Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the company's Fourth Quarter 2018 Operating Results. [Operator Instructions]. For your information, this conference call is now being broadcasted live over the Internet. The 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 would 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 Assistant VP for Chunghwa Telecom. Welcome to our fourth quarter 2018 results conference call. Joining me 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 2018 earnings call. In this quarter, the overall market remained competitive, but we continue to maintain our leading position in both mobile revenue and subscriber shares. The trend of positive subscriber net adds persisted from the second quarter to the fourth quarter.

Starting from 2019, we would continue making effort to migrating customers to higher-priced plans for incremental ARPU despite the market competition in order to mitigate the down-sell that happened in 2018. In our broadband business, we are pleased with the steady migration of our broadband subscribers to higher-speed services throughout 2018.

We are even more delighted to report that, in the fourth quarter, MOD subscribers exceeded 2 million. We started to carry one of the most prestigious international OTT, Netflix, on MOD platform in January to satisfy subscribers' demand on popular content with 4K quality on TV.

Going forward, we will continue to seek partnerships with popular content providers all over the world to offer our MOD and OTT subscribers quality content and increase our IDC and CDN revenue through the partnerships as well.

Our ICT revenue decreased year-over-year in the fourth quarter, primarily due to the increasing selectiveness for the projects.

However, despite this decrease, we continue to strengthen our core capabilities in selected areas to provide a more focused ICT-related solutions as well as streamline our ICT product platform for better positioning and competitive pricing. Thus, we expect our ICT business will rebound in 2019.

For our IDC business, both revenue and customer traffic volume continued to increase year-over-year in the fourth quarter, and we proceed with the third phase of construction of our highest-rated IDC in Banqiao.

Going forward, we will continue to leverage our strengths in communication technologies, IoT, IDC, CDN and other capabilities to cater to the growing demand for comprehensive ICT solutions. And now, I will walk you through each of our business lines. On Slide 5, I would like to update you on our mobile business.

In the fourth quarter 2018, despite intense competition in the second quarter resulting in down-selling across the overall market, our mobile service revenue was less affected than the other major providers.

We are also delighted to see that the number of mobile subscribers continued to increase due to our effective customer retention and acquisition strategies. However, we expect the mobile ARPU to continue its decline as the handset replacement cycle becomes longer and the market remains competitive.

Going forward, in addition to expanding our existing product portfolio, including our handset and CPE bundle plans, value-added services, handset insurance and other incentives, we will also explore new opportunities to complement our product offerings and boost our mobile service revenue.

In 2019, we plan to leverage our industry-leading technologies, including our leading mobile network quality, our nationwide NB-IoT network and Cat M1 network to develop IoT-related applications and increase mobile revenue. Slide 6. Slide 6 shows the performance of our broadband business.

We are delighted to see our continued migration of our broadband subscribers to higher-speed fiber services. In the fourth quarter, the number of users signing up for plans with connection speeds of 100 megabits per second or higher grew by 10.9% year-over-year to more than 1.4 million.

And the number of subscribers are signing up for connection speeds of 300 megabits per second or higher increased 120% year-over-year as well. Going forward, we will continue to encourage higher-speed services adoption, especially fiber services, to mitigate the mandatory tariff reduction from the regulators.

We will also leverage our other advantages to enhance user stickiness on our network, such as Wi-Fi, MOD and OTT offerings, to allow subscribers to enjoy smartphone environment and AI-related applications. I'm moving on to the Slide 7. We are glad to report another robust quarter for the IPTV business.

In the fourth quarter, our IPTV MOD platform continued to be the largest video platform in Taiwan with more than 2 million subscribers, representing a 25.5% increase year-over-year. In addition, our SVOD subscribers reached 1.27 million in the fourth quarter, maintaining its growth trajectory as well.

Our IPTV revenue also continued to grow in the fourth quarter with 27.7% increase, despite a onetime adjustment booked in the fourth quarter. Moreover, we partnered with the popular global OTT service provider, Netflix, to provide our subscribers with access to Netflix on our IPTV platform.

