Earnings Call Transcript - KT Q1 2023

Seung-Hoon Chi, IRO

Good afternoon. I am Seung-Hoon Chi, IRO of KT. We will now begin the earnings presentation of KT for 2023 Q1. This earnings call is being webcast live on the company website. Slides are also available for you to follow while listening to the call. Please note that today's presentation includes estimates of financial and operating performance based on K-IFRS that have not yet been reviewed by an outside auditor. As such, other than confirmed historical data, we cannot guarantee the accuracy and completeness of the financial and business-related information, and these figures may change in the future. Now Mr. Young-Jin Kim, CFO of KT will give some welcoming remarks and present the earnings of Q1 2023.

Young-Jin Kim, CFO

Good afternoon. I am Young-Jin Kim, CFO of KT. I will go over the highlights of KT in 2023 Q1. KT has continued robust growth in the first quarter of 2023 by making efforts to provide stable customer-oriented services. Consolidated revenue in Q1 grew by 2.6% Y-o-Y to reach KRW6,443.7 billion. Standalone revenue increased by 0.2% Y-o-Y to KRW4,619 billion despite the spin-off of KT Cloud. Consolidated operating income stood at KRW486.1 billion and standalone operating income recorded KRW388.1 billion. These numbers were not far from market expectations despite the base effect coming from a one-off profit generated by the sale of real estate, namely the Mapo Solution Center last year and cost increases due to inflation. B2B business is continuing growth backed by corporate demand for digital transformation or DX. DX platform and smart space businesses are starting to generate revenue in earnest, while the expansion of the customer base of corporate Internet and data and the strong growth of the MVNO market led to a well-balanced growth in all areas of Digico and Telco. In the AI business, we are developing MIDEUM, our hyperscale AI, while further advancing the existing AICC and smart mobility services. In particular, we are pursuing mobility DX services in four segments of smart mobility, which are connectivity, infotainment, CITS, and digital logistics. As for AICC, the business is starting to take off, evidenced by KT winning Shinhan Financial Group's Integrated AICC project. In B2C, premium subscribers drove robust growth. Roaming service revenue is on the rise as global travel picks up post COVID-19. Wireless revenue also grew by 1.9% Y-o-Y as 5G penetration rose to 65%. Both broadband and IPTV observed Y-o-Y revenue growth by 2.8% each supported by a rise in subscribers. Group subsidiaries are growing as well mainly driven by the core portfolio-centric growth strategy. BC Card's revenue rose by 5.6% Y-o-Y, thanks to an increase in domestic credit card transaction value and full-scale expansion of the finance business. Meanwhile, as of Q1, all operating indicators of KBank are improving. Deposits stood at KRW16.6 trillion. Loans stood at KRW11.9 trillion backed by 8.71 million customers. In Media and Content, original dramas such as Pale Moon and Bo Ra! Deborah and original variety shows such as World Dice Tour and HMLYCP were produced and aired, continuing to create buzz in both drama and non-drama segments. Also, KT Cloud attracted... Meanwhile, KT Cloud will maintain leadership in corporate DX based on AI-driven digital innovation and stable service provision as corporate center, the era of hyperscale AI. We are building the full stack for the AI ecosystem from AI infrastructure to middleware solutions, computational training, and applications based on 12 years of experience. Also, KT Cloud attracted a KRW600 billion investment from IMM Credit and Solutions based on a valuation of KRW4 trillion. The investment will be used to strengthen KT Cloud's business capacity and growth foundation. In real estate, hotel demand is recovering after the pandemic, which should continue to drive revenue for hotel leases. In addition, we have started in earnest efforts to improve corporate governance with the launch of the task force to establish a new governance structure. The new governance establishment task force comprised of corporate governance experts recommended by major domestic and foreign shareholders was launched on April 17. TF is working to develop improvement measures to build a highly credible corporate governance structure. The TF has already developed improvement measures for the most urgent task, which is the appointment process of outside directors. Currently, we are receiving recommendations for potential candidates for outside directors from shareholders. We are planning to create a pool of potential candidates based on recommendations from shareholders and also external organizations. We