Earnings Call Transcript - KT Q1 2021

Seung-Hoon Chi, IR Officer

Good afternoon. I’m Chi Seung-Hoon, KT’s IRO. We are webcasting this earnings release call. You can also follow the slides as you listen in on the call. Let us now begin KT's Q1 2021 Earnings Presentation. Before we begin, please note that today's presentation includes financial estimates and operating results based on K-IFRS standards and are yet to be reviewed by an outside auditor. As we cannot ensure accuracy and completeness of financial and business data, except for historical performances, please be reminded that these figures are subject to changes. Now, I will invite our CFO, Kim Young-Jin, for his greetings and presentation on Q1 '21 earnings.

Young-Jin Kim, CFO

Good afternoon. I’m Kim Young-Jin, KT’s CFO. I will begin with Q1 '21 key business highlights. KT’s consolidated revenue was KRW 6,029.4 billion, service revenue was KRW 5,230.4 billion and operating profit came in at KRW 444.2 billion. Driven by balanced growth across B2B, financial, media and content and other platform businesses and incumbent core businesses of 5G and Internet, revenue was up 3.4% year-on-year, and operating profit was up 15.4% year-over-year. Service basis revenue was up 3.3% year-on-year to KRW 4,574.5 billion, while operating profit was up 21.4% year-on-year, reporting KRW 366 billion. KT in Q1 has aggressively expanded its platform businesses, reorganized business portfolio around growth businesses and once again confirmed the feasibility of success as a Digico. KT’s main core business, which is AI and DX, was up 7.5% year-on-year, driven by the growth of platform businesses, including AI and cloud. Also, the untapped or contact-free environment has geared up data traffic, which led to top line growth of B2B, including enterprise messaging. In the midst of the company's growing demand for digital transformation, KT has been launching DX services, mostly in areas where KT can excel and that have potential for growth. For instance, AI contact centers provide services that adopt DX on top of existing telecom services for insurance and financial sectors, which traditionally operate call centers. We are expanding to other service areas, such as public and retail. In development is a voice call DX for small merchants, which uses a voice bot for booking and information delivery. For CITS, a next-generation, intelligent, digital-based transport system, we started off with a successful reference in Jeju Island and one project in Ulsan and Gwangju city. We will continue to expand on the service area. Also, to prepare for the upcoming era where robots become available for mass market use, we are undertaking platform development for robotics, distribution and service offerings. We first launched serving robots, hotel robots, and barista robots and plan to expand the lineup to include care, quarantine, and information robots as well. The growth trend from the telecom business was also sustained. Despite declines in the roaming revenue, both wireless ARPU and service revenue were up year-over-year. We reported market share #1 in quarterly net additions with broadband Internet subscribers increasing by more than 100,000. We actively revamped the group’s businesses and engaged in investment for transformation into a Digico. Studio Genie, an entity specializing in content, was established back in January. KT’s equity in Storywiz and Skylife TV was invested into Studio Genie, laying the foundation for maximizing synergies across media and content businesses within the group. By acquiring Altimedia, which supplies key solutions of the media platform, we were able to secure core technical capabilities of the media platform. There was much progress in the financial sector as well. K Bank, whose deposits as of the end of 2020 were KRW 5 trillion with a customer base of 1,720,000, was able to grow its total deposits to KRW 12.1 trillion with 5,370,000 customers as of April end of 2021 by funding its partnerships and offering differentiated benefits. We plan to further speed up the upward trend through additional capital increase before the end of the year. To further bolster KT Group’s competitiveness in data and broadband business corporation in finance and telecom, we decided to make strategic equity investments into Banksalad, an asset management service application. As you know, we sold off KT Powertel as we believed there was limited potential for synergies with the group. Moving on to Q1 2021 earnings, total revenue was up 3.4% year-on-year to report KRW 6,029.4 billion due to growth business expansions. Operating profit, driven by top line growth, went up 15.4% year-on-year to KRW 444.2 billion. Net profit was up 43.7% year-on-year to KRW 326.5 billion, while EBITDA was up 3.7% year-on-year to KRW 1,345.3 billion. On operating expenses, operating expense was up 2.5% year-on-year to KRW 5,585.2 billion due to higher business-related expenses and sales expenses. On the financial position, the debt-to-equity ratio as of the end of Q1 '21 was 118.7%, down 1.4 percentage points year-on-year. The net debt ratio was down 5.1 percentage points year-on-year to 32.4%. On CapEx, CapEx spend for Q1 was KRW 289.4 billion.

