Earnings Call Transcript - KT Q3 2020

Operator, Operator

Good morning and good afternoon. First of all, thank you all for joining this conference call. And now, we will begin the conference of the 2020 Third Quarter Earnings Results by KT. We would like to have welcoming remarks from Mr. Seung-Hoon Chi, KT IRO. And then, Kyung-Keun Yoon, CFO will present earnings results and entertain your questions. This conference will start with a presentation followed by a Q&A session. Now, we would like to turn the conference over to Mr. Seung-Hoon Chi, KT IRO.

Seung-Hoon Chi, IRO

Good afternoon. I am Seung-Hoon Chi, KT’s IRO. This earnings release call is being webcasted via our website, and you can follow the slide as you listen in on the call. Let us now begin KT’s Q3 2020 earnings presentation. Before we begin, please note that today's presentation includes financial estimates and operating results under the IFRS standard and has not yet been reviewed by an outside auditor. As we cannot ensure the accuracy and completeness of financial and business data, except for historical performances, please be reminded that these figures are subject to changes. Now, I would invite our CFO, Kyung-Keun Yoon, for his welcoming remarks and presentation on Q3 2020 earnings.

Kyung-Keun Yoon, CFO

Good afternoon. I am Kyung-Keun Yoon, KT’s CFO. Although burdened with uncertainties both at home and abroad due to the prolonged COVID-19 pandemic, KT was able to bring stable top-line growth and uncover hidden opportunities for growth. In the post-COVID world, where untouched culture became the new normal, we sustained subscriber growth from the telecom business while establishing a foothold for new growth as a digital innovation partner to other industries, underpinned by KT B2B capabilities in IDC, cloud, AI, among others. Last May, when we communicated our mid-term financial guidance as part of the shareholder return policy, we also communicated that our dividend payout ratio would be 50%. Additionally, to further enhance corporate value, we decided on 300 billion won of share buybacks on November 5. We will continue to exert our best efforts to bring sustainable growth to drive shareholder value enhancements. Now, moving on to Q3 2020 financials, total Q3 revenue declined 3.4% year-on-year to KRW6,001.2 billion. On the COVID-19 impact, Handset revenue was muted, but there were revenue declines from financial, real estate, and other subsidiaries. However, supported by steady growth from Wireless, Media, and B2B business, service revenue increased 0.8% year-on-year. Despite efforts towards efficient spending, COVID-19 constrained subsidiary profit, and as a result, operating profit fell 6.4% year-on-year to KRW292.4 billion. But owing to continuous efforts and operational innovation, which improved the non-operating earnings, net income was up 7.9% year-on-year to KRW230.1 billion. EBITDA was down 1.1% year-on-year coming in at KRW1,197.1 billion. Next, I will elaborate on individual business segments in terms of their performance and future outlook. Wireless service revenue was up 0.9% year-on-year to KRW1,742.1 billion. With the prolonged COVID-19 impact, roaming revenue fell by a large margin, but due to robust growth of 5G quality subscribers, wireless service revenue was up 0.6% year-on-year to KRW1,636.2 billion. If you discounted the roaming impact and accounting changes on the membership point, wireless service revenue increased by 3% compared to last year. Total wireless subscribers in Q3 increased to 200,000, reaching 22.333 million. As of Q3, there were 2.810 million 5G subscribers accounting for 20% of the handset subscribers. Following the Super Power plan, we introduced a mid-to-low-end tariff plan in October. And for 5G customers who value the media experience, we launched a Netflix bundle plan, providing more choices to our customers. KT, with its long track record, as the first to introduce iPhone in the domestic market, drove 5G expansion through iPhone 12, which was launched on October 30. By solidifying core competitiveness, we will continue to drive growth going forward. Next is on Fixed Line and IPTV business. Fixed Line telephony revenue was down 7% year-on-year to KRW369.2 billion on reduced subscribers. Broadband internet revenue was down 0.3% year-on-year to KRW498.7 billion due to stronger retention activities, targeting GiGA Internet subscribers nearing the expiry of contracts. In the post-COVID age, the in-home Internet environment has become increasingly important. In June, we launched a new WiFi concept service called GiGA WiFi, which has seen favorable market responses and expanded our subscriber base. By providing a complete set of Internet services from Fixed Line Internet to WiFi inside people's homes, KT can further solidify its leadership in the broadband Internet market. Driven by double-digit growth of subscriber net addition and revenue, IPTV revenue was up 11.9% year-on-year to KRW459.3 billion. Supported by a Netflix partnership, exclusive showing of popular content, and trendsetting offerings, we expect yet another increase in competitiveness, driving the onboarding of high-quality subscribers. KT will respond nimbly to the fast transforming media market, so that it may continue to strengthen its position as the number one pay TV provider. Next is on the B2B business. B2B revenue was up 0.8% year-on-year to KRW690.3 billion, especially the AI/DX business, which we utilized as a foothold for expanding digital transformation demand, recorded a growth of 8.1% year-on-year. As a leading company in DX, namely digital transformation, we plan to ramp up growth in the B2B market. On October 28, we launched KT Enterprise, a B2B exclusive brand and opened our 13th IDC on November 4, which further builds our position as the number one IDC and cloud service provider. We are also actively introducing solutions across various sectors, including education, entertainment, call centers, and remote working. We successfully won government projects on digital new deal initiatives, and as such, we expect B2B business growth to intensify. Due to distinct DX platform, underpinned by AI, Big Data, and Cloud, along with KT’s network infrastructure, we will be a digital innovation partner to companies, helping them grow and accelerate digital transformation for Korea as a nation. Next is on the performances of group subsidiaries. Due to the extended impact from COVID-19, profit contribution from affiliates declined 25.4% year-on-year to KRW85.6 billion. BC Card revenue was down 0.6% year-on-year to KRW863.4 billion due to lower acquiring volume since the pandemic outbreak. K-Bank, which resumed operations in July, saw strong performance driven by its new product and services like online apartment mortgage loans, leading to a six-fold increase in daily new customers, yet again confirming market potential. As Korea's first Internet-only bank, we plan to expand our financial services in both B2C and B2B segments. With the objective of turning profit in 2022 and going public in 2023, we will seek synergies with KT and other shareholder companies to create buzz, ultimately focusing on acquiring new customers. Skylife revenue was down 3.1% year-on-year to KRW176.6 billion due to a subscriber decline for satellite products. Skylife has decided to acquire Hyundai HCN worth KRW490 billion. By completing the acquisition process, we are making this an opportunity to further enhance our media capabilities. Revenues from content subsidiaries, including KTH, Genie Music, and Nasmedia, along with strong performance from content and ad business, were up 8.6% year-on-year, reporting KRW194 billion. This has been KT Group's Q3 2020 earnings results. With only two months left, looking back at 2020, all of us felt the changes brought on by the COVID-19 pandemic. For us at KT, it was a year when we raced forward to show a new side of KT, different from the past. We were steadfast at generating stable business performance while being equipped with a new growth engine of B2B business, building out a robust governance structure, and also notched up our efforts to enhance shareholder value, from setting up the dividend policy to share buybacks. Last but not least, we expect 2020 financials to be an improvement from last year and will exert our best efforts to bring better performance for next year. We ask for your support and interest and wish only the best to investors and analysts. Thank you.

