Earnings Call Transcript - KT Q2 2022

Seung-Hoon Chi, IRO

Good afternoon. I am Seung-Hoon Chi, KT's IRO. Let us begin KT's Second Quarter 2022 Earnings Presentation. 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 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 historical performances, please be reminded that these figures may be subject to changes. With that, I will hand it over to our CFO, Young Jin Kim, to present on Q2 '22 earnings.

Young Jin Kim, CFO

Good afternoon. I am KT's CFO, Young Jin Kim. Let me begin with KT's key highlights for Q2 2022. In 2022, the second quarter, we firmly established the group's portfolio around growth businesses with a successful transition to a digital platform company and the ramping up of our business portfolio around finance, media and content and real estate businesses. 2022 marks the third year since the pledge as a DIGICO, achieving record high performance of first half consolidated operating revenue of KRW12,589.9 billion as we successfully broadened the playing field. In the B2B business, we are leading the market, catering to corporate demand for DX or digital transformation, leveraging our core DX technologies and the biggest fixed and wireless infrastructure that we have in Korea. By offering differentiated services for each customer segment and by bringing AI, big data and cloud capabilities to our existing businesses to drive digital transformation, we plan to further power growth of these services. AICC is where we see an adoption of AI technology by Korea's top-notch customer service centers and a good example of our DX digital transformation coming together in traditional businesses. First half revenue, therefore, has surpassed last year's annual figure, spearheading digital conversion for call centers in Korea. For the B2B business, underpinned by our strength in public, defense and financial sector, we delivered customized services for customers across different sectors, growing the number of orders booked, up by 33% year-over-year for the first half and 45% on a cumulative basis as of July end, solidifying our mid- to long-term growth foundation for B2B business. B2C business is also sustaining its growth in terms of quality and volume by elevating customer experience and values. 5G penetration reached 54% as Internet and IPTV have all maintained growth rate on par with that of last year. Cloud and IDC business is now established as a separate special entity, setting itself up as a solid growth pillar. We are at the forefront of the market, preemptively responding to demand as we equip ourselves with managed services capabilities for the cloud business and build additional IDC capacity. Key pillar of the group's portfolio of growth businesses, which comprise of financial and media and content business has seen growth fully ramp up, supported by the DIGICO strategy. In the first quarter, we enhanced business capacity through active partnerships and alliances with outside partners and visible results were seen and proven in the market during the second quarter. For the media and content business, on the back of the popular hit from our original content, brand awareness of the ENA channel improved, building a positive feedback loop across content, channel and the platform. Also following strategic alliances with CJ ENM, we decided on the merger of Seezn and Tving connecting Korea's #1 OTT platform to KT Group's media value chain, equipping with a solid foundation and becoming a leading provider of K content. KT's financial business is evolving into a digital financial platform as we strengthen profitability and tap into markets with high future growth potentials. BC card is seeing growth from its incumbent payment business, while through the My Data business is diversifying its business portfolio and nurturing engine for future growth. K Bank has also seen all of its operational indicators uptrend, including number of customers, deposits and loans, reporting a profit for 5 consecutive quarters, while solidifying platform capabilities through different forms of outside partnerships. I will now run through financial results for Q2 2022. Operating revenue was up 4.7% on year, reporting KRW6,322.2 billion, and operating profit was down 3.5% on year to report KRW459.2 billion. Net income was down 2% on year to KRW363.4 billion, while EBITDA was up 1% year-over-year, reporting KRW1,387.2 billion. Next is operating expense. Driven by changes in macro backdrop such as inflation, business expenses were up and on one-offs, including labor expense, operating expense was up 5.4% on year, reporting KRW5,853 billion. Next is the financial position. Debt-to-equity ratio as of end of June '22 was 131.1%, up 6.3 percentage points Q-on-Q. Net debt ratio was up 5.5 percentage points Q-on-Q, reporting 42.9%. Next, on capital expenditure. To provide a clearer communication on KT Group's DIGICO strategy, we will share the CapEx figure of our major subsidiaries starting this quarter. First, KT Group's first half CapEx spend was a total of KRW1,716.6 billion, while KT standalone CapEx reported KRW1,402.2 billion, with major subsidiary CapEx, which comprises of financial, media and content, cloud and IDC and real estate business amount to KRW314.4 billion. Next is breakdown of business performance. Driven by wireless revenue and solid growth of broadband Internet revenue, telco B2C revenue was up 1.6% on year, reporting KRW2,371.9 billion. Wireless revenue on the back of 5G subscriber growth was up 2% year-over-year to KRW1,550.3 billion. Total wireless subscribers were 23,410,000 as of Q2 end '22, sustaining the net addition trend of total wireless subscribers, underpinned by integrated management of the MVNO and the MNO market. Broadband Internet revenue was up 2.5% year-over-year to KRW596.3 billion on subscriber growth around GiGA Internet. Fixed line telephony revenue was down 3.4% on year to KRW225.3 billion on decline in number of household subscribers. Next is on DIGICO B2C business. DIGICO B2C business was up 2% year-over-year to KRW554.4 billion on the back of media business and growth of the mobile platform business. On sustained platform-based revenue growth and subscriber uptrend, IPTV business was up 6.1% on year. And in June, in order to satisfy wide-ranging content demand from our users and to offer more choice, we revamped the tariff plan into the Choice plan. On the back of balanced growth from enterprise Internet, data and voice call, Telco B2B was up 6.8% year-over-year, reporting KRW529.9 billion. On steep rise in enterprise data traffic and growing demand for premium services, B2B Internet and data revenue was up 5.9% year-over-year. Enterprise voice call continued on with a high growth, posting 8.9% year-over-year increase, thanks to preemptive responses to the expanding MVNO market and continuing net add trend for enterprise VoIP. Next is DIGICO B2B. DIGICO B2B business is growing in step with expanding DX demand from businesses. While the year-over-year revenue was down 2.4% to KRW481 billion, if we include ktcloud's revenue, there was 17.4% growth with revenue at KRW578.6 billion, which is a double-digit growth and a continuation of such growth. Enterprise DX reported 12.9% year-over-year growth as we differentiated our service offerings and responded to the market preemptively. For the AICC business on more projects and orders booked ramping up the revenue stream, there was 48.1% year-over-year growth for the AI and new business. Next is subsidiary performances. An increase in acquiring volume following recovery of domestic consumption and rise in financial assets, BC card revenue was up 9.3% on year to KRW991.2 billion. Skylife revenue was up 45.2% on year to KRW254.2 billion on the back of growth from MVNO and Internet resale businesses and from the content business underpinned by SkyTV. On higher revenues from digital ad and e-commerce and KT Studiogenie ramping up its business, content subsidiary revenue was up 34.7% on year, reporting KRW285.3 billion. Under the endemic, as hotel operations started to recover, KT Estate revenue was up 46.3% on year, reporting KRW97.7 billion. For the second half, we have opening schedules upcoming for Myeong-dong, Le Meridien and Moxy Hotel and we expect KT's real estate business to continue on with the growth trajectory. So far, I've walked through KT's second quarter 2022 earnings highlights. In the first half of 2022, we recorded a record high revenue, thanks to a successful transition to DIGICO and firmly established group portfolio around growth businesses, which broadened the playing field for the company. We will continue to create new value for our customers from our telco business and further advance group's portfolio of growth businesses underpinned by DIGICO B2B to generate concrete results. We look forward to your continued interest and support. Thank you very much.