Unidentified Company Representative, Management

Next, let’s take a look at the performances of each of the business lines. Wireless revenue was up 2% year-on-year to KRW 1,770.7 billion. Wireless service revenue was up 2.2% year-on-year to KRW 1,667.6 billion on the back of steady 5G subscriber growth. As of the end of Q1 2021, total wireless subscribers were 22,430,000, while there were 4.4 million 5G subscribers, which account for 31% of the handset subscriber base. Next is on the fixed line and IPTV business. Fixed line telephony revenue was down 0.3% year-on-year to KRW 377.3 billion. With growth in enterprise subscribers, fixed rate-based product sales were quite positive, slowing the speed of top line erosion. Despite declines in interconnect revenue and a continuous rise in high-quality subscribers, broadband Internet revenue was up 0.1% year-on-year to KRW 503.2 billion. On the back of subscriber growth and sustained revenue growth based on the media platform, IPTV revenue was up 6.8% year-on-year to KRW 446.2 billion. Next is B2B business. B2B revenue was up 2.3% year-on-year to KRW 684.2 billion. Demand around contact-free services or online led to increases in data traffic, driving up B2B revenue by 0.7%. B2B IT and solutions revenue was up 1.5% year-on-year due to digital new deal projects from the government. The AI and DX business, driven by greater demand from customers on digital transformation, including cloud, IDC, AICC, and blockchain, recorded a revenue up 7.5% year-on-year, continuing the upward trend. Next is on subsidiary performance. Despite subdued consumption due to the COVID pandemic, BC Card revenue was up 5% year-on-year to KRW 839.5 billion driven by an increase in domestic acquiring volume. KT Estate revenue was down 41.3% year-on-year to KRW 62.6 billion, impacted by lower real estate sales and sluggish hotel business due to COVID, as well as the transfer of the building management business to a group affiliate. Skylife revenue was down 0.6% year-on-year to KRW 166.9 billion due to the decline in OTS service subscribers. One of the key pillars of KT's digital transition is revenue from our content subsidiaries, such as KTH, M Hows, Genie Music, and Nasmedia, which was up 12.2% year-on-year, reporting KRW 199.6 billion, supported by higher platform revenue from these key business subsidiaries. Despite business constraints posed by the COVID pandemic, we are seeing better performances from the financial affiliates alongside growth from affiliates in the content business. So that ends KT’s Q1 '21 earnings highlights. This year, KT’s key focus is transitioning into a Digico and underpinning growth. Our guidance for 2021 is stand-alone service revenue growth of above 4% year-on-year and consolidated revenue of more than KRW 25 trillion. With Q1 as the beginning, we expect our growth as a digital platform company to further accelerate as we go forward. We will continue to bring stable revenue from our telecom business while generating tangible results from growth businesses of B2B and platform. Additionally, we plan to bolster synergies across group affiliates and actively pursue the revamping of our business structure. We look forward to your support and encouragement.

Kim Joonsop, Analyst

I’m Kim Joonsop from KB Securities. First of all, congratulations on such a great performance. I would like to first understand what management’s assessment is behind such a good performance this quarter. That’s my first question. Secondly, it seems like your PSTN top line erosion speed has slowed. Once again, what’s the reason behind that?

Unidentified Company Representative, Management

Thank you, Mr. Kim Joonsop for your question. I will respond to both of those questions. First question relates to what KT’s management’s view is regarding the causes behind the good performance. The good performance is attributable to strong results from KT’s core businesses as well as from AI and DX, and growth in the top line from our affiliates and subsidiaries, which drove a year-on-year improvement in operating profit. We call this business our traditional telecom business, which includes mobile, Internet, and TV. We’ve seen both in wireless and Internet increases in 5G subscribers as well as overall improvement in the acquisition of premium subscribers, driving top line growth. In terms of Internet, we’ve seen growth in subscriber base for GiGA Wire as well. Additionally, we’ve seen increases in monthly IPTV-related fees. Our revenue from advertising and platform business has also had a positive impact. Our DX digital transformation platform-related business, which is the messaging business, has achieved double-digit growth. We launched a call check-in service back in October, and although the absolute size is not significant at this point, we are seeing steep growth in terms of subscriber numbers and top line revenue. With the opening of the Yongsan IDC Center, we have begun booking some good performance in our numbers. Also, in our cloud business, by acquiring new customers, we have maintained a high growth rate of over double digits. Regarding our group affiliate contribution, we are seeing growth from both financial and media platforms. We will ensure continued growth from these areas. Regarding the slowing of PSTN erosion, I can cite three key factors. First, we drove up the subscriber base for enterprise Internet-based telephony. With the spread of untapped contact-free environments, revenues from enterprise intelligence network-based businesses have increased. The decline in home telephony has also slowed, and by introducing a flat rate tariff product, we were able to stabilize that decline in home telephony.

