Fu-fu Shen - Director, IR Chi-Mau Sheih - President Harrison Kuo - CFO.

Peter Milliken - Deutsche Bank Neale Anderson - HSBC Jack Hsu - Sinopac Securities Jinjin Wang - UBS Ronny Zhu - UBS.

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom conference call for the company's fourth quarter 2017 operating results. During the presentation, all lines will be on listen-only mode. When the briefing is finished, instructions for submitting your questions will be given in the question-and-answer session.

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. Now I'd like to turn it over to Ms. Fu-fu Shen, the Director of Investor Relations. Ms.

Shen, please go ahead..

Thank you. This is Fu-fu Shen, the Director of Investor Relations for Chunghwa Telecom. Welcome to our fourth quarter 2017 results conference call. Joining on the call today are Mr. Sheih, our President; and Mr. Kuo, our CFO.

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. 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..

Thank you, Fu-fu, and hello, everyone. Welcome to our fourth quarter 2017 earnings conference call. For the fourth quarter of 2017, we continue to retain our market leading position in mobile subscribers and mobile revenue, despite the competitive landscape.

And we are pleased to report we have the lowest churn rate and lowest decline of mobile service among the peers. In the fourth quarter, we continued to reallocate service to guide mobile subscription towards high end plans and we saw a significant year-over-year increase in user subscription for plans that cost NT$79 or more during the end of 2017.

Looking ahead, we will retain this policy to enhance margins in our mobile business and take that strengthen new subscriber acquisitions. In addition, we have further solidified our broadband customer base and successfully mitigated the subscriber loss.

Throughout the number of MOD subscribers, the revenue grew significantly in the fourth quarter, as we endeavor to facilitate the overall TV operational environment, while continuing to enrich content and enhance our user experience. We are also pleased to report strong performance in our ICT-related business.

Our IoT platform had demonstrated that smart cities, smart agriculture, smart manufacturing and other IoT related applications. In the fourth quarter 2017, which is very fit and our highest rate of IDC in Viettel [ph] had continued its second phase RAC installation to meet increasing demand.

Going forward, we will continue to utilize our IDC advantages to offer upgraded broadband service to attract more high-end users, drive high-speed service adoption and strengthen our broadband revenue. Now I will walk you through each of our business lines. On Slide 5, I would like to update you on our mobile business.

As of December 2017, our total number of 4G subscribers has exceeded 7.9 million. Mobile internet adopters continued to grow, reached 82.9% of total post-paid subscription, which consequently drove up our mobile internet revenue by 5.1% year-over-year.

Moreover, since we strengthen subsidies and incentives to attract high-end plan adoption, our users find our plans that cost NT$100 or NT$99 [ph] or more increased significantly. It proved that our subsidy efficiency has improved when comparing the cost of handset subsidies versus the revenues brought in during customers' entire track period.

We will continue this effective strategy to enhance margins in our mobile segment and roll out incentives for existing customers to consolidate the subscriber base. Slide 6 shows the performance of our broadband business. In fourth quarter, we saw a decrease in broadband subscriber number, which we believe is resulted from a one-time event.

Although the number of our broadband subscribers slightly declined year-over-year, we still see our subscriber loss has been mitigated and we continue to mitigate the loss. In addition, we continue to see a migration of our broadband subscribers to high speed fiber services.

We are pleased with the number of users signed up for commercial speeds of 100 megabit per second or higher, which grew by 9.5% year-over-year to 1.28 million in the fourth quarter. We expect to improve this number by upselling with offerings that bundled with our MOD, Wi-Fi information security.

Going forward, we will continue to encourage customers to migrate to higher speed services and stay ahead of our competitors by enhancing user stickiness in our network through smartphone services that leverage our Wi-Fi advantages, as well as MOD and OTT offerings. Moving onto Slide 7.

We are glad to report that our IPTV subscribers exceeded 1.6 million in fourth quarter 2017. That's representing 20.3% increase year-over-year. Our IPTV revenue continued its growth trajectory in fourth quarter 2017 with a 15.7% increase year-over-year, primarily driven by the healthy growth of IPTV and SVOD subscribers.

