capital surplus; the other is to subsequently reduce the capital stock by the same amount. The capital increase took place in September. For the capital reduction, a trading suspension is expected to happen between the end of February and early March 2009, just before the cash payment date. In the future, our capital management priorities will continue to be: 1) First, investments in our core business, which has always been our primary focus. 2) Second, M&A opportunities synergistic to our overall growth plans. 3) Our third priority is to return cash to shareholders via capital reduction or share repurchase. The current financial crisis has impacted the global economy, especially in the US. Based on our current outlook, given that telecommunication is a utility-like service and our dominant leadership in Taiwan, the impact on us will be relatively small. As a result, currently, we are still confident that we should be able to achieve our annual guidance which we set out earlier in Dr. Shieh will now continue with our financial and business review. Dr. Shieh, please go ahead. Dr. Shieh, CFO: Thank you, Chairman Lu and thank you all for joining us. Income Statement Overview Slide 4 shows income statement highlights on a consolidated basis. Our total revenue for the first nine months 2008 was NT$151.9bn, a 3% increase year-over-year. EBITDA decreased by 2.7% to NT$75.6bn; operating profit decreased by 1.9% to NT$46.9bn and net income amounted to NT$36.5bn, representing a decrease of 3.3%. While our Internet and data businesses were a positive contribution, 2008 year to date, revenue growth was mainly driven by the inclusion of our subsidiary Senao for the full nine month period, as only 5.5 months of Senao s operational results were included in our consolidated financials for the first nine months of The EBITDA and net margin declines can also be primarily attributed to the consolidation of Senao, which operates at a lower margin than the parent company. On slide 4, we show third quarter 2008 figures. Revenues decreased by 1.5% year over year. EBITDA decreased by 12.4%. Operating profit decreased by 16.6%, mainly due to increased marketing and personnel expenses from parent company and Senao s costs on a consolidated basis.

3 Cost and Expenses Overview As shown on slide 5, total operating costs and expenses for the first nine months of 2008 were NT$104.9 bn, an increase of 5.3% when compared to the first nine months of The increase was mainly attributable to the consolidation of our subsidiaries, especially Senao. For the parent company, total operating costs and expenses increased by NT$1.5 bn, representing a year-over-year increase of 1.6%. This was primarily coming from an increase in handset sales costs and handset subsidies. For the third quarter of 2008, total operating costs and expenses increased by 6.2%, mainly due to the same reason aforementioned for the nine months results Segment Revenue On slide 6, we show the revenue performance for each individual business segment in the first nine months of Internet and Data revenue continued to increase due to increased broadband subscriber numbers and successful initiatives to upgrade customers to higher speed ADSL and FTTx services. On our mobile business, we had progress on our subscriber data: we reported a 2.5% increase in subscriber numbers and 26.8% higher value added service revenue compared to that at the end of September However, this was offset by the traffic decline and price cuts imposed by the NCC, leading to a 2.0% revenue decrease year-over-year. In the Fixed-Line business, Local and Domestic long distance revenues decreased by 2.9% and 6.5%, respectively, year-over-year for the first nine months of 2008, mainly due to mobile and VOIP substitution. International long distance revenues decreased by 4.2% compared to the same period in This was mainly due to increased competition from calling card and the decrease in settlement income resulting from the fluctuation of FX rate. However, the decline was mitigated in September. Other revenue increased by 65.7%, mostly from the consolidation of Senao. For the third quarter 2008, Internet revenue was 0.3% lower year over year because of revenue reclassification and tariff reduction. Data revenue increased by 2.5%. Mobile revenue decreased by 3.4%, mainly due to the price cuts imposed by the NCC and promotional packages. Fixed line revenue as a whole decreased by 5.1% as compared to the same period last year. Cash Flow Overview

