Business Context and Reporting Period
Chunghwa Telecom Co., Ltd. (NYSE: CHT), Taiwan's largest integrated telecommunications services provider, reported un-audited consolidated operating results for the third quarter ended September 30, 2018. The filing, dated October 31, 2018, covers the period under Taiwan-International Financial Reporting Standards (T-IFRSs). Notably, the company adopted IFRS 15 effective January 1, 2018, using the modified retrospective method; consequently, 2018 figures reflect IFRS 15 while 2017 comparisons are based on pre-adoption standards.
Key Financial Metrics
| Metric | Q3 2018 | YoY Change |
|---|---|---|
| Total Revenue | NT$52.71 billion | -6.6% |
| Operating Costs & Expenses | NT$42.28 billion | -3.9% |
| Operating Income | NT$10.42 billion | -16.1% |
| Operating Margin | 19.8% | -220 bps |
| Net Income (Parent) | NT$8.50 billion | -16.2% |
| Basic EPS | NT$1.10 | N/A |
| EBITDA | NT$18.38 billion | -9.1% |
| EBITDA Margin | 34.9% | -90 bps |
| Cash Flow from Operations | NT$21.76 billion | +12.4% |
| Cash & Equivalents (Sep 30) | NT$20.33 billion | -20.2% |
Revenue by Segment
- Mobile Communications: NT$23.45 billion (-13.0%)
- Domestic Fixed Communications: NT$16.50 billion (-7.2%)
- Internet: NT$7.19 billion (-0.2%)
- International Fixed Communications: NT$4.19 billion (+32.4%)
Material Changes vs. Prior Period
Revenue declined across most core segments due to intensified market competition and substitution effects. Mobile service revenue dropped 13% driven by VoIP substitution and competitive pricing, partially offset by smart device sales. Domestic fixed revenue fell 7.2% due to declining local telephone service (VoIP substitution) and reduced ICT project revenue as the company became more selective regarding project margins. Conversely, International fixed communications revenue surged 32.4%.
Despite revenue declines, operating costs decreased 3.9%, primarily due to lower cost of goods sold and ICT project costs. However, the cost reduction was insufficient to offset the revenue drop, resulting in a 16.1% decline in operating income and a 16.2% drop in net income. Operating margin compressed from 22.0% to 19.8%.
Outlook, Management Commentary, and Risks
Management Commentary: Chairman and CEO Yu Cheng highlighted that despite a competitive market, the company maintained its leading market position. Mobile market share stood at 36.4% (subscribers) and 37.8% (revenue). The company successfully grew young subscribers via "Back-to-School" promotions and increased high-speed broadband (100Mbps+) sign-ups by 10.6% year-over-year. IPTV maintained a leading position with over 1.9 million subscribers, driving advertisement revenue growth. Management emphasized a strategy of upselling higher-speed services and expanding ICT solutions to improve margins.
Outlook: The company remains committed to developing leading-edge businesses, including IoT and AI, and seeks to enter innovative emerging businesses. They plan to continue strengthening resource integration among sales, product development, and research to improve ICT margins.
Risks and Contingencies: The filing includes standard forward-looking statement disclaimers, noting that actual results may differ due to market competition, regulatory changes, and other factors outlined in previous SEC filings. The adoption of IFRS 15 impacts comparability with prior year data.
Investor Verification Checklist
- Verify the impact of IFRS 15 adoption on the comparability of 2018 results versus 2017.
- Monitor the sustainability of the 32.4% growth in International fixed communications revenue.
- Assess the effectiveness of the "Back-to-School" promotion and high-speed broadband upselling in reversing mobile and fixed revenue declines.
- Review the specific margin improvements in the ICT business segment as management targets higher selectivity on projects.
- Confirm the trajectory of cash equivalents, which decreased 20.2% year-over-year despite a 12.4% increase in operating cash flow.