As the largest video platform in Taiwan, we are currently the only platform able to offer Netflix-focused streaming. We believed it positive to our overall subscriber acquisition and able to keep us ahead of our competitors in the realm of video services.

To build on the success of our video business, we will continue the growth dynamics in video business by acquiring popular content, including exclusive rights to sports and e-Sports to increase subscriber base and further grow our revenue in this segment. Please turn to Slide 8 for an update on our ICT initiatives.

In the fourth quarter of 2018, although our ICT revenue decreased year-over-year, we continued to see IDC revenue grow 16.7% for the fourth quarter and 22.4% year-over-year in 2018. In addition, our information security business also grew steadily in terms of revenue and market share.

To maximize synergies, we are optimizing our research, sales and distribution efforts on selective products and services. In particular, we are focusing on products and services where we have clear advantage in the market to enhance ICT project acquisition and profitability.

We continued acquiring fintech projects with FIDO, information security, cloud computing, big data analysis services as well as fintech patents. Going forward, we will continue to leverage advantages to maintain our leading position in ICT business. 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 detail, beginning on Slide 10. Slide 10 provides you with highlights from our income statement. For the fourth quarter of 2018, total revenues decreased by 8.9%, and operating costs and expenses decreased by 9.8% year-over-year.

Our income from operations decreased by 2.1%, and our net income decreased by 3.0% year-over-year. In addition, our EBITDA margin increased to 32.79% in the fourth quarter from 30.26% in the same period of 2017. Please refer to Slide 11 for revenue breakdown by business segments.

The decrease in total revenue for the fourth quarter 2018 was mainly due to the decrease in voice revenue and ICT project revenue, which offset the increase of Internet business. The decrease of voice revenue was primarily because of Voice-over-IP substitution and market competition.

Moving on to Slide 12, our operating costs and expenses decreased by TWD 4.93 billion, or 9.8% year-over-year, in the fourth quarter, mainly due to lower cost of goods sold. Slide 13 shows that cash flow from operating activities for the fourth quarter of 2018 decreased by TWD 4.89 billion, or 19.6%, compared with the same period of 2017.

This was mainly because the deadline for the provisional payment of income tax was postponed to October 1, 2018. As of December 31, 2018, we had TWD 27.7 billion of cash and cash equivalents. Slide 14 shows our operating results as compared to our guidance.

In the fourth quarter of 2018, revenue was lower than our fourth quarter guidance mainly due to unexpectedly intense competition in mobile market, slowdown of high-end handset sales and lower-than-expected recognition of ICT revenue. Thus, our operating income, net income and EPS were lower than our fourth quarter guidance.

For 2019, we are in the process of implementing a series of initiatives, as discussed earlier by President Sheih, to rejuvenate growth and profitability, while sharpening our competitive advantages to cement our leading position. Moving on to Slide 15, which shows our 2019 consolidated guidance.

Looking ahead, our total revenue for 2019 is expected to increase by 2.4% to 3.5% to TWD 221 billion to 202 - sorry, TWD 223 billion. The increase in revenue is expected to come from the enterprise ICT business, application value-added service, Internet services like IDC and information security, and MOD service.

Operating costs and expenses for 2019 are expected to increase by 3.4% to 3.7% to TWD 177.8 billion to TWD 178.3 billion. The increase in costs and expenses is expected to be attributable to the increase of ICT project costs.

Given these projections, we expected a 2.1% year-over-year decrease to 2.3% year-over-year increase in operating income and 4% year-over-year decrease to 0.5% year-over-year increase in net income. Lastly, Slide 16. We are budgeting CapEx of TWD 29 billion for 2019 in which we anticipate a similar level of mobile CapEx spending before 5G realization.

And we will also continue our precision construction policy to optimize overall CapEx spending. Moreover, we allocate budget for asset revitalization, including new building for subsidiary as well. Thank you for your time. We would now like to open the line for questions..

[Operator Instructions]. Our first question is coming from Neale Anderson, HSBC..

I had two questions, please. The first relates to the mobile business and specifically the guidance.