We are pleased to see that our IPTV customers continue to sign-up for additional SVOD programs and a number of SVOD subscribers is expected to exceed 1 million in the first quarter of 2018.

On managed service, we differentiate our IPTV service product by introducing popular international sport events such as 2018 Winter Olympic Games and 2018 FIFA World Cup as well as e-sport to further expand channel subscription base.

Going forward, the quality and diversification of our IPTV content offerings will continue to be our priority to further strengthen user acquisition and user stickiness. We will also plan to carry more OTT offerings to increase customers' total contribution to our revenue. Please turn to Slide 8 for an update on our ICT initiatives.

We are delighted to see solid growth in ICT business in the fourth quarter of 2017. Our ICT business continue to remain on the growth trajectory. In December last year, our IoT platform continued to demonstrate the latest solutions concerning smart agriculture, smart manufacturing and smart transportation.

In 2017, the accumulated IoT revenue increased 23.3% year-over-year. We're also glad to report that our IDC accumulated revenue grew 18% year-over-year in 2017.

Our highest rated Viettel IDC [ph] has started the second phase of RAC installation to meet increasing demands from the financial industry and international content providers and expected to be complete in the first quarter of 2018.

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 our enterprise customers, develop new opportunities in our innovate business lines, and establish a comprehensive ecosystem in the sector.

Now I would like to hand over the call to Mr. Kuo for our financial results..

Thank you, President Sheih. Now I will go through our financial results in details. If move on Slide 10. Slide 10 provides you with highlights from our income statement. For the first quarter of 2017, total revenues increased by 4.4% and the operating cost and expenses increased by 5.2% year-over-year.

Our income from operations increased by 5.1% and our net income increased by 11.7% year-over-year. In addition, our EBITDA margin decreased to 30.29% in the fourth quarter from 31.01% in the same period of 2016. Please refer to Slide 11 for revenue breakdown by business segments.

The increase in total revenue for the fourth quarter of 2017 was driven by an increased handset sales and ICT project revenue, which partially offset the decrease in voice revenue. Moving onto Slide 12.

Our operating costs and expenses increased by NT$2.49 billion or 5.2% year-over-year in the fourth quarter due to higher ICT project costs and the cost of goods sold.

On Slide 13, cash flow from operating activities for the fourth quarter of 2017 decreased by NT$6.58 billion or 20.8% compared to the same period of 2016, mainly due to larger amount of change in receivables.

In November 2017, we acquired 4G mobile broadband license in 1.8 and 2.1 gigahertz frequency bands, which resulted cash outflow of NT$10.94 billion. As of December 31, 2017, we had NT$28.89 billion of cash and cash equivalents. Slide 14 shows our operating results as compared to our guidance.

We are pleased that our performance in 2017, including income from operations, net income EPS and the EBITDA met our full-year guidance. Moving on Slide 15, which shows our 2018 consolidated guidance. Looking ahead, total revenue for 2018 is expected to increase from 1.7% to 2.4%.

The increase in revenue is expected to come from enterprise ICT business, internet application, value-added service and government service and mobility service.

Operating costs and expenses for 2018 are expected to increase from 0.7% to 1.9%, primarily driven by the growth in our ICT business, smart device sales and the enhancement of digital content. Additionally, cost and amortization cost for 4G spectrum were increased year-over-year.

Given this projections, we expect 0.9% to 8.8% year-over-year increase in operating income and 4.1% year-over-year decrease to 3.7% year-over-year increase in net income. Moreover the net income guidance is already factored in the increase of income tax rate from 17% to 20%. The act was passed in the parliament earlier this month. Lastly Slide 16.

We are budgeting CapEx of NT$33.1 billion for 2018. We will focus on investment in our core businesses, including FTTx, 4G, IDC and service platform among others under our position and construction principle. Thank you for your time. Now we would like to open the line for questions..

Operator:.

, :.

