Earnings Call Transcript - KT Q1 2022

Seung Hoon Chi, IRO

Good afternoon. I am Seung-Hoon Chi, IRO of KT. I would like to begin KT's 2022 Q1 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 to the call. Before we begin, please note that today's presentation includes estimates of financial and operating results, which have been prepared in accordance with K-IFRS standards that have not yet been reviewed by an outside director or an outside auditor. Therefore, other than confirmed historical data, we cannot guarantee the accuracy and completeness of financial and business information. Please be reminded that these figures are subject to change. With that, I would now like to invite our CFO, Mr. Young-Jin Kim, for his remarks and presentation on the business performance of KT in the first quarter of 2022.

Young Jin Kim, CFO

Good afternoon. I am Young-Jin Kim, CFO of KT. I will first go over the key performance highlights for the first quarter of 2022. In the first quarter of 2022, operating revenue grew 4.1% year-over-year and stood at KRW 6,277.7 billion. Thanks to the full-fledged business expansion of the DIGICO B2B business as a digital platform company, the continued robust growth of the Telco business, and a stronger growth portfolio driven by partnerships and cooperation. The 6.4% year-over-year revenue growth of service revenue was especially notable. Operating income jumped 41.1% year-over-year to reach KRW 626.6 billion, supported by revenue growth driven by DIGICO and efficient cost control. Even on a standalone basis, revenue increased by 0.7% year-over-year to report KRW 4,608.4 billion, and operating income grew by 17.5% year-over-year to reach KRW 429.9 billion. KT is successfully achieving the DIGICO success formula by leading Korea's digital transformation demand and actively cooperating and partnering with Korea's number one business operators to secure growth momentum. For B2B, KT offers customized services to different industries based on Korea's largest mobile and fixed infrastructure, strength in core digital transformation technologies such as AI, big data, and cloud, and our diverse corporate product portfolio, which led to a 10.5% year-over-year growth for DIGICO B2B and a 7.1% year-over-year growth for the Telco B2B business. In particular, in Q1, we were able to win orders not only in finance and the public sector, but also in the distribution industry, expanding our references. A total of KRW 0.9 trillion orders were booked, which is a 59% jump year-over-year. The revenue of the cloud and IDC business, the key to digital transformation, grew by 14.7% year-over-year to continue strong momentum, mainly propelled by the increased sales to large global content providers, KT's preemptive response to new demand, and increased demand from the public cloud sector. On April 1, we established a new entity, KT Cloud, to preemptively respond to the Cloud/IDC market and solidify market leadership. KT is making utmost effort to become Korea's top digital infrastructure company. The Telco business is continuing volume and quality growth, mainly driven by premium subscribers. 5G penetration has reached 50%, and wireless service revenue grew by 2.4% year-over-year. The broadband business revenue also increased by 2.6%, thanks to subscriber growth driven by GiGA Internet. KT has been cementing its leadership in the IPTV market as well, which drove the sustained robust growth of 9.3% year-over-year. Finance and media content, the main growth pillars of KT Group, have engaged in active cooperation and partnerships with industry top brands to lay the foundation to leap forward to become a top-tier player in Korea. Since January, KT and Shinhan Financial Group have been working together to develop cooperative endeavors for the future finance business based on the key strengths of the top players. The two companies are number one players in their respective sectors, namely finance and telco. In March, we inked a partnership agreement with CJ ENM, Korea's top content operator, on all-around cooperation in the content business. We are planning to mutually cooperate in various areas, including joint content production, content procurement, and programming. In particular, the valuation of KT StudioGenie was recognized to be above KRW 1 trillion in just one year since establishment to attract an investment of KRW 100 billion. In the case of K Bank, all sales indicators, including the number of customers, balance of deposits, and loans grew, leading to higher profit. As of Q1, the total number of customers increased by 330,000 since the end of last year to reach 7.5 million. As of Q1, the outstanding balance of deposits was KRW 11.5 trillion and KRW 7.8 trillion for loans. I will now run through the 2022 Q1 earnings results. Operating revenue increased by 4.1% year-over-year and stood at KRW 6,277.7 billion. Operating income jumped 