Kt Corp Q4 FY2024 Earnings Call

Good afternoon. I'm KT's IRO, Young-Kyun Yoon. We will begin KT's 2024 full-year earnings presentation. This earnings release call is being webcast live on the company's website, so you can listen in on the call and follow the presentation slides as we go along. Let me remind you that today's presentation includes financial estimates and operating results under the K-IFRS standards that are yet to be reviewed by an outside auditor. We, therefore, cannot ensure accuracy or completeness of financial and business data, aside from the historical actuals. So, please note that these figures may be subject to change in the future. With that, I invite the company's CFO, Jang Min, to run through our annual results of FY 2024.

Good afternoon. I'm the CFO of KT, Jang Min. In 2024, under the goal of AICT transformation, KT pushed forward with innovating its workforce and business structure. Through our partnership with Microsoft and by cultivating our IT professionals, we strive to build up a driving force behind our future growth. On the back of balanced growth between B2C and B2B and good performances from data center, cloud and other core businesses, consolidated revenue reported KRW 26,431.2 billion, which is a historical record since the company went public in 1998. We also entered into a strategic partnership with Microsoft to effect a complete transformation as an AICT company, focusing on structural profitability improvements such as innovating the workforce structure and rationalizing underperforming businesses. Following workforce innovation in Q4, operating profit fell 50.9% year-on-year, coming in at KRW 809.5 billion. But if one-off impact is removed, operating profit stands at KRW 1,811.8 billion, increasing 9.8% year-on-year, showing stronger fundamentals. Also in terms of corporate value, last November, we established mid- to long-term corporate value enhancement goals, presenting a progressive action plan. We will accelerate structural innovation to transition to an AICT company by 2025. By actively implementing the plan on corporate value enhancement, we intend to yield results from core growth businesses, including AICT, cloud, and elevate shareholder return. Accordingly, we've set a consolidated revenue target for the year at above KRW 28 trillion. Under the strategic partnership with Microsoft, we will launch products that are distinct to KT in the first half of the year, such as AI models specialized for Korea and secure public cloud, to drive sales and order wins and build a basis for B2B AX business growth. The fixed and wireless business and the media business will continue their growth by delivering differentiated customer experiences underpinned by AX technology. Through technology innovation and scaling up IT, we plan to optimize systems for business operations and management. As an AICT company, KT is committed to making improvements in growth and profitability, enhancing shareholder value. In 2024, we adopted quarterly dividends as part of our shareholder-friendly management policy, with KRW 150 billion of cumulative dividends paid out up to Q3. The dividend per share for Q4 '24 is KRW 500 per share, and the dividend record date is February 28. We increased annual dividends from KRW 1,961 back in 2023 to KRW 2,001 in FY '24. Q4 dividends will be paid out after approval at the March General Meeting of Shareholders. Under the corporate value enhancement plan, as part of the KRW 1 trillion share buyback and cancellation plan we have until 2028, we plan on KRW 250 billion buyback and cancellation this year. KT will continue to drive fundamental innovation as an AICT company to ensure sustainable growth and corporate value enhancement. I will now move on to 2024 annual earnings. Operating revenue was up 0.2% year-on-year to KRW 26,431.2 billion, while operating profit declined 50.9% year-on-year, coming in at KRW 89.5 billion on the back of one-off labor costs following structural enhancement of the workforce. Following the decrease in operating profit, net profit fell 54.5% year-on-year to KRW 450.1 billion, and EBITDA was down 14.2% year-on-year to KRW 4,687.2 billion. On operating expense, on the back of workforce revamping, which led to an increase in one-off labor costs and higher depreciation, operating expense was up 3.6% year-on-year, reporting KRW 25,621.7 billion. Regarding the financial position of the company, the debt-to-equity ratio at the end of December '24 was 12.3%, and the net debt-to-equity ratio dipped 1.9 percentage points year-over-year, reporting 37.7%. Moving on to CapEx, KT Group's total CapEx spend in 2024 was KRW 3,123.4 billion. KT, on a separate basis, its cumulative annual CapEx was KRW 2,299.9 billion, and CapEx from key growth businesses in finance, media, DX, and real estate reported KRW 823.5 billion. In terms of performance across our business segments, wireless revenue was up 1.3% year-on-year, reporting KRW 6,959.9 billion. With the launch of various rate plans offering more choices to customers, the 5G subscriber count exceeded 10.4 million subscribers, accounting for 77.8% of our total handset subscriber base. We continue to see solid growth in roaming and MVNO business. In the fixed line business, driven by growth in GiGA Internet subscribers, Internet revenue was up 1.1% year-on-year, reporting KRW 2,486.9 billion. The media business experienced 1.2% year-on-year growth, primarily due to IPTV subscriber expansion, centered around high ARPU plans and higher-quality set-top boxes. The new media division established at the end of 2024 is set to become a pivot for our group's media business-related competencies, and we plan to drive media business innovation through AX technology. However, home fixed line telephony revenue fell 7.3% year-on-year to KRW 699.4 billion. On the B2B services front, despite rationalization of unprofitable businesses, driven by strong growth in the enterprise Internet and data business, as well as growing demand for AX services, B2B revenue increased by 2.9% year-on-year. The AI/IT business revenue increased 11.9% year-on-year, benefiting from AICC expansion and Thailand's LLM project. In 2025, we will continue to streamline underperforming businesses while focusing on volume and quality growth through strategic customer engagements and product launches in collaboration with Microsoft. Regarding our major subsidiaries, the decline in acquiring volume led BC Card revenue to drop 5.4% year-on-year to KRW 3,805.8 billion. However, operating profit posted a significant year-over-year increase driven by private label cards, financial business expansions, and profitability enhancement efforts. Despite growth from Internet resale and MVNO business, KT Skylife revenue decreased by 1.5% year-on-year, coming in at KRW 1,022.9 billion. The content subsidiary experienced a 13.6% year-on-year revenue decline, but notable box office successes like 'Your Honor' and 'To My Harry' showcase future growth potential. Thanks to increasing data center usage by global customers and growing traffic for cloud-based CDN, KT Cloud posted 15.5% year-on-year growth. KT Estate saw a 1.7% year-on-year increase, totaling KRW 604.9 billion, attributed to rental revenue growth from offices and hotels. This concludes our update on KT's 2024 annual performance. KT will continue to promote structural transformation as an AICT company. Through the successful implementation of our corporate value enhancement efforts, we aim to elevate KT's corporate value further. We thus look forward to your ongoing support and interest from all our investors and analysts. Thank you.

