Chunghwa Telecom Co., Ltd. ($2412)

Good afternoon, ladies and gentlemen. Welcome to Chunghwa Telecom Conference Call for the Company's First Quarter 2026 Operating Results. [Operator Instructions] 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 would like to turn it over to Ms. Angela Tsai, the Vice President of Finance. Thank you. Ms. Tsai, please go ahead.

Thank you. I'm Angela Tsai, Vice President of Finance, Chunghwa Telecom. Welcome to our first quarter 2026 earnings conference call. Joining me today are Chunghwa's President, Rong-Shy Lin; and our Chief Financial Officer, Audrey Hsu. During today's call, management will begin by sharing our recent strategic achievements and providing an overview of our first quarter business results. This will be followed by a discussion of our segment performance and financial highlights. We will then open the floor for questions and answers. Please turn to Slide 2 to review our disclaimers and forward-looking statement disclosures. Now without further delay, I will turn the call over to our President. President Lin, please go ahead.

Thank you, Angela, and hello, everyone. Welcome to our first quarter 2026 results conference call. To begin, we are pleased to announce that our 2025 cash dividend per share is set to TWD 5.2 with a payout ratio of 104.2%, reflecting both our confidence in operational performance and the commitment to shareholders. For 2026, we are glad to see strong financial performance of the first quarter with all metrics exceeding quarterly guidance. Our revenue for this first quarter hit a record high for any first quarter since 2012, mainly driven by outstanding ICT revenue growth. In addition to our strong mobile and fixed line performance, our operation income, net income and EPS in the first quarter further elevated on a healthy upward trajectory. This represents a very positive start to the year. Given the steady business growth in 2026, we plan to further deploy resources for the capturing pre-6G and the AI-related opportunity. In the mobile front, we will continue our gradual construction of 5G stand-alone network. The SA deployment in our plan is a necessity to transition to 6G and will be progressively rolled out in phases, based on demand. Certain select verticals such as unmanned vehicle and autonomous driving are using SA network. In addition, we are extending SA deployment to high-traffic areas to support commercial demands and events like exhibitions, sport games and the art performances. Another important development in 2026 is the utilization of agentic AI building on the generative AI catalyst initiatives launched internally in 2025. We further expanded the use of agentic AI to enhance operational workload and upgrade our service offering. From a revenue perspective, we continue to monetize our AI infrastructure, delivering solid revenue growth particularly driven by AI data center. On the technology front, we would like to highlight our self-developed CHT AI Factory platform by integrating DeepFlow solutions, compute power and a portfolio of AI models and agents. The platform not just supports the development of our own enterprise copilots through various AI agents, but also enable us to offer AI-enabled applications to enterprise customers, including smart home ecosystem and smart manufacturing in 2026. We remain confident in the growth potential of this AI-enabled solution. Finally, in the first quarter, alongside our technological leadership, we remain equally dedicated to setting new global ESG benchmarks. We retained our MSCI ESG rating of AAA in 2026, underscoring our position as the top-tier telco with the highest scores among global peers by April. In February, 1 year ahead of regulators' requirement, we successfully became the first in Taiwan to file a group-based sustainability-related financial information of 2025, fully compliant to IFRS standard 1 and Standard 2, representing our transparent ESG financial disclosure. In addition, at the forefront of the industry, we ranked in the top 5% of the S&P Global Sustainability Yearbook for the fourth consecutive year and maintained our position in the Dow Jones best-in-class World Index and Emerging Market Index. Furthermore, we secured our third consecutive A ranking from the CDP survey, maintaining the climate leadership position. Now let's move on to our first quarter 2026 results. Please turn to Page 5 for our success in Taiwan's mobile market. In the first quarter, we continued our market share leadership in Taiwan's mobile market. According to data from our telecom regulator, our mobile revenue market share rose to 41.1%, a historic high, while our subscriber share among peers climbed to 39.7%, mainly driven by the continued growth in the postpaid subscribers and the strong roaming performance in the quarter. Our 5G performance was equally impressive. Based on regulators' data, our 5G subscriber market share was up to 39.4%, maintaining our industry-leading position. The 5G penetration rate among our smartphone users further increased to near 48% by this March, while the average month fee uplift from 5G migration slightly decreased to 36% due to a onetime factor. With the combined strength of our expanding subscriber base and the growing 5G adoption, our mobile service revenue growth outpaced the industry, achieving an exciting 4.4% increase year-over-year. Postpaid ARPU also grew by 3.6%, TWD 20 on a year-over-year basis. We expect this positive trajectory to continue, supported by Taiwan's favorable mobile market landscape. Let's move on to Slide 6 for our fixed broadband business update. In the first quarter, we are glad to see the number of subscribers adopting service speed of 300 megabits per second and above reached 40% of our total fixed broadband subscriber base, which is encouraging. As a result, our fixed broadband revenue in the first quarter posted a 3% increase year-over-year, while the ARPU obtained a year-over-year rise of TWD 20 to TWD 818 per month. Fixed broadband subscribers delivered a positive growth year-over-year. Going forward, we will continue to promote high-speed services such as 500 megabits per second and 1 gigabit per second and above to further enhance our