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Chunghwa Telecom Co. Ltd. (CHT - Analyst Report) declared mixed financial results for the second quarter of 2012. Quarterly total revenue was approximately $1,826.2 million, remaining flat year over year. Second-quarter GAAP net income was approximately $379.8 million, down by a whopping 15.2% year over year.  Net earnings per ADR were 49 cents, down 5.8% year over year.

Quarterly operating income was $486.6 million, down 6.3% year over year. Operating margin was 26.7% compared with 28.3% in the year-ago quarter. Second-quarter 2012 EBITDA was $761 million, down 3.6% year over year. Quarterly EBITDA margin came in at 41.7% compared with 43% in the prior-year quarter. During the second quarter of 2012, Chunghwa generated around $478.2 million cash from operations, down 12.8% year over year. Capital expenditure, during the reported quarter, was around $254.1 million, up 36% year over year.

At the end of the second quarter of 2012, Chunghwa had approximately $2,348 million of cash & cash equivalents and a little over $60 million of outstanding debt on its balance sheet compared with $3,501.3 million of cash & cash equivalents and $60 million of outstanding debt at the end of 2011.

Segment wise Revenue

The Mobile Communications segment accounted for approximately $833.7 million of the total second-quarter 2012 revenue, up 10.7% year over year. The Internet segment accounted for $202.2 million, down 4% year over year. The Domestic Fixed-line Communications segment generated $621.4 million in revenue, down 6.8% year over year. International Fixed-line Communications segment generated $130.4 million, up 0.2% year over year. Other Business segment generated the remaining $38.4 million, down 47.6% year over year.

In the second quarter, Broadband access (including ADSL and FTTx) revenue was around $161.1 million, down 7% year over year. Mobile VAS revenue was nearly $170 million, up 33.6% year over year. Internet VAS revenue was slightly above $23.8 million, down 6% year over year. Handset sales revenue was $224.1 million, up 34.9% year over year.

Subscriber Statistics as of June 30, 2012

Total Broadband subscriber base was more than 4.56 million, out of which FTTx subscriber base was around 2.61 million, accounting for 57.2% of total broadband subscriber base. Broadband subscribers signing up for 50M connections were over 683,000. HiNet subscriber base was 3.75 million, up 3.4% year over year. Mobile subscriber base was 10.13 million, up 2.7% year over year. Mobile Internet subscriber base was 2 million, up 74.3% year over year. Management expects its mobile Internet subscriber base to reach 2.35 million by the end of 2012. International /Domestic Fixed-line subscriber base was 11.92 million. Multimedia-on-demand (MOD) subscriber base was more than 1.3 million.

2012 Outlook

Chunghwa reaffirms its financial outlook for fiscal 2012, provided in February 2012. Total revenue is estimated around $6,177 million, down 1.9% year over year. Operating costs and expenses will be approximately $4,702 million, up 1.8% year over year. Income from operations is estimated to be approximately $1,475 million, down 11.9% year over year. Net income will be around $1,282 million, down 16.8% year over year. EBITDA will be approximately $2,521 million, down 7.3% year over year. EBITDA margin will be 40.8% compared with 43.2% in fiscal 2011.

Recommendation

Chunghwa faces stiff competition from Taiwan Mobile Company and Far EasTone Telecommunications Co. Ltd. The company entered into agreements with China Telecom Corp. Ltd. (CHA - Snapshot Report) and China Unicom Ltd. (CHU - Analyst Report) to access software from their application stores for providing premium services to its subscribers. We maintain our long-term Neutral recommendation on Chunghwa. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.

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