Earnings Call Transcript - KT Q2 2023

Seung-Hoon Chi, IRO

Good afternoon. I am Chi Seung-Hoon, KT's IRO. Let's begin KT's second quarter 2023 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 statements and operating results under the K-IFRS standards that have not yet been reviewed by an outside auditor. As we cannot ensure accuracy and completeness of financial and business data, aside from the historical performance, please be reminded that these figures may be subject to change. With that, I will now invite our CFO, Kim Young Jin for his remarks and presentation on the second quarter earnings results.

Young-Jin Kim, CFO

Good afternoon. I am Kim Young Jin, KT's CFO. I will begin with key earnings highlights for the second quarter of 2023. Supported by KT's solid fundamentals in B2C and B2B and robust growth from the group's core portfolio, including finance, real estate, media content, and DX businesses, second quarter consolidated and stand-alone operating profit both recorded double-digit growth. Despite a rise in business expenses due to higher inflation, earnings outperformed market expectations on the back of cost efficiency gained from improvement in business implementation, such as strengthening distribution and improving outsourcing structure, which bolstered profitability. Second quarter stand-alone service revenue, hence, was KRW4,018.6 billion and operating profit recorded KRW407.5 billion. Each posted a growth of 2.1% and 34.2% year-over-year, respectively. For the first time in 13 years, quarterly service revenue reached the KRW4 trillion level. Consolidated revenue recorded KRW6,547.5 billion, while operating profit was KRW576.1 billion, up 3.7% and 25.5% year-over-year, respectively. KT's Board of Directors made the decision to appoint Kim Young-shub as the new CEO of the company on August 4. The incoming CEO will be officially appointed after the approval of shareholders during the second Extraordinary General Meeting of Shareholders to be held on August 30. By removing governance-related uncertainties and based on solid fundamentals, KT will continue to strive for corporate value enhancement in the second half of the year. I will now move on to earnings for the second quarter of '23. Operating revenue was KRW6,547.5 billion, up 3.7% on-year. Operating profit came in at KRW576.1 billion, up 25.5% year-over-year on the back of stronger profitability, which is an outcome of better cost efficiencies following an improvement in the structure for business implementation. Net profit was up 19% year-on-year, recording KRW432.5 billion, while EBITDA increased 8.5% on-year, reaching KRW1,505.3 billion. To the next page, let's take a look at operating expenses. On the back of business expansion-related spending and a rise in inflation, operating expenses were up 2.0% year-over-year to KRW5,971.4 billion. Debt-to-equity ratio as of June-end '23 reported 115.4%, down 6.1 percentage points quarter-on-quarter. Net debt-to-equity ratio was also down 2 percentage points quarter-over-quarter to 44.6%. Cumulative CapEx for KT Group as of Q2 was KRW1,383.8 billion. On a KT stand-alone basis, Q2 cumulative CapEx recorded KRW998.5 billion. Group subsidiary CapEx, which includes core growth businesses of finance, media and content, cloud, and IDC, real estate, recorded KRW385.3 billion, in line with our annual CapEx plan. The Telco B2C business posted a growth of 0.8% year-on-year, reporting KRW2,390.2 billion on the back of an expanded customer base, centering on premium services. Supported by growth in 5G subscribers and higher domestic roaming demand seen from inbound visitors, wireless revenue was up 0.8% year-on-year to KRW1,562 billion. We now have 9.280 million 5G subscribers, accounting for 68% of the total base of subscribers. Broadband Internet revenues saw a 2.7% year-on-year growth, reaching KRW612.4 billion, driven mostly by GiGA Internet subscriber growth. Fixed-line revenue was down 4.2% year-on-year to KRW215.8 billion. Next is on DIGICO B2C business. An evenly spread-out growth coming from media and mobile platforms, DIGICO B2C business was up 3.8% year-over-year, reporting KRW575.6 billion. The IPTV business reported 1.2% year-over-year growth, underpinned by growth in the high ARPU subscriber base. Telco B2B business was up 7.6% year-on-year, reporting KRW546.9 billion on the back of growth of both B2B Internet and data as well as enterprise voice call businesses. B2B Internet and data business was up 5.2% year-on-year on the back of higher demand for lease lines for CCTVs and increases in orders booked from small to mid CPs. The enterprise telephony business posted 12.3% year-over-year growth on sustained growth of MVNO's typical product, which is the deferred payment scheme. Moving on to DIGICO B2B business. DIGICO B2B was up 0.6% year-on-year, reaching KRW505.9 billion. There was some impact from business rationalization, but it's mostly driven by revenue streams from projects that we've already booked, such as the projects of National Defense broadband integrated network, as well as an uptrend from five hotels, including Myeongdong's Le Méridien and Moxy hotel, which opened in November 2022. Regarding subsidiary highlights, BC Card revenue was up 5.9% year-on-year to KRW1,049.2 billion, thanks to higher credit card acquiring volume and sustained new business growth, including issuance of BC branded cards and lending business. Skylife revenue was up 2.8% year-on-year to KRW261.3 billion due to growth from MVNO and Internet resale businesses. KT Studio Genie and SkyTV released seven original dramas and five original entertainment programs during the first half of the year and are leading at the forefront of the media and content market. Original content has helped enhance our competitiveness in the channel and distribution through global OTTs, and channels support the popularity streak of these titles. However, due to the economic slump in the ad market, the commerce market showed contraction and so the revenue from the content subsidiary was down 5.8% year-on-year, coming in at KRW268.9 billion. KT Cloud, in just one year since its launch, has proven its value as Korea's top DX company. Based on a KRW4 trillion valuation that it received, we successfully closed raising KRW600 billion of investment. Thanks to solid growth of our IDC business and as AI Cloud business took off in full scale, revenue was up 18.5% year-on-year, recording KRW153.8 billion. This has been a brief update on KT's financial performance for Q2 of '23. Despite macro headwinds of inflationary pressures and recession, KT's B2C and B2B businesses have all shown robust growth, supported by the fundamentals, and we once again witnessed growth potential of the group's portfolio of businesses. In the second half, under the leadership of the newly appointed CEO, who is equipped with business caliber and ICT expertise, we will continue our endeavor to enhance KT's corporate value. Once again, I extend my deep gratitude to our investors and analysts, and we ask for your continued interest and support. Thank you.