Seung-Hoon Chi, IRO

For more detailed information, please refer to the material that we have circulated previously. And we will now begin the Q&A session.

Operator, Operator

The first question will be from Joonsop Kim at KB Securities.

Joonsop Kim, Analyst

I would like to ask you 2 questions. First has to do with the mid-priced price scheme for the 5G services. And the second question relates to your B2B business. Regarding that 5G mid-range pricing scheme, your competitor has introduced that pricing scheme ahead of everyone else. I would like to get your assessment of what you expect or how you expect the competitive landscape to develop going forward? And if KT also has a plan to adopt this pricing scheme? What impact are you expecting from that release? Second question, if you look at the second quarter's B2B business result, it was quite positive. What is your assessment of the growth potential from the B2B business going forward?

Young Jin Kim, CFO

Thank you, Mr. Kim, for your question. I will start by addressing your inquiry about our 5G pricing scheme. At KT, we are preparing to implement a mid-price range pricing scheme aimed at providing customers with more choices to select rate plans that suit them best. We have plans to introduce a 5G mid-priced tariff scheme soon. However, since we are still in the pre-launching phase, I am cautious about giving a specific outlook on its impact. That being said, some existing 5G subscribers may choose to downgrade to this lower pricing scheme, but we also have a significant number of LTE subscribers. I believe that offering more options in rate plans could actually speed up the transition of LTE subscribers to this pricing scheme. I will be able to offer a clearer outlook on this once we release the pricing scheme. Now, regarding your second question about the growth drivers for our B2B business and our projections, I want to elaborate on that. As I mentioned in my opening presentation, our B2B business is crucial for our company's growth. In the first half of the year, we saw a year-over-year increase of 33% in the number of orders booked, and by the end of July, that growth rate had climbed to about 45%. This indicates a strong trend. Our B2B growth is underpinned by three pillars of our overall digital strategy. The first is expanding into new business areas by enhancing our telco capabilities with digital solutions. The second is establishing dominance in the digital transformation market by leveraging our robust telco resources. The third is providing tailored digital transformation models with specialized offerings for different customer segments. KT has the largest nationwide coverage for our B2B services in Korea, supported by our extensive fixed-line and wireless infrastructure, which enables us to meet our customers' needs directly. To assist various businesses in their digital transformation, we prioritize infrastructure. KT offers a stable and robust fixed and wireless network, along with core technologies vital for digital transformation, such as AI, Big Data, and cloud services. Our range of enterprise products allows us to deliver customized services for each customer segment, positioning KT closely alongside our business partners in their digital transformation journeys. Our target for this year is to exceed KRW3 trillion in revenue, with plans to secure over KRW5 trillion in orders by 2025.