So could I ask what assumptions you've made for the mobile market and reflected that - and how you've reflected that in the guidance? Do you assume not much changes in pricing or things start to turn around by the end of the year? Any color on that would be very helpful. Second question is on the ICT business.

What are your margin expectations for 2019 in this business, please?.

Okay. For the first question, about the mobile business, the assumption. I think we believe - we still expect this year. I think the whole market is a bit of easing versus that of the last year. And we still would like to have some kind of higher - high-end kind of price point to promote.

So we should have some opportunity to get some incremental ARPU from that part. But of course, the - since there's a lot of SIM-only kind of package subscriptions from last year, we understand this is a trend.

So we do expect, with some bundled plans, we'd like to enrich the content, enrich the bundled plans with the details to make sure we'll always be kind of attractive to our customers. So we have this opportunity to have some kind of increase in that part.

But of course, like we already mentioned already, we talked about the ARPU downward, this trend will continue. All these measures we can kind of mitigate into that part. Talking about the overall the ICT-related, we also have some kind of measures. I think our president will mention about that later..

About the question of ICT, the ICT business performance, below expectation in fourth quarter 2018, was mainly due to some part of revenue recognition delay.

In the future, we would focus on optimizing our research, sales and distribution efforts on selecting the products and services, while we're also focusing on products and services where we have clear advantages in the market to enhance ICT project acquisition and profitability.

And to further improve margins in ICT-related business, we had adopted a more cautious policy towards project selection in order to solidify our financial management in recent years. We do expect our ICT revenue to rebound in 2019..

Can you give any broad comments about margin in that business?.

ICT margin, usually, under 10%. And I think we've been trying for, in fact, several years, we're trying to increase that part. But the performance is kind of small, which you see the margin increase year-over-year. And hopefully, this year, we can keep those deals, we knew that we got a lot of project in the pipeline for this year.

So we would like to try our best to improve the margin as well as improve the revenue this year..

Our next question is coming from Jack Hsu, SinoPac Securities..

I had two questions. The first question would be the revenue from - the mobile revenue dropped a lot. Was that only a result from the price cuts, especially that had the all-you-can-eat, this kind of trend, or are there still other reasons to make the mobile revenue drop a lot? This is the first question.

And my second question is congratulations for MOD. Our MOD subscribers grew to 2 million subscribers. But we see fourth quarter's revenue drop from the third quarter.

But subscriber number is growing, so could you give us some kind of how this segment, what happened and how do we see the MOD in the 2019?.

The revenue for mobile dropped last year. Of course, mainly because of the price cuts and the - I think, at the same time, the SIM-only also dragged the price plan as well. I think that's probably the main - major reason for that..

Okay. The second question is about the MOD revenue drop from third quarter because we have a onetime adjustment booked in the fourth quarter. This will not affect our pattern now in the first quarter. Thank you..

So from how many revenue are affected by onetime adjustments?.

Actually, we're normalizing that part, the trend up, this trend doesn't change..

Okay.

So how do we experience - forecast the mobile revenue growth in 2019? Because you really had - the MOD revenue for the last, in 2018, but how do we see that this growth will feel - we see that we grow 25% in the 2018, so do we still forecast the same growth in 2019?.

Our mobile revenue will - we expect it will decline in 2019 and - but our MOD service will still increase in 2019..

The next question is coming from Peter Milliken, Deutsche Bank..

Can you explain a bit more about the mandatory tariff cuts that seem to impact the MOD revenues? And also, in terms of Netflix, was that available as an app in Taiwan up until this point? Will we see the first available date of access Netflix for the Taiwan user?.

For your first question, the mandatory tariff cuts from NCC, that part isn't having any impact on our MOD revenue..

Right, that's a broadband tariff cut? Is that correct? Or are you talking about a different type of tariff because you mentioned that, I think, [indiscernible]..

Peter, can you repeat your second question?.

The second question was Netflix previously available in Taiwan for consumers in any way?.

Yes, it's already available. I mean, Netflix as an app in Taiwan already for customers. But for Chunghwa, this time, we talked with the Netflix. So our MOD close garden MOD services. Our MOD customer can access Netflix on our platform, which means we can get some share of any individual subscription, revenue share..