customer profile and gain incremental ARPU. Page 7 highlights the performance of our million subscriber consumer services. The first growth driver was our multiple-play offering. which integrated mobile, fixed broadband and Wi-Fi services, subscription surpassed the milestone of 1 million in the first quarter, representing a 15% year-over-year growth. Notably, our Wi-Fi penetration among fixed broadband subscribers reached 55%, reflecting our significantly enhanced in-home coverage, anchoring customer loyalty and driving sustained ARPU expansion. The most encouraging performance was recorded in our video business, thanks to the excitement around the 2026 World Baseball Classic. In the first quarter, total video subscribers, including MOD and Hami Video recorded a 6% quarter-over-quarter increase, successfully exceeding 3 million subscribers. Meanwhile, Hami Video ARPU also demonstrated encouraging double-digit growth year-over-year. Looking ahead, as we are preparing for the upcoming FIFA World Cup in the second quarter and the Asia game in the third quarter, we plan to leverage long-term subscription offering and sustain user engagement across consecutive major sports events throughout the year. Lastly, our digital service delivered 2 additional million subscriber milestone. The subscriber number of our consumer cybersecurity services maintained above 1 million during the quarter, while the number of transacting users of our DCB services also exceeded the 1 million threshold during the same period, reflecting the sustainable growth momentum of our digital ecosystem. Slide 6 (sic) [ Slide 8 ] illustrates the key development in our enterprise ICT business. With the group collaboration, our group ICT revenue in the first quarter increased 25% on year due to continued expansion of emerging services. Recurring ICT revenue also grew by 11% maintaining strong growth momentum across all major services line, particularly cybersecurity, IDC and international public cloud services. Among our core ICT services pillars, IDC, cloud and AIoT continue to be the key growth drivers, posting year-over-year growth of 29%, 43% and 26%, respectively. IDC revenue was mainly driven by the installation projects from a manufacturing company. Cloud revenue received contributions from government taxation projects and the smart environment solutions continue to support AIoT revenue growth. In addition, on a year-over-year basis, our big data service revenue grew by 8% and the 5G private network services revenue surged, both thanks to project revenue recognition from both domestic and international public sectors. However, revenue from cybersecurity services declined due to the high comparison base last year. We are even more proud to share that our ICT order intake in the first quarter recorded a new high with country value amounting to TWD 20 billion mainly representing opportunities from network resilience, project and a large follow-on project on national fiscal and surveillance assistant Notably, the value of the smart surveillance project obtained exceeded TWD 1 billion, underscoring our #1 market leadership position in surveillance services. in addition, our home ground AI traffic flow, identification and analysis technologies continue to win us smart transportation projects. While our subsidiary. Next bank also worked with us to leverage our telecom data on loan decisions both represent replicable solution for more future projects in specific verticals. Slide 9 highlights the robust performance of our international subsidiaries. In the first quarter, international subsidiary revenue is -- grew 20% year-over-year mainly driven by major ICT project delivers across the United States and the Southeast Asia market. especially U.S. revenue surged 89% year-over-year, driven by a successful revenue recognition of large-scale AI supply chain project. while Southeast Asia revenue increased 16% year-over-year due to contribution from a fast construction project as a key customer facility in Singapore. We continue to secure large-scale project contracts in the United States while extending this proven expertise into Southeast Asia. Starting from this quarter, we are pleased to report our financial return from network resilience deployment. In the first quarter, our satellite service revenue increased 16% year-over-year, stemming from our satellite connectivity solutions across multiple sectors, including government, multinational enterprise, high-tech and offshore energy industry. Additionally, revenue of international private lease line or Leased Circuit or IPLC rose 6% year-over-year, mainly driven by the recurring revenue contribution from our SJC2 and APRICOT submarine cables, starting from the previous quarter, Excitingly, to meet surging connectivity demands, we expanded the capacity of AUG East submarine cables by additional 18 terabits per second spending routes from Taiwan to Japan and Taiwan to Singapore. The expansion is expected to support medium- to long-term bandwidth demands across Asia and serve as a key driver of long-term revenue growth. Now let's move on to Page 10 for the financial performance of our 3 business groups. In the first quarter, thanks to steady revenue growth in the mobile and fixed broadband services higher sales revenue, driven by the strong iPhone demand. Our consumer business group delivered a robust 6.2% year-over-year revenue increase and a solid 5.3% year-over-year income before tax increase broadly underpins the group's outperformance. For Enterprise Business Group, its revenue rose to -- rose by 8.5% year-over-year, driven by strong ICT business and growth in mobile and fixed broadband services. However, fixed income before tax dropped by 2.7%, mainly due to fixed voice service decrease, which offset the growth in ICT business, as mentioned earlier, for international business group, both of its revenue and income before tax grew positively by 10.7% and 1.6%, respectively, driven by the rising ICT service demand from the overseas AI supply chain, together with a strong roaming performance. That concludes the business overview of the first quarter. Now I would like to hand the call over to Audrey for the financial update.

