Earnings Call Transcript - KT Q4 2021

Seung-Hoon Chi, IRO

Good afternoon, I am Chi Seung-Hoon, KT's IRO. I would like to begin KT's 2021 Earnings Presentation. For your information, this earnings release call is being webcast live on our website and you can follow the slides as you listen in on the call. Before we begin, please note that today's presentation includes financial estimates and operating results under the K-IFRS standard that have not yet been reviewed by an outside auditor. As we cannot ensure accuracy and completeness of financial and business data, aside from our historical performances, please be reminded that these figures are subject to change. With that, I would now like to invite our CFO, Kim Young-Jin for his remarks and presentation on year 2021 earnings.

Kim Young-Jin, CFO

Good afternoon. This is Kim Young-Jin, KT's CFO. Let me run through KT's key performance highlights for year 2021. In 2021, KT set out to transform itself into a Digico, driven by successful business structure enhancements and portfolio expansion. Consolidated revenue, hence, reported KRW 24.898 trillion; service revenue, KRW 21.7275 trillion; and operating profit came in at KRW 1.6718 trillion. On balanced growth from Digico and Telco and revamping of the group's portfolio around growth businesses, revenue was up 4.1% on year and operating profit posted 41.2% year-over-year growth. Separate basis revenue was up 2.8% on year, reporting KRW 18.3874 trillion, with operating profit up 21.6% year-over-year, recording KRW 1.0682 trillion. In particular, we saw significant growth in service revenue with separate basis service revenue up KRW 417.8 billion, driving operating profit to break through the KRW 1 trillion mark. We also achieved the 2022 OP target ahead of plan in 2021. This is an outcome of steady top-line growth as a telco as well as digital transformation that drove our business expansion in B2B and platform businesses. In the B2B business, a total of KRW 3 trillion worth of orders were booked which is 30% higher year-over-year, while enterprise voice, call and cloud and IDC business recorded growth of 8.6% and 16.6% on year, respectively. Wireless and Internet, which are our cash cow businesses, saw both qualitative and volume growth underpinned by sales focusing on premium subscribers. By targeting the 5G premium handset market and higher sales of the 1 GiGA product, 5G penetration was up 20 percentage points year-over-year to 45%, while GiGA Internet subscribers accounted for 66% of the total base. In 2021, we placed momentum behind revamping the group with a strong focus on growth. KT StudioGenie became the focal point of the group's media and content capabilities and through the acquisition of Millie's library, we were able to strengthen digital subscription capabilities. K Bank successfully raised capital through write offerings reporting KRW 22.4 billion net profit in 2021, achieving a turnaround in four years since the assumption of the company. K Bank's customer base went from 2.19 million as of end of 2020 to 7.17 million by end of 2021, an increase of five million. During the same period, deposit balance went from KRW 3.750 trillion to KRW 11.320 trillion, while loans increased from KRW 2.990 trillion to KRW 7.090 trillion. K Bank also took its first step towards an IPO and retained the lead arranger. We expect growth to gain traction with a planned public offering. Based on profit enhancement and corporate value growth and our confidence therein, we strengthened shareholder return as well. On the back of rising profit, KRW 19,010 was set as the 2021 dividend, which is up 41.5% year-over-year. Since the announcement of the Digico KT transformation back in 2020, we've been focusing on the platform-based Digico domain. B2C Digico business of IPTV and B2B Digico segment, which include AICC, cloud, and IDC have all benefited from the spread of digital-based lifestyle patterns since the outbreak of the pandemic. And as KT moved swiftly to cater to such demand in the B2B market, we saw higher top line growth versus 2019, which was before the Digico transition. In tandem with the transformation, Digico's domains share of the service revenue has grown from 38% in 2019 to 40% in 2021. Our target is to expand to 50% by 2025. Now let me run through business direction for 2022 and the guidance for the year. With steady revenue stream from the telco B2C domain, we plan to speed up growth as a Digico by expanding digital transformation and new platform businesses. There are two key directions. First, on top of existing customers and product offerings, we will create new value and revenue sources via timely offering of digital transformation services to new customer segments. We will also broaden the user base by targeting emerging core segments, i.e., single-member households, SMEs, and local governments. For the cash cow businesses of Wireless and Internet, we will employ the add-on strategy to drive up revenue through customer-centric product packaging and new service development, which will drive both growth and profitability. Second, through active cooperation and partnerships and M&A, we will accelerate Digico portfolio transformation and internalize core capabilities. In finance, DC Card will partner with fintech companies to expand on digital asset management services and use its own balance sheet to broaden into financial asset business and fully initiate my data services to diversify its business portfolio. K Bank will strike a balance between financial performance and its evolution as a platform. By expanding business horizons beyond banking to a digital financial platform, we intend to further enhance corporate value. Following the turnaround in 2021, we will drive structural earnings expansion in 2022. By strengthening the fee business underpinned by expanded partnerships, we will unlock the value of the platform. In the media business, by securing more than 10 titles in the production lineup as well as through planning and development of AAA content that can succeed on the global stage, KT StudioGenie plans to expand the coverage of the platform. Millie's library, which became part of the KT group last year, will work in collaboration with KT GenieMusic to expand the AI audio platform business. Through IPO this year, we will secure