For more details, please refer to the presentation deck, which we previously circulated. We would now like to begin the Q&A.

The first question will be provided by Shin Eun Jung from DB Financial and Investment.

I have a couple of questions. First one relates to your 2025 outlook. If you could guide us on what your forecast is in terms of revenue, profit and shareholder return, that would be helpful. I would also like to understand as to when we will be able to see either revenue and profit come through from your real estate development located in the north of the river site.

Responding to your second question first, regarding the real estate development-related profit, you're asking the timing under which we will recognize that profit. With respect to the apartment that's been built on site, we will start to book the revenues from that business as people will begin moving into that apartment starting in March, and we will recognize and book the profit across Q1 and Q2. Regarding the guidance for revenue, operating profit, and shareholder return, as I mentioned in my presentation, the revenue guidance is on a consolidated basis above KRW 28 trillion. Regarding profit guidance, we cannot share a specific figure at this time. However, based on the size of the profit for 2024 and the effects of structural improvements we've undertaken, as well as the revenue expansion from the AICT business and initiatives, you can make an appropriate estimation. As part of managing our bottom line, we aim to ensure that all the workforce-related improvements we made over the past year will translate into profit this year. We will continue to rationalize unprofitable or underperforming businesses, thereby striving to enhance our structural profitability. Addressing your question on shareholder return, once we realize the impact of profit improvements, it will provide us with resources to facilitate shareholder returns. The specifics regarding the mix between actual cash payouts versus share buybacks and cancellations will be decided based on the upcoming BOD meeting, but we will ensure we maintain the minimum level of return that the market expects.

The following question will be presented by Kim Joonsop from KB Securities.

I'm Kim from KB Securities. My questions relate to your AX business and the partnership that you have with Microsoft. First, I understand from press articles that KT will focus on providing business process innovation solutions to your customers and clients. I'm curious about the unique points of KT's AX business strategy, your roadmap, and the topline revenue projection from this business. Second, regarding your cooperation and partnership with Microsoft, you mentioned a more Korea-specialized AI model and secure public cloud. What will your focus be this year, and what milestones do you anticipate?