Thank you, President. Good afternoon, everyone, and thank you for joining us today. I'm pleased to walk you through our financial performance for the first quarter of 2026. Please turn to Slide 12. We reported consolidated revenue of TWD 59.99 billion this quarter. This represents a year-over-year increase. It is also a record high for the first quarter. This growth was driven by 3 key factors. First, our ICT business delivered strong momentum. This was supported by integrated projects, IDC and cloud demand and AIoT expansion. Second, sales revenue was very strong. This was mainly driven by handset demand at both the parent company and our subsidiaries now. Also, our subsidiary, Chunghwa Precision expect also contributes meaningfully Third, our core telecom business remained stable. We saw steady growth in mobile, broadband and data service. Income from operations increased by 4.6%. This growth was supported by the sustained profitability of our core telecom business as well as strong earnings contribution from our subsidiaries. In addition, the recognition of a higher-value integrated projects, together with the continued scaling of our IDC and cloud operations further improve our operating margins and overall earnings quality. As a result, earnings per share increased from TWD 1.26 to TWD 1.3, reflecting our consistent profitability and making the highest first quarter EPS in the past 10 years. EBITDA for the quarter remained stable at TWD 23.3 billion, with a healthy EBITDA margin of 38.85%. In summary, these results reflect high-quality earnings growth across our business segments. So now please turn to Slide 13 as we move on to our balance sheet highlights. Total assets increased by 2.3% year-to-date, primarily driven by a rise in current assets. This was led by an increase in time deposits and CDs along with seasonal increases in prepaid expenses, inventories and accounts receivable to support our business operations. Additionally, investment properties rose following the completion of the new rental sites, while the net decrease in PPE reflects depreciation charges for the period. On the liability side, total obligations increased by 1.1% compared with year-end 2025. The increase was mainly attributable to a higher bonds payable driven by the issuance of convertible bonds by our subsidiary, Chunghwa Precision Test Tech. Aside from this, our liability structure remains stable. Our financial strength is further reflected in our key ratios. The debt ratio improved to 24.92% while the current ratio remained healthy and well above 100%. Most notably, our net debt-to-EBITDA ratio to 0 highlight our solid financial position. Now let's move to Slide 14 for our cash flow summary, where we will review our performance for the first quarter of 2026, Net cash provided by operating activities remained healthy in the first quarter. Year-over-year changes in operating cash flow were mainly driven by working capital movements. Lower cash inflows from accounts receivable were largely offset by reduced cash outflows from accounts payable. Additionally, we saw an increase in cash outflows related to inventory movements reflecting our efforts to support upcoming business expansions. On the investment side, CapEx totaled TWD 4.55 billion represent a planned year-over-year decrease of 15.9% and Mobile CapEx declined by 24.4%, in line with our strategy to gradually reduce capital intensity as we move beyond the peak of the 5G deployment cycle. Nonmobile CapEx decreased by 12.8%, mainly reflecting a higher base in the previous year. As a result, free cash flow reached TWD 6.65 billion. Despite modest year-over-year fluctuations, our cash position revamped very solid. Our recurring cash generation continues to comfortably support both business expansion and shareholder returns. Turning to Slide 15 for our performance highlights relative to guidance. In the first quarter of 2026, we delivered strong results with revenue exceeding our guidance. This performance was supported by continued growth in our ICT business, stable contribution from our core telecom operations and stronger-than-expected sales revenue. Most importantly, revenue growth continued to outpace the increase in operating expenses, reflecting improved operating efficiency and disciplined cost management. While certain project-related costs increased alongside higher ICT revenue recognition. Overall cost control remained well within expectations. As a result, all key profitability metrics including operating income, net income, EPS and EBITDA came in above expectations for the quarter. So now this concludes our financial results highlights. So thank you for joining us today, and we will now open the call for questions.