expect to appoint outside directors with expertise and independence in June. As soon as a new Board of Directors is formed, the Board will start the process to appoint a new CEO. We expect the candidates for the new CEO will be finalized in July. We will make utmost effort to stabilize the management of the company as early as possible. I will now move on to the earnings of 2023 Q1. Operating revenue rose by 2.6% Y-o-Y to KRW6,443.7 billion. Operating income decreased by 22.4% Y-o-Y to KRW486.1 billion due to the base effect of a one-off profit last year coming from the sale of real estate, namely the Mapo Solution Center and overall economic slowdown. Net income decreased by 32.0% Y-o-Y to KRW309.6 billion. EBITDA decreased by 6.8% Y-o-Y to KRW1,415.5 billion. Next, I will go over the operating expense on the next page. Operating expense increased by 5.4% Y-o-Y to KRW5,957.6 billion due to inflation and investments in the expansion of Digico and B2B businesses. I will move on to the financial position of the company on the next page. The debt ratio as of March 2023 stood at 121.5%, which is a one percentage point Q-o-Q decrease. The net debt ratio increased by 5.6 percentage points Q-o-Q to 46.6%. Next, I will go over CapEx. KT Group's first quarter cumulative CapEx was a total of KRW466.2 billion. On a standalone basis, CapEx was KRW313.5 billion. The CapEx of subsidiaries, including core growth businesses such as finance, media content, cloud IDC, and real estate was KRW152.7 billion. CapEx is being executed as annually planned. Now I will go over the earnings on each business. Telco B2C business revenue grew by 1.2% Y-o-Y to KRW2,381.1 billion mainly supported by expansion of premium service subscribers. Wireless revenue grew by 1.1% Y-o-Y to KRW1,554.8 billion as international travel recovery led to higher roaming service revenue and an increase of 5G subscribers. 65% of total handset subscribers, which is 8.94 million are now 5G subscribers. Also, integrating the management of MVNO and MNO markets has led to continuous net growth of total mobile subscribers. High-speed broadband revenue grew by 2.8% Y-o-Y to reach KRW607.9 billion, driven by an increase of GiGA Internet subscribers. Fixed line telephony revenue decreased by 2.8% Y-o-Y to KRW218.4 billion. Next is Digico B2C. Digico B2C business revenue grew by 3.1% Y-o-Y to KRW566.1 billion, thanks to the continued increase of media and mobile platform users. IPTV revenue increased by 2.8% backed by a rise of high ARPU subscribers and platform-based revenue growth. Next is the telco B2B business. In telco B2B, corporate broadband and data and telephony all showed balanced growth to post revenue of KRW540.8 billion, which is a 4.1% Y-o-Y growth. It should be noted that corporate broadband and data revenue related to KT Cloud has been reclassified to Digico B2B starting from this year. Corporate broadband and data revenue grew by 3.4%, supported by continuous data traffic increase and stronger demand for premium services as companies undergo DX. Corporate Telephony grew by 5.4% Y-o-Y. Thanks to KT's preemptive response to the expansion of the MVNO market and the net addition of corporate internet phones. Next is Digico B2B. Digico B2B business is robust, growing in line with increasing corporate DX demand. The business is starting to book revenue for projects such as building the integrated AICC of Shinhan Financial Group and the M-BCN. Including KT Cloud, revenue grew by 2.4% to reach KRW552.6 billion. Real estate business grew by 10% Y-o-Y as the hotel industry recovers after the pandemic. Le-meridian and Moxy hotel in Myeong-dong successfully opened in November 2022. Next is the performance of major subsidiaries. Revenue of BC Card rose by 5.6% Y-o-Y to KRW953.2 billion, thanks to an increase of credit card transaction value and expansion of new businesses such as the issuance of its own credit cards. Revenue of Skylife rose by 5.8% Y-o-Y to KRW254.8 billion with the growth of MVNO sales and Internet resale. The revenue of the content subsidiary decreased by 7.6% Y-o-Y to KRW249.9 billion due to the ad and commerce market being impacted by the economic slowdown. This concludes the earnings presentation of KT in Q1 2023. Despite business challenges such as high inflation and a sluggish economy, KT quickly turned to its emergency management system to continue growth in telco and the core growth portfolio based on strong fundamentals. KT will work to establish an advanced corporate governance structure that is higher in standard than the global standard to normalize business management as quickly as possible and boost corporate value. We ask for the continued interest and support from shareholders and analysts. Thank you.