Good afternoon and thank you for the call, and congratulations on being able to return to profit hopefully and profit growth in 2018. I've got two questions. Firstly, the MOD and the SVOD subs increased sharply in the fourth quarter.

Can you tell us what contents you added to drive that in the period? And the second question is, you talk about mobile subs or the proportion of 999 and above mobile subs increasing in 2017, but I didn't really noticed that in the month-by-month revenue trends or ARPU trends.

Is this something that you're actually - is this something very recent? Thank you..

Peter, I think for your question number two, mobile subscriber number, I think what we mentioned about is about the mobile internet subscribers, okay. So that's where we have some increase. But as you understand that for the whole mobile market in Taiwan, the subscriber numbers is decreasing, so it's inevitably for us to have this kind of impact.

But for us, we feel it's pretty good to have customer migrate to mobile internet. I think that's I hope answer your question..

As for the MOD/SVOD subscribers question, the priority is to enlarge customer base and enhance value-added service, application service.

Along with the launch of OTT service and continuous introduction of VOD programs on our platform, we expecting our subscriber number will continue to increase and revenue sharing from OTT service providers will also contribute to the revenue growth going forward.

We aim to make MOD a more open platform in the interest of consumers by acquiring local channels including TV shopping channel, leading to launch MOD 4K trial service and enhance MOD user interface and so on.

In 2017, we invited international and local OTT service providers to offer their service on our MOD platform, which enrich our content, as well as strengthen our MOD services. Thank you..

Great, got it. And just one follow-on question. So it's nice to revenue increasing again. Would you say that that is more from the internet business side, or is it also mobile is expected to do better in 2018? Thank you..

Peter, yes, are you talking about the guidance for '18?.

Yes, I am..

I think the guidance for '18 we give a range this time.

Do you understand that okay? So I think we really expect we still have some growth business like in ICT and we do like to continue our customer mobile customer to - you're talking about internet side, right?.

I'm just talking about….

You're talking about overall net increase. Yes, I think of course you know the internet business side, we do see some innovative business coming, like we are talking about our IDC, like IoT and cloud, big data. This is all kind of innovative side. This is we are quite optimistic about this business..

Great. Thank you very much..

Thank you. Our next question is coming from Neale Anderson, HSBC. Go ahead please..

Hi there. Good afternoon. Two questions from me please. First one is on the broadband side. So you posted a decline in customers in the fourth quarter.

Where are those customers going? What's been the change in competition and does that have anything to do with the quite significantly increase in CapEx you have planned for the domestic fixed business? The second question is on the wireless side. I was encouraged to see you mentioned on Slide 5 the move towards tiered pricing.

That to me is a just a little bit change in thinking. I understood that that was going to be very difficult now that flat rate pricing has been so prevalent and so standard in Taiwan for so long. So could you talk a little bit more about that and how yourselves and the market might move to tiered pricing? Thank you..

By the [indiscernible], we did have a decline in customers in fourth quarter but that just likely in information in the very beginning of the presentation we believe that's one-time kind of event. Why? Because this is one company is kind of local in Taipei City only.

You got some big kind of operational Taipei City government and that part, to our understanding, it's kind of one time and this is very small scale. We believe the [indiscernible] doesn't really change. So I feel this year I think we see forecast in some small net add for our broadband usage customer number. Thank you..

As for question two, we still believe that tiered pricing on the fair usage policy is the right direction operator should move forward. However there is always a demand for unlimited data plan in the market. So we think it would take longer times than we expected in the beginning. Thank you..

Thank you. Just a follow-up on the broadband CapEx. So, is the increase there, is that related to expanding coverage maybe outside the urban areas? What's the reason for that increase in the domestic fixed CapEx? Thank you..

For fixed broadband CapEx, we will [indiscernible] for customers for upgrading broadband speed to 100 megabits per second. In addition, we will increase the 1-gigabit per second coverage in metropolitan areas and continue to strengthen our competitiveness in high speed broadband network. Thank you..

Thanks very much..