41.1% year-over-year to reach KRW 626.6 billion. Net income grew by 39.5% year-over-year and reported KRW 455.4 billion. EBITDA increased by 12.9% year-over-year to report KRW 1,518.3 billion. I will go over the operating expenses on the next page. Operating expenses increased 1.2% year-over-year and recorded KRW 5,651.1 billion, mainly due to the increase of labor costs, general expenses, and costs of services provided. I will go over the financial position of the company on the next page. The debt ratio as of March 2022 was 124.8%, which is a 6.1 percentage point increase year-over-year. The net debt ratio rose by 5 percentage points and stood at 37.4%. I will now move on to CapEx. Total CapEx expenditures in 2022 Q1 were KRW 346 billion. I will now go over performance by each business line. The Telco B2C business revenue rose by 1.2% year-over-year to record KRW 2,353.5 billion, backed by stable wireless and broadband revenue growth. The growth of 5G subscribers supported wireless revenue, which increased by 1.9% year-over-year to reach KRW 1,537.6 billion. As of 2022 Q1, total wireless subscribers amounted to 23.06 million, with 5G subscribers amounting to 6.94 million, which is 50% of our handset subscribers. Broadband revenue increased by 2.6% year-over-year to reach KRW 591.1 billion, which was driven by GiGA Internet subscriber increase. Fixed telephony revenue declined by 6.8% year-over-year to KRW 224.8 billion due to the reduction of residential and household subscribers. Next is the DIGICO B2C business. The DIGICO B2C business revenue grew 4.7% year-over-year to record KRW 549.3 billion, thanks to the growth of media and mobile platform businesses. The 9.3% year-over-year growth of IPTV is especially notable. Services such as Prime Kids Land enhanced customer value leading to the expansion of subscriber base and platform-based revenue growth. Next is the Telco B2B business. The Telco B2B business revenue rose by 7.1% year-over-year to report KRW 519.7 billion as balanced growth was witnessed across corporate data and telephony. Corporate broadband and data revenue increased by 3.7%, thanks to corporate digital transformation leading to higher traffic and stronger demand. Corporate telephony rose by 14.3% year-over-year, continuing robust growth momentum supported by net growth of corporate Internet telephone and by KT preemptively responding to MVNO market trends. I will move on to the DIGICO B2B business. Cloud/IDC and AI/New Biz drove growth of DIGICO B2B, which grew by 10.5% year-over-year to report KRW 539.6 billion. Enterprise DX revenue decreased by 0.8% year-over-year due to the decline in revenue of the infrastructure business, which includes global business, despite growth of profits generated by corporate messaging. Revenue of the Cloud/IDC business showed strong growth, with a 14.7% increase year-over-year, backed by winning orders for cloud projects in the public and financial sectors, upselling to existing customers against higher demand for IDC and revenue growth of the IDC DBO business. The AICC business, which was launched in the second half of last year, has started to win orders and show earnest revenue growth. With the additional growth of smart mobility and blockchain businesses, the AI/New Business revenue jumped 40.7% year-over-year. I will now go over the earnings performance of main subsidiaries. Revenue of BC Card recorded KRW 902.2 billion, which is a 7.5% year-over-year increase, thanks to credit card transaction value recovering to pre-COVID levels. Revenue of Skylife jumped 44.2% year-over-year to reach KRW 240.8 billion, backed by acquisition of HCN on top of the expansion of MVNO and Internet resale. Revenue of content subsidiaries jumped 35.5% year-over-year to report KRW 270.4 billion, supported by the effect of consolidation of KT Seezn, HCN, and Millie's Library on top of revenue growth of major subsidiaries related to digital advertisement and T-commerce. KT Estate posted revenue of KRW 150.5 billion, a substantial year-over-year jump, driven by one-off real estate revenue on top of the launch of the Sofitel in Songpa and hotel revenue buoyed by post-pandemic travel demand. We went over the 2022 Q1 performance of KT. 2022 marks the third year since declaring transformation into DIGICO, and KT is continuously writing a rich DIGICO growth story. In addition to stronger profitability of the Telco business, we will be making utmost effort to deliver visible results in the DIGICO B2B business as it starts to show full-fledged growth. We would like to ask for continued interest and support from our investors and analysts. Thank you. For more details, please refer to the earnings presentation, which has been previously circulated. We will now be taking your questions. In order to allow as many Q&A opportunities as possible, we would appreciate only two questions from each participant. Thank you.