Seung-Hoon Chi, IRO

For more information, please refer to the IR document that we circulated, and we will now entertain your questions.

Operator, Operator

Now, the Q&A session will begin. The first question will be provided by Hoi Jae Kim from Daishin Securities. Mr. Hoi Jae Kim, please go ahead with your question.

Hoi Jae Kim, Analyst

I would like to pose your questions. You have announced a plan to buy back your shares. I would like to understand the purpose of that share buyback. Is it for translation? Or would you be using that for M&A purposes going forward? Can we consider the share buyback as separate from your dividend payout? Second question is, on a standalone basis, we see that your cumulative net profit has gone up by 29% year-on-year and also that it had actually outperformed the 2019 net profit figure. Could you share if there have been any changes on your operating side? Additionally, since Q4 typically has lower expense levels, can we expect a higher level of net income by the end of the year? Have there been any specific changes on the non-operating business side?

Kyung-Keun Yoon, CFO

Let me first respond to your question about share buyback. The assessment of management is that the current share price compared to the intrinsic value of KT is significantly undervalued. As we have communicated in May, even at a very conservative forecast, we believe that we will be able to achieve KRW1 trillion of standalone operating profit by 2022. We are confident that we will further improve our fundamentals, and we expect our equity and share prices to show an upward trend going forward. Therefore, we decided that a meaningful size of capital allocation is necessary and that is why we’ve decided on 300 billion of share buybacks. In light of the fast-changing operational backdrop, we felt that we needed to have options regarding capital allocation. Regarding the potential of canceling the shares bought back, in light of future business earnings and changes in the business backdrop, we feel that this is one possible option. Responding to your next question on dividends, we announced at the previous Corporate Day event that we will be paying out 50% of our standalone adjusted net profit over the coming three years. This dividend policy still stands. As for the actual amount of the dividend, we will communicate with the market once our Board of Directors is convinced for Q4. Our decision to conduct a share buyback was again based on management’s assessment that the current share prices, compared to the intrinsic value of the company, are significantly undervalued. This was the basis for the decision to do a share buyback, and it is separate from our decision on dividends. Regarding your question on our net profit and changes we can identify on the non-operating side, basically, the employee welfare fund, which used to be under the non-operating items, has been changed to an operating expense. The size of that impact is about KRW60 billion to KRW70 billion on an annual basis. We’ve seen a steady trend for both the disposition of losses for both tangible and intangible assets, which contributed to the net profit on the non-operating side. Regarding Q4, we expect some seasonality, but compared to previous years, we expect more improvements as we go forward.

Seung-Hoon Chi, IRO

We will take the next question, please.

Operator, Operator

The next question will be presented by an analyst from NH Investment Securities. The following question will be presented by Joonsop Kim from KB Securities. Please go ahead with your question.