Thank you. Our next question is coming from Jack Hsu, Sinopac Securities. Go ahead please..

Thank you and congratulation for the results. And also I have two questions. The first question is could you give us the guidance overview about 4G subscriber in 2018 and also - this is the first question. And my second question is, how do we see our ICT business because we have the ICT business will grow in the 2018.

Could you give us some numerical guidance or some feel of the range, how - what will the ICT business grow in the 2018? Thank you..

Because of the termination of 3G license, we will move our - migrate our 3G users to 4G network. So at the end of 2018, 4G subscriber will reach 10.5 million..

And to answer your question number two, we expect our ICT revenue year-over-year growth in 2018 will get back to the similar level of 2016. And the ICT revenues share will exceed 10% of our total consolidated revenue. Thank you..

Thank you. And just one final question. We see our 4G subscriber number in the end of 2017 is around 800 million - sorry, is around 800 million, but it's little bit below with the guidance in the beginning of 2017. Does that caused by the competition from the peers or something else? Thank you..

Actually I have to understand that by end of this year I think according to the NCC agenda, I think, all the 3G customer will migrate to 4G. I think we take very - take the efforts to doing so to try to migrate our customer to 4G. I think that's pretty much information about the target for by the end of this year.

I think the number is just our present information. As for you mentioned about the '17, I think '17 the over-marking really subscriber numbers decreasing, so we will make even more efforts to doing so. Okay, thank you..

Thank you..

Thank you very much. Our next question is coming from [indiscernible]. Go ahead please..

Hi good afternoon. Thank you for taking my questions. My first question is I see smart device sales is one of the reason to drive 2018 revenue.

So can you share your view on handset sales first quarter? Do you see sustained demand for iPhone 8 or 10 on a q-on-q basis, or do you mean demand is probably for on second half of this year? My second question is do we have one-off cost last year, so our dividend payout ratio is nearly 96%.

So this year without the one-off cost, can we expect the payout ratio can be similar to 2015, which is above 100%? Thank you..

Okay, for question one, the iPhone sales iPhone offers iPhone 8 and 8-plus and iPhone X, three models in the year of 2017. iPhone 8 and 8-plus sales volume is slightly lower compared with that of iPhone 7 or 7-Plus in the beginning. However iPhone 10's demand is not as high as the market expected.

The overall iPhone sales for the last three months was actually weaker year-over-year. And new phones performed better in the fourth quarter of 2017 year-over-year, which contributes to the handset sales revenue. Thank you..

Okay, for question number two, dividend payout depends on the operational performance and the CapEx spending and the final decision is up to the March board approval. Thank you..

Thank you.

For the follow-up question, so do you see handset sales tier-one year or handset sales is probably for second half of this year?.

Sorry, I think Amber [ph] can you repeat your questions?.

Okay, sorry. Because I see smart device sales is one of the reason to drive this year's sales to - revenue sales growth.

So I was wondering do you mean you see strong handset sales in 1Q, or you expect the strong handset sales is probably for on second half of this year?.

Usually in our handsets, sales related to handset models in the market, right. Yeah, I think we have some kind of estimation but I think we are not going to talking to that details here..

Okay, thank you so much. No worries..

Thank you. The next question is coming from Jinjin Wang, UBS. Go ahead please..

Good afternoon. Thank you. I have two questions. One is regarding the IFRS adoption this year.

Whether this year is going to have any impact regarding our revenue and net profit? Whether it's going to be a positive impact on net profit and whether that's also going to translate into maybe better than impacted dividend payout? Secondly regarding the 5G progress. I'm not sure what's on your agenda and which spectrum probably you are aiming for.

Thank you..

To answer your question number one, the IFRS new standards provides us the approach for transition, which way our results in one-time adjustment of return earnings on January 1, 2018. And we will closely related affected amounts for the adoption of IFRS 15 in our 2017 year-end financial statements, which will be released in March 2018. Thank you..

For the second question about 5G progress, we have come out with more than 40 corporations and organizations from the government, academic and research factories. We found the Taiwan 5G alliance, CHT Pilot Team to accelerate the development of related 5G services in Taiwan.