Seung-Hoon Chi, IRO

For more details, please refer to the earnings presentation, which has previously been circulated. We will now begin the Q&A session. In order to allow as many Q&A opportunities as possible, we would appreciate only two questions from each participant. Thank you.

Operator, Operator

Now the Q&A session will begin. The first question will be provided by Jaemin Ahn from NH Investment & Securities. Please go ahead with your question.

Jaemin Ahn, Analyst

Good afternoon. I am Ahn Jaemin from NH Securities, and thank you for the opportunity today. The Q1 earnings were slightly lower than market expectations. And so I'm wondering whether the full year operating income will be able to still grow Y-o-Y? And also regarding the performance in earnings, what are your plans for the dividends for this year? Thank you.

Young-Jin Kim, CFO

Thank you, Mr. Ahn for the question. As I briefly mentioned during the presentation, in Q1, the Telco business and the Digico B2B business continued robust growth. So in consolidated terms, the service revenue grew by around 2.7%. However, in terms of profitability, there were some base effect issues coming from Q1 of last year. We already mentioned the sale of the Mapo Solution Center last year. That was around KRW74.6 billion. And there was some accounting treatment for the receivables of handset sales. That's another KRW50 billion. So due to these one-offs, the operating income slightly decreased. And you also asked for the annual outlook. So from Q2 onwards, both KT in terms of consolidated and on standalone basis, we'll be working hard to balance the growth and profitability. And we will be making utmost effort to improve the profitability situation so that we can grow in 2023 for the full year compared to the previous year. So on a standalone basis, if I can go into more detail, we will be focusing in largely three areas. For the first one is the Mobile Internet and TV business. This has been a solid cash cow for the company and we plan to continue quality growth in this area. Not only we will be focusing on expanding the premium customer base, we will be segmenting our customers to have better-targeted services. We will be developing value-adding services such as the coloring, the dual numbers, catch call, and OTT, so that we have more value-added services that we can bundle together to satisfy our customers. And we are hoping that this will continue to generate stable revenue growth for the company. And then second is the Digico B2B business. We have already won major projects like the M-BCN, and these projects are starting to book revenue. The revenue size from these projects, I think, will grow as time passes. Also in the second half of this year, there are some major public and private projects that will be coming to the market. Our DX business will be making utmost effort to win these large-scale projects so that it can become a growth driver of the future. KT has AI-based DX services. We are dominant in the IDC and cloud infrastructure area, and we also have very strong network-based infrastructure as well. So all of these factors combined, I believe that KT has been very competitive, as evidenced by its track record in major projects. And we will be making continuous effort in this area to ensure that we can become an even more dominant player. Third, we will be also making continuous effort to structurally reduce costs. There are some external factors that we cannot control, such as economic slowdown and inflation. So we will be strengthening automation and many projects and efforts to boost the efficiency of the company. For example, we will be leveraging our DX capacity to have more intelligent network control services. We will also be using our AI capabilities as well. We can also use the RPA to help automate repetitive tasks that can boost efficiency. In the AICC area as well, we can leverage our AI capacities and different AI-related services to enhance automation and efficiency. So I would briefly like to go over the group in consolidated terms. So in Q1, there were slight decreases in profitability because there were some subsidiaries who were impacted by economic slowdown, and also there were some businesses that required investment for future growth. From Q2 onwards, we will be making utmost effort to balance the growth of our core portfolio while also generating stronger profitability. For the content subsidiary, we will continue to produce and distribute original content. But if you also look at the group's media value chain, we will be working to maintain leadership in that area and also to generate more synergy. As for these subsidiaries that are impacted by the economy, such as advertising and commerce, those companies will work to strengthen to attract new partners, new customers, use AI to make the sales process more efficient, and strengthen its partnerships and alliances so that it can balance both growth and profitability. As for the real estate, the post-pandemic travel has led to the recovery of the hotel industry, which should help our real estate business. And then later in the year, there will be development in our Gangbuk premise. This should also lead to higher revenue and profit of the real estate business. Lastly, subsidiaries like BC Card and Skylife may require some investments to secure future growth drivers and to diversify its portfolio in the near future. However, these companies will work to balance profitability and growth, so that it can achieve the economies of scale in the near future. To summarize, there are some parts of the business that can be impacted by the overall macroeconomic conditions. But both in terms of KT standalone and consolidated, we will be working to balance growth and profitability, so that for the full year, the profitability of the company can be improved compared to the previous year. As for the dividends, if the earnings improve, there will be a larger base to use for dividend payouts. There is the new Board of Directors that is being formed. And once there is also a new CEO of the company appointed, I think there will be internal discussions to maintain the track record of our shareholder return policy.

Seung-Hoon Chi, IRO

Next question, please.

Operator, Operator

The following question will be presented by Soojin Kim from Mirae Asset Securities. Please go ahead with your question.

Soojin Kim, Analyst

Good afternoon. My name is Soojin Kim from Mirae Asset Securities. Today, I read in the news that KT Cloud attracted KRW600 billion investment from IMM based on a KRW4 trillion valuation. So I'm wondering how the company plans to spend the KRW600 billion investment. And second, I would also like to know more about the growth strategy of KT Cloud.