Unidentified Analyst, Analyst

I would like to ask you two questions. Firstly, on your B2B business, we see that your B2B revenue on a year-on-year growth aspect seems a bit weaker. Can you explain why? You've shared your vision and announced KT Enterprise as a brand, and it seems like you're going to be quite aggressive in providing services based on your new IDC center. If possible, could you provide your growth projection for your AI and DX business after next year? If that's difficult, could you provide some insights on the strategy going forward? Additionally, are there any updates concerning your collaboration with Microsoft and Cloud?

Kyung-Keun Yoon, CFO

The reason for the weaker performance is that some of the large-scale projects originally scheduled had slowed. You are correct; we are going to push for strong growth momentum in our B2B business. While we proceed, we will be mindful of both growth potential and profitability. If we see a need for any rationalization, we will definitely take that route. But the mainstream trend will certainly be an upward one. Regarding KT’s B2B business, we have consistently communicated that we will become a platform provider underpinned by our telecom infrastructure. As the number one B2B telecom service provider, we have engaged not only in basic network provision but also in national disaster safety and networks, as well as maritime and railway networks. Our experience in participating in large-scale national infrastructure projects has positioned us well. Since launching 5G services, we have gained about 170 B2B use cases. Through such efforts, we aim to create a business and establish a new market segment for us. KT is committed to growing the B2B market via our DX services. In addition to the 5G service and network capability we provide, we also have a competitive edge in terms of AI, big data, and cloud services. In the AI segment, we started with GiGA Genie set-top boxes and expanded successfully into other AI services, including hotels and apartments as well as call centers. We have successfully implemented new B2B business models. For example, in the case of our call center, we are currently working with our subsidiary and have acquired 12 customers thus far. If we analyze our big data offerings, KT has expertise in telecom location-based and financial and payment data. It is upon these elements that we wish to further develop our businesses. As Korea's top cloud and IDC service provider, we're actively responding to the rising demand in this segment. We recently opened our 13th IDC, which bolsters our number one position in the domestic IDC space. In terms of cloud, we offer specialized services to the public and financial sectors, and with the launch of our KT DX platform in November, we expect our cloud capabilities to become even more robust. We have now gained 7,000 clients. Our B2B clients can enjoy KT’s strong network and the largest scale IDCs and cloud infrastructure, allowing us to offer integrated solutions moving forward. As previously mentioned, we also launched our B2B brand, KT Enterprise. This effort aims to solidify our image as a specialized B2B company. Our nationwide sales channels give us a significant competitive advantage. Given all these factors, we anticipate that for the next year, like this year, we will sustain double-digit growth. Regarding your specific question about Microsoft, please understand that there are confidentiality aspects concerning service providers. Rather than focusing on specific arrangements, what’s more important is our ongoing cooperation with diverse companies both domestically and internationally in terms of IDC and cloud, which we will continue to expand in the future.

Seung-Hoon Chi, IRO

We will take the next question, please.

Operator, Operator

The next question will be presented by Joonsop Kim from KB Securities. Mr. Joonsop Kim, please go ahead with your question.

Joonsop Kim, Analyst

Thank you. I'm from KB Securities. I would like to ask two questions. Firstly, could you elaborate further on this 5G mid-to-low-end tariff plan? Would there be any cannibalization of your existing 5G plans? What impact would this have on your subscriber growth? Secondly, can you share with us the financial impact from the iPhone launch?

Kyung-Keun Yoon, CFO

In order to further increase the penetration of 5G services, in addition to the current premium rates, we introduced 5G mid-to-low-end rate plans last October to facilitate the migration of mid-to-low-end LTE subscribers to 5G much faster. Since it’s only been a month since the launch of this rate plan, it’s difficult to provide specifics about its impact. However, if you look at the figures from October, there has been some increase in the percentage of subscribers opting for this mid-to-low-end tariff plan, below KRW80,000. Yet, the percentage of customers still selecting the premium Super Plan, above KRW80,000, is around 80%. Additionally, we launched a Netflix choice rate plan at the end of October, which is expected to help attract more high-end subscribers opting for plans in the range of KRW90,000 to KRW110,000. While this new rate plan could apply some pressure on the decline in 5G ARPU, we believe that it is overall helpful as we can expand our base of 5G subscribers, potentially leading to a larger impact on the top line. Responding to your iPhone inquiry, iPhone 12 is selling quite well. With the iPhone launch in Q4, we expect a significant uptick in the migration from LTE to 5G due to handset upgrades. By the year-end, we anticipate that the 5G penetration based on handsets will increase to 25%. Most iPhone subscribers are choosing the selective discount rate plan, so we don’t expect the iPhone sales to significantly drive up our marketing expenses. With an expanded base of 5G subscribers and reduction in costs, we anticipate a supportive uplift to our profits.

Seung-Hoon Chi, IRO

There are no further questions. We would now like to close our earnings presentation. Once again, thank you very much for joining KT’s Q3 2020 earnings presentation.