We will leverage our technological capabilities and cooperate with potential partners to explore opportunities for future 5G high voltage business development, so as to lead the service grow out in Taiwan. We came up with Nokia and Ericsson to establish network last year and are going to build 5G trial network by the end of 2018.

According to 5G development schedule by ITU, the 5G technology standard is scheduled to be announced in 2020. However monitor the development closely to be well prepared for network evolution and the right time of service product introduction.

About the spectrum property, currently we have three consecutive 20 megahertz spectrum in 1800 megahertz, 2100 megahertz and 26 megahertz, respectively. The spectrum auction was finalized on 3 November last year.

We will leverage our production advantages with high band and a low band in 900 megahertz to offer monthly carrier aggregation high-speed and high-quality mobile broadband service. Thank you..

Can I have a follow-up question? So is that fair to see that a commercial - large scale commercial launch and also meaningful 5G CapEx or earnings timing is 2020?.

I think the CapEx for 5G we will have some spending on 2019, yes..

But 2019 shouldn't be very big. I'm talking about like more large scale 5G CapEx..

Exactly, yes..

I see. Thank you.

And also for the 5G rollout, are you more prefer the middle range spectrum like 3 to sub-6 gigahertz or millimeter wave, the 24-above gigahertz?.

I think the regulators haven't made the final decision for that, so we don't really have any comment on that. Sorry..

Okay, thank you..

Thank you very much. [Operator Instructions]. Our next question is coming from Ronny Zhu, UBS. Go ahead please..

Hi. Thank you management. Just a follow-up question with Jinjin. As management mentioned that our 4G subscriber target by the end of this year should be like 10.5 million, which considering we will migrate the 3G subscriber to 4G.

So does that mean we will expect the total subscriber to remain stable this year as start declining? And another question is could management also give more guidance on ARPU trend if there is more subscriber migrate to high end, can we expect the ARPU to increase on the mobile side? Thank you..

For NCC document, they mentioned about they expect every 3G operator to smoothly migrate their 3G subscriber to 4G service by the end of this year. And this time it's a little bit different from that of the 2G network close last year in June. So we don't really have any grace period for that.

So I think every one of us will make up their way to migrate customer to from 3G to 4G. I think that's the kind of preliminary and the kind of information from the regulator..

Okay. For question number two, we expect that 2018 full-year branded ARPU will remain in effect to that of the 2017 because of the mandatory interconnection fee reduction and more competition, but the IFRS 15 adoption will also have a little bit effect. So that's our view. Thank you..

Well, that is - sorry, a follow-up question is it sounds like that we are expecting our mobile business revenue to remain flat next year and the credit trend it seems that our broadband subscriber base continues to slightly decline this year. But our general guidance is to expect revenue to increase 1.7% to 2.4%.

Would you elaborate more where the growth come from?.

Ronny, I think the majority growth will come from - because you now understand that for the whole business right now the voice revenue is coming down and for the mobile service revenue, I think here we have some countermeasures. We would like to see some kind of a bit of better performance.

I think the y-o-y performance we do like to see some [indiscernible] mentioned about flat. But we do have some growth business like especially like ICT.

ICT we mentioned about for the past several years, we actually continue to have kind of double-digit - low double-digit kind of growth, and last year the growth rates was low because the year before last year we would like to increase the ICT margin. We would like to be more selective for the ICD project.

So that's slower as well a bit for ICT, but this year we do expect to have the gross track will come back to a bit of higher maybe to the similar level of last year. And also another thing is we are talking about our MOD business, okay.

The MOD business, although the revenue are very small but we are quite encouraging by last year, second half last year's performance. We would like to continue the momentum and we do set subscriber target for this year we would like to achieve, okay.

Of course in addition the new opportunities from emerging business like IoT, big data analysis and especially some other we mentioned about our IDC capability of cloud computing, big data. We would like to see the continuous growth. And so I think that's where the increase come from, but we expect it's okay..