Seung-Hoon Chi, IRO

Now for more information, please refer to the previously circulated presentation material. We will now move into the Q&A session. Due to the time constraint, I would like to ask that you limit your questions to two per person.

Operator, Operator

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

Hoi Jae Kim, Analyst

Thank you. I am Kim Hoi-Jae from Daishin Securities. I have two questions. I want to ask regarding your earnings results. First has to do with your top-line revenue, and second question relates to your cost. First, if we look at your second quarter earnings performance, it really outperformed market expectations. Is there any key drivers, maybe two or three key elements that you wish to highlight with regards to the background to this earnings result? And also, if you could provide some color as to what the second half outlook is from the perspective of the company, that would be helpful. Second question is on cost. A high level of inflationary pressure seems to work as a burden on many companies, but it seems KT was able to really control its cost quite well. I would like to understand what efforts you put in to control such costs?

Young-Jin Kim, CFO

Thank you, Mr. Kim, for asking two questions. You asked about the top-line revenue drivers and the outlook for the second half of the year as well as cost. So, I will combine all of that and provide you with an answer. On the revenue side, I think we could highlight three key elements. The first element has to do with B2C business. We were able to drive quite steady performance because we focused on improving quality aspects, especially quality sales activities regarding our mobile Internet and TV business. The second element has to do with our B2B business. The projects that we have already won in the past are beginning to see monetization. We see revenue streams coming through, and in the first half of the year, we also observed growth in the number of orders that we were able to book. So, the new order expansion also was a key driver behind our B2B business growth. The third key driver behind the performance was from our subsidiaries. Our core portfolio of businesses, which includes finance, real estate, media and content, cloud, and IDC, have all been able to bring about growth. Hence, we endeavor to continue to bring on growth from our B2C and B2B businesses, as well as from the businesses that are part of our core group portfolio. We want to be able to bring about additional growth from the KT Group perspective. Regarding the inflationary pressure, it is indeed a cost burden for most companies, and KT is no exception. The increases in inflation impacted our electricity costs as well as various commissions paid items. However, within KT, we have continuously placed momentum behind making our processes more efficient by utilizing AI and other digital transformation technologies and improving the way we do business, particularly the business implementation process status. Thanks to all of these efforts, we have been able to offset some of the cost increases and pressures that we were exposed to. To provide you with more detail, by expanding customer self-activation, we optimized the entire activation-related dispatch workflow, and we applied AI across all of the call center-related workflows. As a result, we improved efficiency and per-person productivity. Additionally, we updated and sophisticated our overall structure for distribution in consideration of market changes and shifts in customer purchasing and usage patterns of our services, helping us further improve efficiency. Regarding profit outlook for the second half of the year, we believe that inflationary pressures and increases in costs will persist. However, we will continue to endeavor to further improve our top-line revenue and profitability, aiming for year-over-year OP growth.

Seung-Hoon Chi, IRO

We'll take the next question, please.