Operator, Operator

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

Hoi Jae Kim, Analyst

My name is Kim Hoi-Jae from Daishin Securities. I have two questions. First is related to dividends. I understand that the dividend policy is 50% of ordinary income and profit, and it excludes one-off items. So, the dividend is related to the earnings of the company and, like this year when the earnings are very strong, I believe that we can expect a higher dividend for the full year. But I also understand that this policy is only valid for this year. Will the dividend policy continue next year as well, and will the dividend continue to lead to the earnings of the company? Second is related to content. I understand that original titles have been launched by StudioGenie this year. What is the lineup of the content titles this year? What is the time slot for those titles? And also, if possible, can you also provide some guidance on the profitability of the content business?

Young Jin Kim, CFO

Thank you for the question. Your first question was regarding the dividend policy after next year. I will answer that question first. As you know, for the dividend payout for 2022, it will be 50% of net adjusted net income on a standalone basis, and this policy will be maintained until the end of 2022. I think it is a little bit early to communicate the shareholder return policy for 2023. Having said that, historically, KT’s dividend payout has been around 50%. The senior management and the Board of Directors of the company have been continuously working to enhance the corporate value and shareholder return policy and have been continuously supporting shareholder returns. As for the dividend policy after 2023, the Board of Directors will be discussing this topic, and we will be considering the expectations and opinions of shareholders and investors to come up with a policy that can meet the expectations of the market. Your second question was regarding StudioGenie, the lineup for this year and the guidance for the performance for this year. For the content lineup this year, we are planning to have more than 10 titles, and from next year onwards, we should have more than 20 titles released each year. We recently released the original title, 'There is No Goo Pil-Soo', which has been receiving positive reviews, and the viewership for the drama is increasing as well. After that, we have 'Strange Lawyer, Woo Young Woo' and also 'My Secret Partner', that are coming up in the lineup. These dramas are based on already verified content like Webtoons, so we will be continuously working to enhance the quality of the titles that we release. We already have a confirmed slate up to next year, but I don’t think that this is the appropriate event to go over each of those titles that are expected to be released. For the guidance for the performance, of course, in 2022, with strong lineups, we will be generating higher revenue. As for the operating income, we believe that it will turn to profit this year, and we will be continuously working to enhance the value of the company, and we are also considering an IPO for the company in the future as well. Next question, please.

Operator, Operator

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

Joonsop Kim, Analyst

My name is Kim Joonsop from KB Securities. First of all, congratulations on the very strong results in the first quarter. I have two questions, one on AI/New Biz and the other on IDC/Cloud. First on AI/New Biz, in the previous call, you mentioned the launch of AICC, and AICC has been receiving attention and making headlines in the press. So, I would like to understand better your growth strategy for this business, your outlook and guidance for the performance, and if there is anything that has changed regarding the AICC since the previous call, it would be appreciated if you can share that as well. The second question is related to IDC and Cloud. There are more competitors entering the market and therefore, the supply of this service will increase as well. What is your strategy to sustain growth in this area?