4 Slide 7 shows our cash flow performance. Our cash flow from operating activities decreased by 2.1% to NT$54.1 bn. The decrease was primarily because of an increase in inventories and a decrease in depreciation and amortization. Free cash flow for the first nine months 2008 decreased by 9.5% when compared with the same period 2007, as capex was 16.4% higher. Our cash and cash equivalents amounted to NT$103.1 bn as of the end of September This 85.2% increase is the result of the timing of our cash dividend distribution this year, which will fall in November, while it was in August in However, we are still accumulating cash despite the dividend distribution factor. For the third quarter of 2008, cash flow from operating activities decreased significantly by 44.3%. The decrease was primarily owing to the decrease in tax payable and the decrease in mark to market loss of financial assets. Capital Expenditure Next, on slide 8, capex for the first nine months of 2008 was NT$18.3 billion, an increase of 16.4% year-over-year. This was mainly due to an increase in other spending of NT$1.2 bn in the first quarter for the purchase of state-owned land, where one of our outlets is located. Going forward, our capex may increase due to investments focused on our core businesses and our efforts to migrate mobile and data customers to higher revenue platforms, including our 3G/3.5G system, IP-based NGN, FTTx and xdsl. Now, let us move on to operational details for our business. CHT Overall Business Overview On slide 10, you can see that Chunghwa Telecom s total revenue for the first nine months 2008 was NT$151.9bn. On the left hand side, you could see the breakdown of our revenue and on the right hand side we demonstrate our market position. Chunghwa has a commanding first place market position in each of our business segments. We have been successfully defending our fixed line market share and are confident that our strong market position will sustain. CHT Broadband Business Overview Next, on slide 11, I will review our broadband progress. Our broadband subscriber number continues to increase. Of the 4.3 mn broadband subscribers at the end of September 2008, more than 70% use services with speeds higher than 2Mbps.

5 Internet value added services (VAS) drive broadband services revenue. Top contributors include Land Administration Information Service and our Internet pornography gatekeeper, which accounted for 33% and 9% of VAS revenue, respectively. The fastest growing VAS are Internet Advertisements and the Internet pornography gatekeeper. Internet Advertisements service was launched since April 2007, and it exhibited year-over-year revenue growth of 116% for six months from April to September as compared to that of the same period in Internet pornography gatekeeper also performed a 65% year-over-year revenue growth for the first nine months of Total broadband access revenue was approximately NT$15.0 bn, which was 0.2% higher than that of the prior year period. The growth rate is lower due to the tariff cuts imposed by the NCC. Progress on CHT Broadband Initiatives Now, as shown on slide 12, our key initiatives for the broadband business are 1) to migrate our customers to higher access speeds and 2) to continue to increase our fiber coverage by deploying fiber networks in residential buildings, campuses, and commercial buildings, allowing more opportunities for customers to access and adopt a variety of Internet value added services. These initiatives have shown satisfactory progress. As you can see on the left side of this slide, the average bandwidth per user has continually increased over the last few years and reached 4.2 Mbps in the third quarter In addition, about 1.5 mn broadband subscribers utilize a service speed of at least 8Mbps, representing about 35% of our total broadband subscribers. The number of fiber subscribers has also shown strong growth, with 946 thousand subscribers at the end of September In addition, I would like to emphasize that the nearly 17 thousand buildings to which we offer fiber access service represents market share of about 91%. Going forward, we expect this trend of growing broadband business to continue. CHT Mobile Business Overview Chunghwa Telecom has maintained its number one mobile market share position. As shown on slide 13, at the end of September 2008, we had 8.9 mn mobile subscribers, including 3.2

6 mn 3G customers. 3G subscribers as a percentage of the total mobile subscriber base continued to increase. Of the 3.2 mn 3G subscribers, 76% utilize 3G handsets. In addition, 11.7% of 3G ARPU was from data usage, compared with 7.8% for 2G ARPU. Progress on Mobile VAS Promotional Initiatives Moving to slide 14, I want to provide some more detail on our VAS initiatives for our mobile business. During the first nine months of 2008, we were encouraged by our mobile VAS growth, primarily due to the success of our exclusive mobile VAS platform, emome. Total VAS grew by 26.8% year-over-year; of this, mobile internet exhibited the highest growth, which was 48.5%. Data card business has also performed well over the past several months. At the end of September, we had 98,000 data card subscribers, the associated ARPU for which was robust at NT$885. As a result, data revenue as a percentage of mobile revenue increased to 9.5% for the first nine months of For business customers, we offer a customized service called mpro, along with customized handset models. For the third quarter 2008, we won 17,000 subscriptions and hence accumulated 50,000 users by the end of September. Furthermore, 35.5% of ARPU for mpro users was from VAS usage. The strong growth in subscriber number was because we are offering Economic mpro packages at lower rates until the end of the year to attract more subscribers, and this has recently brought us more than 1,000 subscriptions per week. With the penetration of mpro services, we expect mpro to continue contributing positively to our revenue growth later on. For younger customers, in the third quarter this year, we began to offer handset discounts along with mcool services. The promotion proved to be effective. By the end of September, we had about 100,000 mcool users, which was our 2008 full year target, and their VAS usage contributed 16% of ARPU. Progress of CHT s Convergence Services Moving to slide 15, let me update you on our progress in convergence services. As we reported in last call, the delivery of 2008 Olympic Games over our three platforms has firmly established our new media leadership position in this market. The MOD rating peaked over 40% during the game and maintained around 34% after the game, which is about 10% higher than that of the first half of the year.