valuation as well as resources for future growth. Cloud and IDC business, which became a key platform for enabling digital transformation of different businesses is now targeting high growth this year. To that end, we will increase market share in the public and financial cloud markets and broaden alliances with outside specialized companies, diversifying the IDC business portfolio in order to bolster our leading market position. Last October with the launch of KT's Voice AI Secretary, we committed to mainstreaming our AICC business. We've seen a rise in demand for AICC from one-man operated stores, hair salons, mom-and-pop eateries, and other small merchants. We plan on service upgrades and building a bigger product lineup so as to be at the forefront of the domestic AICC market. We also set up a digital logistics company called Lolab last June, making a full-fledged entry into the digital logistics business. Lolab provides AI-based logistics, consulting, and IT solutions to 3PL companies. In the first year of its business, booked meaningful performance of KRW 43.5 billion of order volume. Through commercialization of an AI logistics platform and sourcing outside investments, we plan to quickly strengthen competitiveness this year. Based on the business direction so far mentioned, I would like to present this year's targets with an emphasis on challenge and growth. Our guidance for 2022 is consolidated revenue of more than KRW 26 trillion and standalone revenue of above KRW 19 trillion. We are also planning to break through KRW 16 trillion of separate basis service revenue. From this earnings release onwards, we have changed revenue classification to effectively communicate KT's strategy and performance as a Digico. We have categorized businesses by customer and business type into four segments, which are: Telco B2C, Digico B2C, Telco B2B, and Digico B2B. Based on this new classification, we will be communicating Digico's accelerating growth. Let me now turn to FY2021 full year results. Total revenue was up 4.1% on year to KRW 24,898 billion; operating profit was up 41.2% on year, reporting KRW 1,671.8 billion. Net profit was up 107.5% on year to KRW 1,459.4 billion. EBITDA was up 9.6% on year to KRW 5,279.5 billion. Driven by rise in labor costs, business expenses, and the cost of services provided, operating expense was up 2.2% on year to KRW 23,226.2 billion. Debt-to-equity ratio as of end of 2021 was 124.3%, up 7.8 percentage points year-over-year. Net debt ratio was up 2.6 percentage points year-over-year to 32.7%. Total CapEx spent for 2021 was KRW 2,855.1 billion, similar to levels last year. Telco B2C business, on the back of steady growth of wireless revenue and broadband Internet revenue, was up 1.7% on year to KRW 9,339.5 billion. Driven by 5G subscriber growth, wireless revenue was up 2.4% on-year to KRW 6,092.4 billion. Total wireless subscribers as of end of 2021 was 22.8 million, while 5G subscribers reported 6.37 million, accounting for 45% of handset subscribers. By strengthening the benefits to customers and activating sales to single member households, which drove subscriber growth, broadband revenue was up 2.2% on year to KRW 2,317.7 billion. Fixed-line telephony was down 3.9% on-year to KRW 929.4 billion. On higher sales of flat rate plans, revenue erosion eased. On the Digico B2C business, on the back of growth from media business and mobile platform business, Digico B2C revenue was up 5.8% year-over-year to KRW 2,144.4 billion, with sustained growth from the IPTV subscriber base and platform-based revenue. Media business was up 6.1% year-over-year to KRW 1,938.7 billion. Impacted by kids content and the release of OLED TV tab, IPTV subscribers reported a net addition of 380,000 year-over-year, reaching 9.14 million subscribers. In the Telco B2B business, with enterprise data and voice call reporting even growth, the Telco B2B business was up 5.1% year-over-year to KRW 1,981.2 billion, on growing demand from businesses, digital transformation, and growing data traffic. Enterprise Internet and data revenue was up 3.5% year-over-year. Driven by growth in SIM-only phones and MVNO revenue and higher revenue from the enterprise intelligence network, including enterprise VoIP and cold check-ins, enterprise voice call reported steep growth of 8.6% year-over-year. In the Digico B2B business, on the back of high growth of cloud and IDC, Digico B2B business was up 2.5% on year to KRW 2,038.9 billion. Despite double-digit enterprise messaging revenue due to declines in system infrastructure business, including the global business, enterprise DX was down marginally quarter-on-quarter. With the securing of public and financial cloud projects and higher IDC demand driving upselling to current customers, as well as IDC DBO revenue growth, cloud and IDC business was up 16.6% year-over-year, reporting steep growth. Despite AICC and Smart Mobility growing double digits on decline in blockchain, video security, and other system infrastructure businesses, AI new business was down 1% on year. An increase in domestic card acquiring volume, BC Card revenue was up 5.7% on year to KRW 3.5796 trillion. Skylife revenue was up 9.2%-on-year to KRW 763.2 billion on the back of growth in MVNO business and Internet resale as well as HCN acquisition. On top of higher revenues from digital ads and T-commerce subsidiaries and revenue streams from original dramas produced and distributed by KT StudioGenie as well as consolidation effect from KT Seezn and Millie’s Library, content subsidiary revenue was up 20.4% on-year to KRW 929.3 billion. Estate revenue posted a sizable rise, reporting KRW 576.7 billion on the back of disposition gains from K-REALTY number one, which was set up in 2011 as part of KT’s asset securitization plan. I have just provided KT’s year 2021 earnings update. In 2021, we took a customer-centric approach to incumbent business in order to drive up satisfaction and laid the basis to bring DIGICO transformation. Thanks to such efforts, we drew meaningful results from platform and the B2B domain. In the year 2022, underpinned by stable earnings from our incumbent businesses, we will expand digital transformation and new platform businesses and endeavor to further enhance the company value. I look forward to your support and interest. Thank you.