Choi Minha, Analyst

I’m from Samsung Securities. I’m Choi Minha. I would like to ask you two questions. We have seen quite steady and stable growth from your wireless business, including the number of subscribers and the earnings and revenue. Earnings from your media and content subsidiaries have been quite positive. However, there seem to be subsidiaries that have been negatively impacted by the COVID pandemic. Could you provide some insight into what your projection is going forward for these affiliates? Also, can you provide a hint as to when, on an aggregate basis, you expect a turnaround in the operating profit of your group affiliates?

Unidentified Company Representative, Management

Thank you, Ms. Choi Minha. You asked about our forecast for group affiliate earnings going forward. Key subsidiaries include BC Card, KT Estate, and KT Skylife. In terms of BC Card last year, the COVID pandemic impacted the overall domestic acquiring volume and UnionPay-based acquired volume, as well as the fall in the number of inbound tourists. For Q1, the domestic acquiring volumes saw an upward impact of around KRW 40 billion due to the recovery of consumption. However, the UnionPay-based credit cards have not yet seen a recovery in inbound tourist demand. So overall, we will work to at least achieve profit levels equivalent to the previous year. For KT Estate, last year, one-off sales-related revenues from selling appointments and office sales in Busan and Daegu were significant. With that factor eliminated, we expect a slight decline this year. Regarding the hotel business, we are seeing some signs of recovery year-to-date, but there’s still a lasting impact from the pandemic. We have a slightly increasing trend in rental-related revenue. For Skylife, they have their earnings release scheduled for 5 p.m. today. We are seeing increases in subscribers for satellite service, while OTS subscribers are declining. The company is working to develop bundled products, including TPS with mobile and Internet. Moreover, we have entities related to media and advertisement. In terms of digital commerce, we have seen increases in volume in T-commerce and enterprise messaging services. Demand for advertisements has also risen in areas such as games and commerce. We expect these entities will start to recover going forward. Regarding the aggregate turnaround in operating profit from our group affiliates, we will ensure that financial content, media, and advertisement growth align with what we are observing in digital platform-based businesses on a year-over-year basis to achieve growth in operating profit.

Jang Min June, Analyst

I’m Jang Min June from Kiwoom Securities. Two questions. First, in terms of your wireless business, at the beginning of the year, you communicated about a 4% year-on-year growth as your guidance. Now that we have passed the first quarter, the growth rate is around 2%. What guidance would you be able to give us for the entire year based on the Q1 results? The second question is to confirm your plans regarding increasing your payout ratio. There seem to be certain issues related to your dividend practices. Could you share your position on dividend payouts?

Unidentified Company Representative, Management

Thank you, Mr. Jang Min June for your question. You asked about any possible adjustments or updates regarding the guidance of 4% growth for our service revenue. That guidance still holds valid. We see 5G penetration increasing, and the number of high ARPU subscribers is also growing. By providing value-added services like caller ring and identifying other revenue sources, we expect to achieve our 4% revenue growth target. Regarding your second question about our 50% payout ratio, back in May 2020, we communicated KT's mid- to long-term plan. We stated that based on adjusted net profit, we would be paying out 50%. This is a commitment to our investors and shareholders, and we plan to uphold it.

Stanley Yang, Analyst

I would like to ask you two questions. First, you've communicated growth projections that by 2022, you’re targeting KRW 1 trillion on a stand-alone operating profit basis. Given your stellar Q1 performance, do you believe you will be able to achieve this target ahead of schedule? If that is the case, would you be willing to increase that target for 2022? My question stems from the fact that in 2016, when you achieved KRW 1 trillion of operating profit, your Q1 performance was lower than what you have reported this quarter. Second, do you have plans to cancel your treasury shares? If not, how do you plan to utilize those treasury shares?

Unidentified Company Representative, Management

Thank you, Mr. Stanley Yang, for your question. Regarding whether we can achieve the operating profit target of KRW 1 trillion earlier than '22 and whether we will consider increasing that target, our plan for this year is to achieve higher operating profit year-over-year. We will evaluate our performance to determine if an update to our target for 2022 is warranted. Regarding your question about share cancellation, at this point, specifics are under review. The treasury shares will be used to strengthen the company’s competitiveness and look into opportunities for partnerships or M&A. Currently, there are no specific plans confirmed yet.

Haesu Lee, Analyst

Could you shed some light on the progress of your share buyback of KRW 300 billion? Until when will that process last?

Unidentified Company Representative, Management

Thank you, Ms. Lee for your question. You asked about the progress of our share buyback process. On November 5, our BoD resolved for a share buyback. It’s a trust arrangement through which we bought back KRW 300 billion of treasury shares. This process has been completed as of March 17. We acquired 12,150,000 shares, which account for 4.7% of the total outstanding shares. Thank you. This ends the earnings release for KT Q1 2021. Thank you all for your questions and interest in the company, and thank you for joining our call despite your busy schedules. This concludes our first quarter 2021 earnings presentation. Thank you.