7 By the end of September 2008, there were about 591 thousand IPTV subscribers, which representing growth of 50% as compared to the end of Furthermore, we are continuing our efforts to improve user interface and to enrich content so as to enjoy synergies among three platforms, including MOD for IPTV, emome for mobile service and hichannel for ISP service. We are also promoting the ever-popular Sports programs. We will continually enhance the content of other VOD and provide interactive value added services such as games, karaoke and exclusive services for corporate customers. In our high quality service offering, we have made more HD video on demand and HD channels for sports, drama and variety shows available. We also have more channel aggregators, like FOX international, join our MOD platform. NGN Progress Update In our last call in August, we reported to you the roadmap for the deployment of our Next Generation Network. Today, we would like to present an update. Please refer to slide 16, which shows the infrastructure deployment status. With the completion of the stage 1 NGN/IMS network and new IP backbone, we will be able to launch a multimedia video phone in the first quarter of 2009, 10 Gbps/1Gbps VPN service and leased line services. With the increase in FTTx ports and enhanced 3.5G base station coverage, we expect to be able to promote better services for remote surveillance, HDTV, VPN, mobile internet, mpro, mcool and mobile TV, which will be part of the major growth drivers for our business. This completes my business review. Now, I will pass the call back to Chairman Lu for our business outlook. Dr. Lu, Chairman and CEO: thank you, Dr. Hsieh. I would like to make a few comments on our business outlook. Near Term Strategic Overview On slide 18, let me highlight the key aspects of our near term strategy. First, in our core businesses, we will continue deploy NGN as a cutting edge platform for developing new digital life services. We will also enhance fiber coverage for upgrading customers to higher speed broadband services. To encourage usage of mobile internet services, we will provide promotional packages integrating mobile services and terminal equipment. We will conduct

8 cross-platform operations to capture new growth opportunities. Based on our superior network facilities and geographic advantage, we would strengthen our regional transmission service. Second, we are providing corporate customers innovative services. These services include ITS/Telemetics, ien, corporate information security service, PBX/IMO and call center. ITS/Telematics includes fleet management system, customized Telematics service and real-time transportation information service. ien is a total energy saving solution that was developed based on our extensive experience. Our corporate information security service is comprised of our anti-hacker service, invasion prevention service and information security alert system. PBX/IMO allows corporate customers to outsource service management to decrease personnel expenses. In addition, the integration of ICT and corporate database will facilitate real-time call center services for corporate customers. Third, cost control. As we mentioned earlier, we are going to have 160 employees participating the early retirement program and leave the Company on November 1st. We expect to save NT$268 mn personnel expenses for year We will also benefit from consolidating broadband core network which expects to result in capex and opex saving of NT$120mn per year. Near Term Strategic Overview (continue) Fourth, we will explore opportunities for alliances, joint ventures and M&A. For example, we are establishing a joint venture with a company in Thailand to offer an intelligent energy solution for corporate customers. We will be able to leverage this experience to offer similar services overseas in the future. In addition, we are collaborating with our local subsidiary to provide ICT solutions for corporate customers. Fifth is our CSR commitment. A strong commitment to corporate governance is one of the cornerstones as we are a world class company. We are dedicated to increasing energy utilization efficiency and decreasing green-house gas emission. We will also create digital opportunities to reducing digital divide. In addition, we continue to promote corporate volunteering and community service programs as a means of protecting the environment and assisting those who are in needs. Finally, as we always emphasize that we will continue our commitment to create shareholder value. While maintaining our high cash dividend payout policy, we will continue to explore opportunities to enhance shareholder returns through capital and cash management, including capital reduction and share buyback. Again, I would like to reiterate that our

9 financial policy will remain conservative. Now, we will be happy to take your questions. - Q&A Session -