Operator, Operator

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

Sean Lee, Analyst

Thank you for taking my question. I would also like to ask two questions. You announced last Friday that the company has selected the final candidate for the new incoming CEO. Can you shed some light on the background of appointing the new CEO? Does the company have a plan to hold a communication session with the investors so that the new incoming CEO can explain and elaborate on the business plan he is currently envisioning? If so, when will that timing be? Second question is about your dividend plan. Your first-half net profit is quite good and attractive. I would like to understand under the new executives of the company if you would be able to continue with the dividend plan that KT has successfully maintained over the years.

Young-Jin Kim, CFO

Thank you, Mr. Lee, for your question. Allow me to first tackle your first question regarding the CEO candidate, the background of his appointment, the business plan he is envisioning, and any plans we have to hold a session with him and investors. KT's Director Candidate Recommendation Committee selected three potential candidates and conducted in-depth interviews to choose the final candidate for the CEO position. On August 4, the Board of Directors decided on Young-shub Kim, the former LG CNS President, as the new incoming CEO of KT. The Board determined that he is the best fit to make KT into a global digital platform-based company due to his extensive corporate business management experience, expertise in ICT and digital transformation, and his focus on fundamental-centric growth and innovation. Additionally, the new CEO, Young-shub Kim, is a finance expert who previously served as CFO of LG Plus and LG CNS. He has extensive experience in corporate management, holding the longest CEO term at LG CNS. He also shared his vision for scaling up ICT infrastructure investment and the telecom business to drive solid growth based on both internal and external trust. The Board of Directors identified him as capable of leading innovation and growth. We are working on setting up an opportunity for the market to meet our incoming CEO, so he can share his vision and strategy. We will communicate the timing of this session once we finalize the details. Regarding the dividend plan, once we formally appoint our CEO and the new Board of Directors is formed, we will establish a dividend plan based on feedback from our shareholders. KT's Board has a history of basing decisions on shareholder return policies upon the feedback received from shareholders, and the new incoming Board will continue this practice.

Seung-Hoon Chi, IRO

Next question, please.

Operator, Operator

The next question will be presented by Aram Kim from Shinhan Securities. Please go ahead with your question.

Aram Kim, Analyst

Thank you for taking my question. I would like to ask you two questions. First, for this quarter, I see that your subsidiary contribution has been quite significant. Could you elaborate on the background of this? Was it the case that during the first quarter, the revenue profile wasn't as good, and then in Q2, you've observed an improvement? Or is this what you consider to be a normal level of profit contribution from your subsidiaries? My second question is about your AI business. What direction is the company envisioning for this business? Do you have specific services where you are actually generating revenue from these AI services? If so, can you tell us what they are?

Young-Jin Kim, CFO

Thank you, Ms. Kim Aram, for your questions. I will first respond to your question about our subsidiaries' contribution. In addition to the balanced growth we are experiencing from the B2C and B2B business areas, we have seen additional growth momentum from KT Group's other businesses or subsidiary businesses, including finance, content, DX, and real estate. Among all the subsidiaries, BC Card and KT Estate had the most significant profit contributions. BC Card is our core financial subsidiary, and its acquiring business is particularly profitable, providing a steady revenue stream. Through the lending business, we have expanded our financial assets. The company has been actively working to diversify the revenue sources, which has also allowed us to drive transaction volume from both B2C and B2B customers. The hotel business segment, part of KT Estate, has increased its revenue stream following a rebound in domestic and overseas travel and leisure activities. Regarding the normal level of profit contribution from our subsidiaries, last year it was around KRW500 billion, and we project similar levels for this year. As for the AI business, we have seen heightened interest in hyperscale AI. KT has prepared an AI ecosystem since 2020, commercializing our hyperscale AI dubbed Mi:dm. Various divisions within KT are collaborating to enhance this AI using GPU-based infrastructure. Our envisioned AI aims to understand customer emotions and provide personalized services in the B2B domain. The hyperscale AI business will involve three significant revenue models: First, integrating AI into our cloud business, particularly AI contact center solutions, targeting different customer segments with specific systems. Second, we plan to open our API for customers to utilize the hyperscale AI platform and pay for its usage. Lastly, we aim to integrate our AI capabilities into KT's products and services to bolster B2C competitiveness.

Seung-Hoon Chi, IRO

Are there any questions?

Operator, Operator

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

Seung-Hoon Chi, IRO

With no further questions, we would now like to close our Q&A session. Thank you very much for all the questions you asked as well as the interest you have shown us. Once again, thank you for joining us despite your busy schedules. This brings us to the end of KT's second quarter 2023 earnings presentation. Thank you.