Seung-Hoon Chi, IRO

For more details, please refer to the earnings presentation, which we circulated previously. We will now be taking your questions. And please make sure that you ask no more than two questions per person.

Operator, Operator

The first question will be presented by Kim Hoi Jae from Daishin Securities. Please go ahead with your questions.

Kim Hoi Jae, Analyst

Good afternoon. I’m Kim Hoi Jae from Daishin Securities. My first question relates to your dividend decision. If the DPS is around KRW 1,910, I think that is 45% of your standalone net profit. Were there any one-off impacts? If you could actually provide some details regarding one-off items, that will be helpful. Second question. We’ve seen that your wireless ARPU had risen by 2.3%, which is quite favorable. Can you provide some more color as to what the guidance for wireless ARPU will be for year 2022?

Kim Young-Jin, CFO

Well, thank you, Mr. Kim, for your question. Your question related to our dividend payout of 45% of net profit on a separate basis. And you’ve asked whether there were any one-off items that were used to adjust this figure. To begin, as you know, we previously communicated that we would be paying out 50% of our adjusted net profit. For financial year 2021, there were some adjustment items. They relate to non-cash items, non-cash related adjustments. So these are one-off items. For instance, in terms of the overseas fund, there are valuation gains on a fair value basis, which is grossed up under financial assets and there were adjustments related to that. Also, as part of our subsidiaries, there were invested equities where there were impairments. Those impairments were also reflected and added. Additionally, in terms of the operating as well as non-operating items where there were non-cash ins or cash outs, those items have also been subject to adjustments. To provide you with a bit more detail. Regarding the fair value assessment of the financial assets, this is an accounting treatment that is conducted at the end of the year. This relates to the funds that we’ve invested in, whose NAV pricing would fluctuate. But none of this has been actually realized; it’s just an accounting treatment and is booked in our financial statement as a one-off impact. It had an impact on a pretax basis of bringing down that level by KRW 110 billion. Your second question related to our guidance or projection relating to our wireless ARPU and wireless service revenue for 2022. If you look at 2021, at the beginning of the year, we communicated that our target for 5G subscribers will be 45% of the handset base, and we were able to achieve that target. At the end of 2022, we expect that percentage to rise to 68%. Underpinned by that 5G subscriber base, we believe that our wireless service revenue as well as wireless ARPU will be able to report a growth rate that is similar to that of the previous year. We will take the next question.

Operator, Operator

The following question will be presented by Kim Joonsop from KB Securities. Please go ahead with your questions.

Kim Joonsop, Analyst

Yes, I am Kim Joonsop from KB Securities. I would like to post two questions. First question has to do with your Digico B2B business. Can you explain who your key customers are for your enterprise DX business and AI new business? And how do you plan to win the market in each of these business segments? Second question. For this year, what do you think are some of the opportunities you can explore in cloud and IDC? And what do you think is the growth potential of this business?