Thank you for that question. When we refer to AICT transformation, our overarching approach to AX strategy focuses on B2B customers through our IT business, combined with our core communication technology business and media business. Our goal is to enable transformation driven by AI capabilities. As mentioned in some press articles, all B2B IT businesses that KT provides depend on AI integration. Therefore, our AX strategy relies heavily on AI capabilities. Our financial impact for AI and IT combined in 2024 is KRW 1 trillion, with a target for double-digit growth in 2025. As for our partnership with Microsoft, I will address this in three sections: service, customer, and internal organizational capacity. Firstly, on the service offering side, we plan to launch a Korea-specialized secure public cloud within Q1 to provide that to our B2B customers rapidly, enabling proof of concept that establishes our market position early on. Secondly, we aim to release an AI model based on GPT-4, trained on data specific to Korea, in the second quarter. This model is currently undergoing training on aspects such as Korean history, politics, and law. In terms of customer breakdown, we've selected about three strategic key customers, in collaboration with Microsoft, and are currently in the proposal stage with them. Lastly, we have improved our internal consulting organization’s capabilities and established an AX-dedicated team, cultivating talent within it to better address our customers' needs.

The following question will be presented by Kim Hoi Jae from Daishin Securities.

I'm Hoi Jae Kim, covering telecommunication services at Daishin Securities. I would like to first inquire about your CapEx. The current CapEx level seems to be decreasing, and I'm interested in the future forecast for CapEx. When do you expect to see an increase in CapEx due to additional investment in 5G or maybe even 6G networks? Also, regarding your AI model training, does that require significant investment? Secondly, you announced your shareholder return or value enhancement plan back in November 2024, listing several objectives aimed at improving shareholder return and increasing ROE. What specific plans will drive that? Regarding your share buyback, you disclosed plans to buy back and cancel KRW 250 billion in treasury shares. Does that mean that from 2025 to '28, you will be buying back and canceling KRW 250 billion every year?

First, regarding your question on CapEx and depreciation. KT and all of its subsidiaries plan to maintain CapEx at 2024 levels. On a standalone basis, while investment in B2C will decrease due to AICT business growth and scaling of IT, we anticipate a flat year-over-year level. Regarding CapEx for 5G and 6G cycles, for 5G investment, the depreciation period has concluded. For 6G investments, significant investment is unlikely for the next 2 to 3 years since technical standards are expected to be established around 2028 or '29. This is a long-term prospect. Additionally, adding spectrum for the 5G network is not urgent, and there are currently no clear government policies on spectrum allocation. Therefore, we do not view it as a risk factor for CapEx investment. Regarding the value-up plan disclosed in November, we outlined four specific action plans to ensure we follow through on them this year. The focus will be on improving profitability, enabling a consistent approach to shareholder returns. We will finalize the specifics through the Q1 dividend approval at the BOD. Yes, we plan to cancel KRW 250 billion of treasury shares, and it's indeed possible that the same amount will be repurchased and canceled every year, depending on the growth and size of the profits we generate. I believe there is upside in this regard.

The following question will be presented by Kim Hong-sik from Hana Securities.

I have two questions I would like to ask. Regarding the reorganization that the company undertook and its impact on cost savings, could you provide a figure for labor costs or the overall cost impact since you reduced headcount both on a headquarters and consolidated basis? I'd like more detail on the cost savings. My second question concerns past practices at the HQ level, where the parent company typically returns about half of the profit generated. Recently, I've heard that dividends from subsidiaries will be used for shareholder returns as well. Can you clarify the reasoning behind this? The dividend inflow from subsidiaries may fluctuate, which complicates forecasting.

Regarding the cost impact from the organizational revamp, it's difficult to provide a specific figure, but we had a reduction of 4,400 people. Of this, 2,700 people retired completely, while 1,700 transferred to the subsidiary we established. Those 1,700 will be earning 70% of their previous wage, with the difference settled in one lump sum. These aspects should assist you in estimating labor cost savings and the expenses associated with these headcount adjustments. For your second question, regarding dividend income from subsidiaries contributing to overall net profit, yes, they can be utilized for shareholder returns. The adjusted net profit encompasses elements like non-cash securities valuation gains or losses. These adjustments help stabilize profit fluctuations. For the 2024 numbers, the calculated adjustment amount was plus KRW 120 billion. I hope this clarifies your queries.

Currently, there are no participants with questions.

With no more questions in the queue, we would like to now close the Q&A session. Thank you, everyone, for your questions and your interest. Thank you once again for joining us despite your busy schedules. This concludes FY 2024 earnings release. Thank you.