Young-Jin Kim, CFO

Thank you for your question, Ms. Kim. As mentioned in the press release, KT Cloud secured KRW600 billion in investment from IMM Credit and Solution in its first year. Before KT Cloud spun off, its asset book value was approximately KRW800 billion, but due to undervaluation, its price-to-book ratio was just around 0.5, meaning it was valued at about KRW400 billion. Now, in terms of pre-money valuation, we have seen an increase to roughly KRW4 trillion. Regarding the utilization of this investment, it will be focused on enhancing our competitive position in the market and securing future growth opportunities. As the leading player in the IDC industry, we aim to diversify our portfolio, strengthen global operations, and enhance our technological capabilities to improve operational efficiency. We also plan to rapidly increase IDC capacity, which includes constructing new data centers and exploring master lease agreements and acquisitions of existing centers. Our goal is to reach a capacity of around 100 megawatts within five years. Additionally, we intend to expand into global markets, particularly in Southeast Asia, and enhance our AI remote technology for better operational efficiency in IDCs. In the cloud sector, we are striving to establish ourselves as a dominant force in the AI cloud market by developing a comprehensive suite of AI capabilities, including chip design and creating an AI service ecosystem. We are currently strong in the public sector and, leveraging this advantage, will move into finance and corporate sectors. I believe this investment will reinforce the growth engines of KT Cloud. We aim for revenues of KRW2 trillion by 2026 while maintaining our leadership in the DX market.

Seung-Hoon Chi, IRO

Next question, please.

Operator, Operator

The following question will be presented by Sean Lee from Citigroup. Please go ahead with your question.

Sean Lee, Analyst

Good afternoon. My name is Sean Lee from Citi. And thank you for the opportunity today. I have largely two questions. First question is related to the corporate governance improvement. So during the presentation today, you already updated us on how this is unfolding, but I would like to know more specifically what parts of the corporate governance of the past is being changed, how it is being changed. So if you can give us the comparison of the past and the current or more improved version, that will be very helpful. And I would also like to know the timeline as to how this is going to unfold in the future. Second is regarding the absence of the CEO. So apparently, the first half of this year, the CEO vacancy will continue. So how will this absence impact the fundamentals of the company? Usually, in a company, the CEO is the final decision-maker. And currently, this final decision-maker is absent at the moment. And I would think that this would naturally cause some disruptions in the business management of the company. So what efforts are being made to minimize any business disruptions? And how will this unfold in the future?

Young-Jin Kim, CFO

Thank you for your question, Mr. Lee. KT is committed to creating a corporate governance structure that exceeds global standards. On April 17th, we initiated a task force focused on governance establishment. We gathered recommendations from shareholders with at least 1% equity, and seven shareholders provided input on nine potential candidates. The KT Board of Directors evaluated these candidates based on their expertise and diversity, ultimately selecting five external directors. You also asked about the evolution of our corporate governance structure. The most pressing task has been to refine the appointment process for outside directors. Previously, the committee responsible for recommending outside director candidates included one inside and all outside directors, but now it consists solely of outside directors. Previously, we relied on a pool of candidates and a search firm to identify suitable candidates, but now we also consider recommendations directly from shareholders who have held at least one share for over six months. Although the committee was primarily responsible for candidate evaluations in the past, an advisory group is now involved early in the process while the committee makes the final decision. Previously, we focused mainly on qualitative criteria, but we have now introduced a two-round approach where quantitative aspects are assessed first, followed by qualitative review. While previous processes were largely confidential, we now provide a channel for shareholder recommendations, allowing us to disclose this information. I compared past and present practices, and as we enhance the Board of Directors' role while aiming to increase shareholder value, we will continue to evolve our measures. Further changes will be communicated to the market. Regarding the timeline, we plan to hold an extraordinary shareholders' meeting at the end of June to amend the articles of incorporation. During this meeting, new Board members will be appointed, followed by the formation of a new Board of Directors, which will then initiate the search process for a new CEO. We aim to identify candidates for the CEO position by the end of July. In response to your second question about the absence of a CEO and its impact on business operations, KT is actively working to manage this challenge and restore normal business management as quickly as possible. We have established an Emergency Management Committee, including the acting CEO and senior management, to collectively make major business decisions. This committee discusses various topics such as customer service, marketing, and investment, ensuring that operational decisions continue smoothly. Apart from the governance structure, we do not currently see any impact on the company's fundamentals. Business strategies and decisions are being executed as planned, and the original business plan is in motion. For example, despite market questions regarding KT Cloud's investment efforts, its successful funding reflects that KT's overall business strategy remains robust and operations continue as normal.

Seung-Hoon Chi, IRO

If there are no further questions, we will conclude the Q&A session. Thank you for your questions and interest in KT. Thank you once again for attending today's earnings call despite your busy schedule. We will now conclude the earnings call of KT for the first quarter of 2023. Thank you.