Kim Young-Jin, CFO

Thank you for your question. You asked who our key customers are for enterprise DX and AI and new business. As you know, KT’s B2B platform is underpinned by Korea’s largest fixed and wireless infrastructure that has the broadest coverage in the nation. Unlike our peers, we basically have the channel based off of the key metropolitan headquarters, and we have various experience in running different projects in both the enterprise and in public. To elaborate more on key competitive edges and the strategies that we have. Regarding this very fast spread of digitalization that we’re witnessing in Korea, KT has the enterprise product that could provide customized services depending on the customer segment and different industry sectors, underpinned by our core technologies in DX, which include AI, Big Data, and cloud. In tandem with the spread of the trend for digital transformation on top of the existing network and telecommunication services, we are seeing higher demand for digital transformation services that require AI, Big Data, cloud, and other types of solutions converging on top of those telecom services. So, as we were able to expand the voice call DX services for the enterprises, including the enterprise messaging and call check-in services, we saw revenue growth of the enterprise voice call business actually rising 8.6% year-over-year in year 2021. This was a testament to the growth potential of our DX services. We will continue to explore new revenue streams aggressively by leveraging our existing and incumbent telecom services and layering on the DX component continuously. We will endeavor to do that in year 2022 in the areas of messaging DX and intelligent network DX. Also, two of our key customers will be SMEs and local governments, which are new potential customer segments that we are very aggressively seeking to secure. We will provide customized DX services to this broader customer base to accelerate growth. Your second question related to growth potential and some of the advantages of the cloud and IDC business. The cloud and IDC business has continuously been posting double-digit growth on a per annum average basis. We think that with a strong customer focus in digital transformation, there will be more growth to follow. Under the current market backdrop, we are seeing a very fast spread of digital transformation within Korea. We observe that companies have a lot of interest and need for IDC support; hence, we see the growth potential. The strength that KT has in its cloud and IDC is not just the network but our capability in providing the solution in an integrated manner. Recently, under the Korean government's digital new deal and the Green New Deal initiative, KT can utilize its capabilities effectively. Supported by our enterprise communications platform capabilities, we will continuously expand into this business domain. To sum up, KT Cloud is the only cloud provider that can truly integrate network, IDC, and cloud altogether. KT has a competitive edge in public and financial cloud. By 2025, all public institutions or public agencies in Korea are to migrate to the cloud; therefore, we're going to focus on that very segment for our business. Another strength that KT has in cloud is that we recently introduced hyperscale AI computing capabilities, essentially immense amounts of GPU resources that anyone can use at any time. This operates on a pay-as-you-use or pay-as-you-go scheme, which distinguishes us from any of our peers.

Operator, Operator

The following question will be presented by Ahn Jae-min from NH Investment & Securities. Please go ahead with your questions.

Ahn Jae-min, Analyst

Hello, this is Ahn Jae-min from NH Investment & Securities. I'd like to first thank you for good performance. In 2021, you were able to continuously grow your operating profit. You've given some guidance on 2022 numbers. We expect top line to grow and also bottom line to follow that growth. Can you provide some more color, therefore, on what your 2022 operating profit outlook is? And for each of your business lines, where do you think that you will be able to gain visibility on the profitability side most out of all the businesses that you operate? Second question relates to your subsidiaries. I understand that you're planning to go IPO with some of the subsidiaries. When the proceeds of the listing actually come in, what are your plans? Where would you use those proceeds? Would you also consider returning back to shareholders?

Kim Young-Jin, CFO

Well, thank you, Mr. Ahn, for your question. Your first question related to our operating profit outlook for year 2022 and our outlook for each of the business lines. As I mentioned at the beginning, on a consolidated basis, our guidance for revenue is KRW 26 trillion. And on a separate basis, service revenue objective is to actually hit over KRW 16 trillion level. Please understand that we won't be able to specify any operating profit guidance number as of now. However, in regards to the growth in top line revenue, there would be expenses and investments that will be needed for the new growth businesses, we would be very mindful of cost efficiency to ensure that such spending is well stabilized. Through those efforts, we will make sure we can defend and secure bottom line as much as possible. On a consolidated basis, operating profit side in 2021, there were some one-off factors, but even setting them aside, we will ensure an improvement in operating profit on a year-over-year basis. You also asked about the subsidiary IPOs and once they are listed and we have some cash inflow, where we will be using those proceeds. The priority area will be to use those proceeds in business areas where there is great growth potential and where it is required to beef up our competitiveness. From the KT mother company level, we will continue to revamp our portfolio of businesses with a strong focus on growth, and it will also be for that purpose.

Seung-Hoon Chi, IRO

Next question, please.

Operator, Operator

The following question will be presented by Neale Anderson from HSBC. Please go ahead with your question.