Okay, got it, okay. And one other question, your earnings have been under pressure for some time. And what would usually happen in a deteriorating profit trend like that? You said costs will be attacked fairly aggressively, and we're seeing Verizon, Telstra, China Unicom, all launched aggressive cost programs.

Is this something that you would know?.

Cost control is usually one of the purpose in our daily operation. Of course, this year - last year, in the overall performance, we did miss guidance, we are missing that part, and the major reason is because of the revenue side. Costs and expenses, we will do our best to improve that part as well, especially in Chunghwa from last year.

In the coming several years, we're going to have - every year, we're going to have more than 1,000 employees, headcount, going to get retired and this really gives us a very big opportunity to optimize our personnel expenses, which is also the major portion of our cost expenses..

The next question is coming from Amber Lee, Yuanta..

I have one question on the guided EBITDA margin for this year. In respect of the range, 35.4% to 35.9%, it's the highest in the past three years.

Can you kind of walk us through further the assumptions behind that?.

Because our ICT, as mentioned by President Sheih, he mentioned earlier, we expect our revenue increase come from the enterprise ICT business application, value-added service and Internet services like IDC and information security. This kind of business will increase our profit. So we expect the EBITDA margin will be a little bit higher than last year.

Thank you..

Yes, but the business that you talked about, it was a margin that's under 10%, according to Fu-Fu, right? So how does that drive the overall margin to a level as high as this year?.

And also, it's - actually, we didn't really disclose the guidance for every segment, revenue segment for this year. Actually, we understand that, on the Internet segment, we - the percentage of the increase of our revenue is the highest.

Because we do expect the emerging business for - in our data communication segment will have some kind of increase for this year, which is also have much better margin from our understanding..

The next question is coming from Varun Ahuja, Crédit Suisse..

I didn't want to pursue on guidance improvement because I think it's pretty unclear to me, given the fact that mobile services, which are higher-margin products, are continuing to be under pressure. And then you have ICT which is growing, obviously, as the previous caller mentioned, the low margin business.

So the margin improvement or EBITDA growth stronger than revenue growth looks a little bit tough to me.

So just wanted to understand, is there any one-off items for revenues in this year which you didn't account for 2018 or are still lower from last year that you're factoring in 2019 for this kind of a guidance? And also, in 2018, if you remember, you had one-off item coming in May 2018 because of the customer switching over to your 4.99 - downgrade to 4.99 plans, so you had a contract termination fee.

So if you adjust for that, it seems a pretty aggressive guidance to me. So color on that will be helpful to allay all these points. Secondly, if we look at your EBITDA growth, it's strong, but if you look at your EBIT guidance, it's coming down. That means your depreciation and amortization is increasing pretty strongly in this year.

So any color why is that depreciation and amortization come in? Is there any spectrum of amortization cost which will come in? Or the CapEx intensity seems pretty consistent to me, so just wanted to understand why D&A is increasing so much in 2019. And lastly, if we can give a little bit color on 5G.

When do you think 5G-related spectrum auction is possible or any 5G-related CapEx?.

Okay. About the margin, the ICT business will increase our profits, as mentioned earlier by President Sheih. And our Internet services have the high margin also, so it will offset some kind from our mobile service revenue. The second one is we still anticipate the mobile handset sales, maybe have the chance in the fourth quarter this year..

About the question on 5G. 5G spectrum auction will be held in 2020, according to NTC. Chunghwa will follow global first mover steps closely to make sure we are kept posted all the time..

Likewise, the information about the - we still expect in the fourth quarter this year still have some - I think we have to remember that, last year, we had a lot of SIM-only kind of subscription. But that part we would like to have some kind of change this year. Of course, we need to do some efforts to try to bundle plans for our customers.

And of course, that's something we have to do to make the marketing more effective to attract new customer to subscribe with the bundled plans, so that will have some change for more or some smart device kind of sales, which will be helpful for the overall revenue.