Operator, Operator

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

Hoi Jae Kim, Analyst

This is Kim Hoi Jae from Daishin Securities. My first question relates to your content business. With the recent hit of the Extraordinary Attorney Woo on TV, there has been growing interest in your company's content investment. We are seeing a lot of changes in the content side. You've decided to merge Tving with Seezn, and we are curious as to what your future collaboration would look like with CJ ENM. Additionally, I would like to understand whether you have other plans to merge Media Genie plus SkyTV going forward? Second question relates to your wireless business. We are witnessing positive measures for 5G penetration as well as ARPU. However, there are concerns that as penetration increases, the ARPU uptrends may start to slow. From a long-term perspective, what strategies are in place to ensure that you can sustain that elevated level of ARPU and wireless revenue going forward?

Young Jin Kim, CFO

I will first respond to the first question about the content business. Since we've merged Tving with Seezn, I will address our future collaboration plans with ENM first. Let me provide some background as to why we entered into a partnership with CJ ENM. Transitioning into DIGICO for the media content business is vital. We have been continuously reviewing possibilities for entering into a mega alliance for us to rapidly gain a competitive edge and scale up our business through outside partnerships. Hence, we've decided to enter into an all-around partnership with CJ ENM, which is a leader in media and content, equipped with strong content production and distribution capabilities. CJ ENM has also committed to invest KRW100 billion into Studio Genie. KT and CJ ENM have agreed on investing, scheduling, and purchasing content, and our executives have ramped up cooperation through a council of business collaboration. Regarding content sourcing, an agreement has been made so that KT Genie's original content will be scheduled through CJ ENM's channels and platforms, including TV and Tving. Moreover, in terms of co-producing AAA titles, KT Studiogenie and CJ ENM will engage in joint production to create global AAA content. Regarding the integration between Seezn and Tving, everything is progressing smoothly with an objective integration date set for December this year. As for future integration plans between Media Genie and SkyTV, we are currently reviewing several options to enhance our competitiveness but have not finalized any specific direction yet. Once we make a decision, we will communicate that to you. Now moving on to your second question about strategies for driving continuous wireless revenue, our 5G penetration is on a steady upward trend. As of the first half, it was at 54%, and we aim to reach 60% by year-end. We introduced the Choice plan, a value-added tariff service where subscribers can choose and subscribe to the rates most suited to their needs. Through this provision of value-added services, we hope to generate additional revenue. Lastly, we are actively developing various value-added services that cater to customer needs, and once these are ready for release, we will provide you with more details.

Operator, Operator

The following question will be presented by Seyon Park from Morgan Stanley.

Seyon Park, Analyst

I would like to submit two questions. First has to do with the spun-off of your cloud business, ktcloud. If you look at the impact that it had on the operating profit on a separate basis, we'd like to understand the extent of this impact on the operating profit line. The second question is in connection with KT's dividend payout policy, which stands at 50% of adjusted net profit on a separate basis. With ktcloud being carved out, there will, of course, be an impact on profit. So at the end of the year, when you distribute the dividend, would you consider the corporate income tax element when determining the amount of the dividend?

Young Jin Kim, CFO

Thank you, Mr. Park, for your question. Let me address your first question regarding the operating profit impact with the carve-out of ktcloud. Starting with top-line revenue, we expect there to be about KRW100 billion of impact on the top line. Assuming ktcloud remained part of the KT Group, we observed that the cloud and IDC growth year-over-year was 11.4%, with separate service revenues at 3.8%. The overall top line growth trend continues; however, the spin-off of cloud and IDC will affect our top line revenue. It is essential to consider the reduced operating expenses, which include labor costs, depreciation, and power expenses. Given both elements, we anticipate that the impact on operating profit will be minimal, substantially less than the top line revenue reduction. Historically, our cloud and IDC business has operated at a higher profit margin compared to the company-wide average. Recently, however, there has been a surge in demand, leading to initial investments and additional hiring, which have weighed down the current operating profit margin. Nevertheless, we believe that this margin will improve in the long term as we respond preemptively to the market and expand our capacity. Moving on to your second question regarding the impact of the corporate income tax from the spin-off of ktcloud on our adjusted net profit. Yes, regarding non-cash expense items, these were indeed considered in our adjustment of net profit. The treatment of the corporate income tax in this spin-off is accounting-based, with no actual cash outlay involved. Therefore, since it's classified as a non-cash expense, it will be included in the adjusted net profit for distribution purposes.

Seung-Hoon Chi, IRO

Well, with no further questions, we would like to now close the Q&A session for the day. Thank you very much for your interest and for your questions, and thank you for joining us. If you don't have any more questions, we would like to end the Q&A session. Thank you very much for your interest and your questions and also for joining us despite your very busy schedules. This brings us to the end of the Second Quarter 2022 Earnings Conference Call. Thank you.