Neale Anderson, Analyst

Thank you. Good afternoon. I had two questions, please. The first relates to the wireless market, and particularly competition at the low-cost or value-conscious end of the market. I wonder how KT might compete against 5G plans from MVNOs. The second question also relates to 5G. When will we see 5G services priced based on the new capabilities of 5G, such as lower latency or network slicing either for businesses or consumers? Thank you.

Kim Young-Jin, CFO

Thank you for your question. I will respond to the first question first. On the low-cost pricing or low-tier pricing, especially from the MVNOs, how we plan to compete against that. The current trend we are seeing in the market is that we see growth in consumer needs who want reasonable and value-based pricing tariffs in the MVNO market. We see telcos acquiring their subscribers through MVNO companies, which has triggered solid growth of the MVNO segment. We think this trend will continue for the time being. KT's growth strategy in this area is that we will not just look at MNO subscribers or MVNO subscribers alone. We will continue to drive revenue growth through our MVNO business as well. Our wireless strategy is underpinned by these two pillars, MVNO and MNO, which we think will help support maximizing KT's value. For the MVNO subscribers, we will further segment the customers and refine targeting to the right customer segment, employing both the MNO and the MVNO engine behind maintaining our wireless subscriber base. In terms of our pricing policy, we will not simply introduce a low-end tariff plan to respond to the low-end priced market. Instead, on the MNO side, we will expand our subscriber base, supported by customer services, customer benefits, and value-added services, adopting a membership type of a scheme. Through the MVNO side, we will cater to the demand and needs of customer segments that are more sensitive to pricing. Your second question, Neale, was on how we're going to reflect low latency and network slicing in the 5G rate plan. At KT, as part of our 5G new value creation, starting July 15th, we've commercialized services for SA, standalone 5G. As we are only at the infant stage, customers can't really perceive the differences today in terms of the services that are being offered. But from a mid- to long-term perspective, as the Internet of Things evolves further, we believe we will be able to provide more differentiated value through instances such as autonomous driving, smart factory, AR/VR, and other 5G convergence services. SA, standalone, is essential for customers to benefit from 5G network slicing, as SA entails low power, low latency, and very fast transmission speed. The government has also released a network neutrality exception guideline, which we believe will form the basis of our 5G B2B policies going forward. We think we will be able to once again distinguish and emphasize the value that the 5G network can provide. We will plan for differentiated pricing schemes that align with the type of products we offer.

Seung-Hoon Chi, IRO

We'll move on to the next question.

Operator, Operator

The following question will be presented by Park Seyon from Morgan Stanley. Please go ahead with your question.

Park Seyon, Analyst

I would like to ask two questions. First question relates to CapEx, how shall we actually – what should we expect from CapEx spend going forward? If you look at 5G, the rollout for 3.5 gigahertz, we're now in the latter half of that entire phase. Looking at the CapEx against the total service revenue, all of the three telcos in Korea seem to have quite a high CapEx burden of about 20%. Going forward, can we expect that level to go down to around 15%, which may be considered the global standard? Second question. The investors are very happy to see that your dividend payout has increased for 2021. However, as we go into 2022, for any reason, if the profit does decline, can we assume that the dividend will stay the same? Or do we have to assume that there will be some cut in the dividend payout? As long as the decline in profit is manageable, is the company willing to keep to the current dividend level?

Kim Young-Jin, CFO

Thank you for your question. Your first question relates to our CapEx outlook and whether we will be able to meet the global standard. In a telecom business, when there is a new generation of wireless or mobile service released, there is a significant increase in CapEx, after which there will be a phased reduction. Back in 2012, when there was nationwide investment for the LTE network, CapEx shot up to KRW 3.7 trillion, after which there was a gradual decline. I believe that for 5G, we will see a similar pattern. KT will need to continue to make network investments for B2C services to ensure we meet customer satisfaction with our network quality. For the Digico B2B side, we will continuously invest for the growth of those businesses. We will manage our CapEx with a focus on profitability and margin. Your second question related to our dividend payout outlook for 2022. We will maintain the 50% payout of our standalone basis adjusted net profit. We shared our top line revenue guidance, but not the operating profit guidance. However, with the growth of our Digico business and our efficient control of expenses and spending, we believe we will achieve year-over-year growth in our profit and profitability. Therefore, we will do our utmost to further expand on shareholder returns or dividend payouts in year 2022.

Operator, Operator

Currently, there are no participants with questions.

Kim Young-Jin, CFO

If there are no further questions, we would now like to close the Q&A. Once again, thank you very much for joining us this afternoon. This brings us to the end of KT's earnings presentation for FY 2021. Thank you.