Young Jin Kim, CFO

Thank you for the questions. I will first answer the question regarding the AICC and AI/New Biz. First of all, if you look at the backdrop of the AICC business, KT has the experience of operating the largest customer centers in Korea. Based on this experience, we were able to automate the service by using that data to input our AI capabilities. So this is the backdrop for this AICC service. To go into a bit more detail, AICC combines the contact center - call center experience with KT’s AI capabilities. We are able to offer virtual consultations with customers and analyze the different cases to come up with solutions and provide these solutions in the form of packages that can best suit the needs of the customer. We can combine the telephony, messaging, and chatting services and integrate all of this into a single platform to enhance customer experience. Yes. We believe that the contact center market size is around KRW 9 trillion and our portion of this market, the AICC portion is continuously increasing. We have largely three strategic directions for AICC. First, as an infrastructure business, we have been focusing on finance and insurance in the past, but we are expanding our presence into the public sector and also the distribution industry. We are also planning to launch and operate the subscription business in this sector for small and medium-sized enterprises. We will be combining the AI and the Cloud of KT services to create what we call CCaaS, and this will help us diversify our business model and secure a larger number of SMEs as our clients. We have also launched the AI voice secretary and this is targeting the smaller mom-and-pop stores and small SMEs. We have been continuously improving our UI to enhance customer experience and secure a larger number of customers. The second question was on how we will be able to sustain the growth of IDC and Cloud. You mentioned about the increase of supply and competitors in this market. In the IDC sector, we believe that corporate demand for digital transformation is continuously increasing, so the demand and supply situation in this market, the demand is continuously larger than the supply. First of all, as to the key strength of KT in this market, we are the only cloud operator in Korea to be able to combine network, data center, and cloud. In 2016, after getting the G-cloud certification, we have been able to aggressively penetrate the public sector. KT operates 14 IDC centers in Korea, the largest in the country. We have been working together with top industry players to better serve our clients. For example, we are cooperating with the number one MSP operator, Megazone Cloud, and we are able to leverage their customer base and consulting capabilities combined with our stable operation of the cloud services. To respond to the skyrocketing demand for IDCs in Korea, we are planning to add 100 megawatts, so that we can solidify our leadership in this market as the number one player. To flexibly respond to the market changes in this sector, we are focusing on partnerships and cooperation along with our internal efforts to establish the infrastructure. Next question, please.

Operator, Operator

The next question will be presented by Jae-Min Ahn from NH Investment & Securities.

Jae-Min Ahn, Analyst

My name is Ahn Jae-Min from NH Investment & Securities. First of all, congratulations and thank you for the very outstanding results in the first quarter. I have a question regarding the marketing expense for the wireless business. We see the marketing expense has stabilized in Q1 and I largely believe that this trend will continue in Q2. But usually in the past, if the expense was lower in the first half - sorry, if the expense was lower in the first half, it tends to be higher in the second half. Also, the second half is when the major device makers launch their flagship handsets. So in relation to that, I would like to understand your outlook for marketing expense for the year for this wireless business.

Young Jin Kim, CFO

Thank you for your question. Your question was on the marketing expense for the full year. Yes. One of the reasons why the marketing expense showed a stabilizing trend in Q1 was because the total volume of new wireless openings has declined, and there has been some reduction in the amortization and depreciation related to that as well. So, as for the outlook for the marketing expense for the full year 2022, in light of the market competition and our efforts to efficiently manage costs, we will be working to maintain or slightly reduce the marketing expense compared to the previous year. Like you mentioned, there can be some flagship device releases in the second half, which could lead to higher expenses targeting new premium customers. But overall, we plan to make utmost effort to maintain or limit the growth of marketing expense to be similar or slightly less than last year in light of efforts to stabilize the market overall and also our efforts to execute costs in an efficient manner.

Operator, Operator

Currently, there are no participants with questions. We will wait for a second until there is another question.

Young Jin Kim, CFO

If there are no more 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 conclude the earnings call of KT for the first quarter of 2022.