So in the fourth quarter - so you can see that, actually, for the first half, the performance will - it kind of followed the - it's not really - the performance for the fourth quarter last year. But for the second half, we still expect to have some kind of possibility.

So that probably explains why we give a guidance that's a bit aggressive, but we still believe there's some possibility down the year. And CapEx part, yes, yes, okay, I think President Sheih already mentioned for 5G. Of course, for CapEx in this year, we budgeted TWD 29 billion versus last year's TWD 28 billion.

And that part we will continue to control, and hopefully, we can have more some saving by the year-end..

Let me add one point, that our CapEx - although our CapEx is kept flat or a little bit increased, but we expect our depreciation costs were a little bit lower than last year because of some CapEx from our subsidiaries. And the subsidiary will increase their profit, too. Okay..

So I just want to go back to depreciation and amortization. So if you look at your guidance, EBITDA minus income from that shows depreciation amortization is increasing to around TWD 35 billion versus TWD 31 billion this year.

So where is that increase coming from? You are mentioning that depreciation will decline, so I didn't get the delta where this increase in depreciation amortization in your forecast coming from..

Yes, it's because we adopted IFRS 16 about the right of used assets..

Okay.

So that means it will shift from operating cost to depreciation amortization cost?.

Shift from the rental costs to depreciation..

Okay. So then [indiscernible] so that means it's not an apples-to-apples comparison. Last year that cost is included in the operating cost. Now this cost is shifting to depreciation and amortization cost, some of it..

It will not increase. It will - it has no significant effect about the operational costs, just a component of the items change..

Okay. I'll take it off-line.

So, secondly, on 5G, can you give a little bit more color when is the spectrum auction expected and which spectrum band in terms of timeline has the regulator come up with that?.

For the band, it's like 2.4G, first. The second one, the high - it's - I'm sorry, it's 2.8G and 3.5G. Yes, in these two bands. That's preliminary - preliminary kind of thinking from the regulator. But all the detail, regulators have yet to announce. Usually, they will be announcing it like six months before the auction..

[Operator Instructions]. The next question is coming from Jack Hsu, SinoPac Securities..

I have another two questions. The first questions is how mainly the depreciation cost will show in the fourth quarter [indiscernible] about the 3G spectrum amortization fee? And another question is we have joined some project about IoT, like about a utility.

Does that kind of IoT project will give us some meaningful revenue in 2019?.

For the second question, the IoT project. I think this is kind of in the first phase, so we expect the revenues not really done for in 2019..

Our total depreciation costs, as shown in our fourth quarter results, is about TWD 6.9 billion..

Does that include 4G or just the 3G spectrum amortization fee?.

All the 3G and 4G - no, no, no, it does not include the amortization costs. Just depreciation, not amortization costs. Our amortization cost is about TWD 1.1 billion in fourth quarter..

Does that include the 3G spectrum amortization or the 3G spectrum amortization still exists in this quarter?.

It's yes..

So there's no 3G spectrum amortization fee in the fourth quarter in the results, right?.

I think, for the spectrum - old spectrum, we need to get amortized every quarter, right? So for 3G, of course, we're adapting 3G spectrum until end of last year. So of course, in the last year, we have this 3G spectrum amortization fee..

[Operator Instructions]. The next question is coming from Jack Hsu, SinoPac Securities..

Sorry, I just have another one question. We have a new - we have a new strategy for our 4G, and we will try to make our 4G portfolio better in 2019.

So will that then mean that in this quarter we see the downward share loss in the market in 2019 or will we do another test to improve our - the revenue of our operations?.

Yes. Of course, we will try to make the 4G portfolio better, I think, make more attractive to our customers and try to sell the bundled services in order to increase the sales, the revenue to push the - to mitigate the down sale - the downward of the market. Yes, this is what we have to do for this year..

So we will try to keep our subscriptions, the scale, almost the subscription number in the mobile subscription number, right?.

I think subscriber is not really a question, how to improve the overall performance is what we are focusing right now..

If there is no further questions, I will turn it back over to President Sheih. Go ahead, please..

Okay. Thank you for your attending. See you next time..

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. Thank you..