And just to clarify this, we're expecting the ICT revenue growth this year to be similar with last year.

So last year should be low double-digit and the revenue from ICT comes around 10% to the total revenue, right, last year?.

Yes, the number is correct..

Thank you..

Thank you very much. The next question is coming from Jack Hsu, Sinopac Securities. Go ahead please..

Hi, thank you for giving me another chance. I have three questions. The first question is we have seen the EBITDA margin in the fourth quarter is lower than expectation and also lower than the period in 2016. I just want to know the reason why the EBITDA margin raise has been lower. This is the first question.

And my second question is we have mentioned we will develop the IoT business in the future, that I just want to know because a lot of the company like Hon Hai. They also announce they will develop the IoT business. What will our strategy will differentiate with the company or manufacturing company like Hon Hai.

What's the different about our strategy and how do we evaluate the contribution for our revenue or even profit in 2018 or 2019. This is the second question. And then the last question is we have did a lot of effort for the overseas business like in the Southeast Asia.

Could you give me more detail about our - the Southeast Asia strategy in 2018? Thank you..

Okay, to answer your question number one, as about mentioned the increase in total revenue for the first quarter of 2017 was driven by the increased handset sales and ICT project revenue, of which margin was lower than the voice and the data business. So the EBITDA margin is lower in fourth quarter, lower than effective and lower in 2016..

About the IoT development in the future, I think for Chunghwa, our strategy was mentioned a lot about. We built IoT platform and would like to facilitate the different industry to put out on our application to facility order the application all the service.

So I think that the major kind of focus of Chunghwa but for Hon Hai probably they have different agenda. I think that's probably it's a bit of major difference. And you asked about how do you value the contribution of revenue over profit in '18 or '19? I think we are already give the guidance.

I really don't have any comments, additional comments on that..

About question three, overseas business strategy, first of all we would like to stand our cooperation with our partners, such as governments and Taiwanese companies in Southeast Asia to further explore opportunities in the area.

We have established subsidiary in Thailand in 2017 and I expect to offer data communication services in the beginning and we also will strengthen our cooperation with Viettel in the field of IoT platforms, smart city and IoT applications. We want to explore market opportunities in Indonesia to further expand fin-tech and ICT IoT business.

We want to have a talk with the large government of cooperation and smart transportation such as electronic highways supervision system. We have continued exploring opportunities in South Asia for years, which is important to our long-term development and has been one of our existing overseas expansion strategies. Thank you..

Thank you..

Thank you. Our next question is coming from [indiscernible], Shin Kong Life Insurance. Go ahead please..

Good afternoon. Thanks for taking my questions. And I only have one follow-up question regarding iPhone's adoption. The 2018 guidance already factor in the adoption of new accounting principle of handset on sales, i.e., amortizing handsets offsetting by using relative market value method instead of revision value method RSC [ph].

And the second question will be what would be the range of your EBITDA target if the accounting principle was applied? Thank you..

Okay, to answer your question number one, after the implementation of IFRS 15, the company, we will recognize a more device sales in the contract years and the less communication service revenue in the subsequent contract periods.

Also the incremental costs of turning contract will be recognized as assets to the extent we expect to recover those costs.

Before the approximation of IFRS 15, the relevant expenditures, such as handset subsidiaries and commissions were recognized as costs and application of IFRS 15 will result in the increase of our return earnings on January 1, 2018. We will disclose this effect numbers in March this year. Thank you..

Would you able to give us a sense that what will be the range of EBITDA target since all the counting method was applied?.

I think the EBITDA targets, the range under the old accounting method, I think that probably - I think we are not going to disclose our parts but in our first quarter financial report we have some other method to make the investor have more comprehensive kind of understanding, but as I know we don't have any range of that to report. Thank you..

Okay, thanks..

Thank you. [Operator Instructions]. If there are no further questions, I will turn it back over to President Sheih. Go ahead please..

Thank you everybody. Thank you for your attention. Thank you..

Thank you, President Sheih. 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..