Business Context and Reporting Period
Chunghwa Telecom Co., Ltd. (NYSE: CHT) reported un-audited consolidated operating results for the second quarter of 2018, ending June 30, 2018. The filing was submitted on July 30, 2018. Financial figures are prepared in accordance with Taiwan-International Financial Reporting Standards (T-IFRSs). Notably, the company adopted IFRS 15 effective January 1, 2018, using the modified retrospective method; therefore, 2018 figures reflect IFRS 15 while 2017 comparative figures do not.
Key Financial Metrics
- Total Revenue: NT$53.66 billion (decreased 3.6% year-over-year).
- Net Income (Parent Stockholders): NT$9.86 billion (decreased 5.6% year-over-year).
- Basic Earnings Per Share (EPS): NT$1.27.
- Operating Income: NT$12.05 billion (decreased 2.2% year-over-year).
- Operating Margin: 22.5% (up from 22.1% in Q2 2017).
- EBITDA: NT$20.02 billion (decreased 1.6% year-over-year).
- EBITDA Margin: 37.3% (up from 36.5% in Q2 2017).
- Operating Cash Flow: NT$17.24 billion (increased 8.3% year-over-year).
- Cash and Cash Equivalents: NT$43.87 billion as of June 30, 2018 (decreased 9.2% from June 30, 2017).
- Operating Costs and Expenses: NT$41.60 billion (decreased 4.0% year-over-year).
Material Changes Versus Prior Period
Revenue declined across most segments due to market competition and technology substitution, though margins improved.
- Mobile Communications: Revenue fell 4.1% to NT$25.68 billion, driven by decreased voice revenue due to VoIP substitution, partially offset by smart device sales. Mobile VAS revenue remained flat.
- Internet Business: Revenue rose 0.9% to NT$7.14 billion, primarily due to higher application value-added service revenue.
- Domestic Fixed Communications: Revenue dropped 3.2% to NT$16.44 billion. Local telephone service revenue fell 5.6% due to mobile/VoIP substitution, and ICT project revenue declined 6.8% due to fewer completed projects. Broadband access revenue decreased 1.8%.
- International Fixed Communications: Revenue declined significantly by 12.0% to NT$3.25 billion due to lower international long-distance revenue.
- Cost Management: Operating costs decreased 4.0%, outpacing the revenue decline, which contributed to an expansion in operating and EBITDA margins.
Guidance, Outlook, and Management Commentary
Management highlighted a highly competitive quarter but emphasized a strong subscriber base foundation for future growth.
- Mobile Strategy: Subscriber net-adds turned positive in Q2, attributed to a NT$499 short promotion plan launched in May. The company is developing 5G capabilities to maintain competitiveness.
- Broadband and Video: The strategy of guiding customers to higher speeds was effective, with users on 100Mbps+ connections increasing 10.1% year-over-year. IPTV/MOD subscribers exceeded 1.8 million, bolstered by the exclusive broadcast of the 2018 FIFA World Cup. Advertisement revenue for MOD increased 77% year-over-year.
- Enterprise and ICT: The company is focusing on IoT, IDC, and CDN solutions. NB-IoT tariff plans were rolled out for enterprise customers, and the third phase of the Banqiao IDC establishment is progressing to meet demand.
- 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.
Investor Verification Checklist
- Verify the impact of the IFRS 15 adoption on year-over-year comparability, as 2017 figures were not restated.
- Monitor the sustainability of mobile subscriber net-adds following the temporary NT$499 promotion.
- Assess the long-term viability of the 77% increase in MOD advertisement revenue post-World Cup.
- Review the trajectory of ICT project revenue, which declined 6.8% due to fewer completed projects.
- Confirm the company's progress on 5G technology deployment and NB-IoT platform adoption.