And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

Okay. We got a question from our platform that how sustainable is the ICT business? And what is the outlook for the rest of 2026 and beyond? And what is the impact of AI on the IT services industry? Okay. I mean for the ICT business for the year 2020, I think actually, we think we remain confident and positive for the outlook of our overall ICT business. It is because of the organic growth from the ICT services and the sorry, than the AI contribution and AI, the value creation. Because as you know, for most of the digital services we provide for the customers or for the enterprise sectors. Actually, in this year, we introduced agentic AI, so which can also help to upgrade some services to meet or get it to the enterprise customer requirements. So I think for these parts, it also can contribute some revenue to the ICT business. But in terms of the impact of AI on the IT services, I think for this part, the major impact came for the enterprise -- our enterprise sectors. And just like I said, we think that we can introduce AI to enhance the services and provide value and bring in the revenues for our overall revenue growth.

[Operator Instructions].

There is a second question from HSBC. That is the -- you had guided for a higher nonmobile CapEx for 2026. estimation. Could you please elaborate on that? And could you get an underlying trend within the nonmobile CapEx guidance. Okay. Okay. For the nonmobile CapEx for 2026 estimates, that's because we have some CapEx increase and like the IDC cost for IDC construction because in 2026, we have some AIDC construction in our pipeline. So we allocated some CapEx for the construction. And then we also continue to -- just like our President, I reported earlier during the results call. We continue to invest in the construction of undersea cable, then to enhance our network resilience. And the undersea cable also continue to contribute to our total revenue for these years. So that's why we raised our nonmobile CapEx for year 2026.

Okay. I can also add for the 2 previous questions. The first question is about that how sustainable is the ICT. And I think that I just want to provide some overview that because due to the digital transformation demand in the industry. So we see that the ICT demand is quite sustainable. So this is for the first part for the question. And the second part for the nonmobile related CapEx. So nonmobile related CapEx, in fact, it basically includes fixed line, satellite, IDC, AIDC, PSTN. And overall, they are 3 focus. The main focus is on resilience and life cycle management. So we need to make sure that the core network can ensure security and resilience. And also, the second part is that we also as some necessary investment to strengthen our critical infrastructure defense. And finally, we need to make sure we also expand on [ signaling ] and user capacity to meet the 2026 business plan demand for AIoT and 5G traffic. So this is also including some of the, say, functionality in a select area to future proof the network. So these are our mobile-related CapEx. But compared to last year, because last year, we have a high basis. So you could see the slight decrease of mobile CapEx in this quarter.

[Operator Instructions] And thank you for all your questions. If there are no further questions, I will turn it back over to President Lin.

Thank you very much for your participation. See you. Bye-bye.

Yes. Thank you, President Lin. And ladies and gentlemen, we thank you for your participation in Chunghwa Telecom's conference. There will be a webcast replay within an hour. Please visit www.cht.com.w/ir under the IR Calendar section. You may now disconnect. Thank you again. Goodbye.