Earnings Call Transcript - KT Q4 2020

Seung-Hoon Chi, KT IRO

Good afternoon. I'm Chi Seung-Hoon, KT's IRO. This earnings release call is currently being webcasted via our website, and you can follow the slides as you listen in on the call. Let us now begin KT's Q4 2020 earnings presentation. Before we begin, please note that today's presentation includes financial estimates and operating results under the K-IFRS standards and have not yet been 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 change. Now I will invite our CFO, Kim Young-jin, for his welcoming remarks and presentation on 2020 earnings.

Kim Young-jin, CFO

Good afternoon. I'm Kim Young-jin, the newly appointed CFO of KT. I would like to clarify a minor mistake made by the operator before I start. Now, let's go over KT's key business highlights for 2020. First, our consolidated revenue reached KRW 23.9167 trillion. Service revenue was KRW 20.8461 trillion, and operating profit was KRW 1.1841 trillion. Although total revenue declined due to a drop in handset sales caused by the COVID-19 pandemic, the profitability of our core cash-generating businesses improved, and we saw a 2.1% year-over-year rise in operating profit. On a stand-alone basis, we experienced growth in our B2B platform, wireless, and media sectors, contributing to a 1% increase in service revenue, surpassing the KRW 15 trillion mark for the first time in nine years. The launch of our B2B brand, KT Enterprise, strengthened our B2B platform, while our AI and Digital Transformation sectors achieved an impressive 11.8% growth year-over-year, marking the strongest increase across all KT business areas. Our existing core businesses in wireless and media continue to sustain their growth momentum. Notably, following the rights offering for K Bank last July, operations resumed, resulting in total deposits increasing from KRW 1.8 trillion in June 2020 to KRW 4.5 trillion by the end of January, more than a 2.5 times increase, and our customer base grew from 1.3 million to 2.47 million. Additionally, to enhance our media platform capabilities, KT Skylife is in the process of acquiring HCN, and we have decided to merge KTH and KT mhows to drive growth within the media commerce sector. Given our confidence in earnings improvement and enhancing corporate value, we are also focusing on shareholder returns. Alongside the KRW 300 billion share buyback announced last November, we will be paying out KRW 1,350 per share, an increase of KRW 250 year-over-year. Now, let's discuss our business direction for 2021. Last year, KT announced our transformation from a telecommunications company to a digital platform company supported by telecom. In 2020, we enhanced our fundamentals to facilitate this transformation, and in 2021, our goal is to deliver tangible business results as a digital platform company. In the post-COVID-19 era, the need for digital conversion has become essential for both consumers and businesses, with the government accelerating digital transformation in the public sector through new policies. This environment presents significant opportunities for KT. We continue to provide the best domestic fixed wireless network and telecom services while enhancing our competitiveness in AI, big data, and cloud services, which are critical to digital transformation. Starting with our IPTV set-top boxes, we have successfully adopted and expanded AI services across various B2B applications, including AI for hotels, real estate, and contact centers. Currently, KT holds the largest AI subscriber base of 2,720,000, serving AI solutions to approximately 7,200 hotel rooms and 500,000 apartments nationwide. We also take pride in our big data capabilities, having accumulated extensive data from fixed wireless communications, video, finance, and other sectors, and we are continually enhancing these capabilities in areas such as healthcare and climate change. The recent amendments to the Data 3 Act have created a more favorable environment for data usage, increasing the potential for data applications. As Korea’s leading native cloud provider, we not only offer hybrid cloud services but have also recently launched a DX platform with top-tier cloud capabilities. Let me now focus on the key objectives for the company this year. Firstly, as a partner for digital transformation in Korean industries, KT will significantly develop our B2B business. In the B2B communication segment, where we hold the largest market share, we will integrate AI, big data, and cloud services to establish a new DX business model and expand our market presence. Specifically, we will enhance our product offerings with AI chatbots, customer support, and big data failure predictions alongside existing call, messaging, and leased line services. We will tailor our services for different customer segments based on sector size and type, targeting public, financial, and large corporate sectors. To boost our competitiveness, we will actively seek partnerships, mergers, acquisitions, and equity investments. Collaborating with partners will enable us to offer integrated services and acquire necessary capabilities through mergers and investments. Secondly, to support platform business development, we will expedite the restructuring of our group portfolio, focusing on growth sectors. Besides B2B, we have identified media content, commerce, and finance as essential growth areas and will concentrate our efforts on fostering their success. The recent announcement of the launch of Studio Genie, a specialized content provider, aligns with these goals. Securing original intellectual properties and content is increasingly crucial, and KT intends to invest in content leveraging our substantial subscriber base of over 12 million. Our management restructuring also reflects an effort to enhance competitiveness, appointing outside financial experts as CEOs for all financial businesses and recruiting global talent for our AI and robotics divisions. By allowing group subsidiary CEOs to hold multiple roles, we aim to maximize synergies throughout the organization. Lastly, we will enhance profitability in our core cash-generating businesses. For fixed wireless communications and internet services, we will focus on acquiring high-quality 5G and GiGA internet subscribers to grow our revenue while ensuring efficiency in our spending. With these strategies, we remain committed to driving growth. We anticipate exceeding 4% growth in service revenue and achieving consolidated revenue of more than KRW 25 trillion in 2021. Now, I will review our full-year performance for 2020. Total revenue declined 1.7% to KRW 23.9167 trillion due to decreased handset revenue. However, operating profit increased, supported by rising service revenue and our cost-efficiency strategies, resulting in 2.1% growth to KRW 1.1841 trillion. Net profit was up 5.6% year-over-year to KRW 703.4 billion, and EBITDA rose by 0.6%, totaling KRW 4.8184 trillion. Next, I will discuss operating expenses, which decreased by 1.9% year-over-year to KRW 22.7326 trillion as a result of ongoing cost efficiency measures. Regarding our financial position, the debt-to-equity ratio at year-end 2020 stood at 116.5%, marking an 11 percentage point decline from the previous year. The net debt ratio fell by 2.8 percentage points to 30.1%. On capital expenditures, we spent a total of KRW 2.872 trillion in 2020. Now, let's examine the performance across different business segments. Wireless revenue increased by 1.3% year-on-year, reaching KRW 6.9338 trillion, with 5G subscriber growth contributing to a 1.6% rise, resulting in KRW 6.5427 trillion. By the end of 2020, we had 22.31 million total wireless subscribers, including 3.62 million 5G subscribers, or 25% of our total handset subscriber base. In the fixed line and IPTV segment, PSTN revenue fell by 7.3% year-on-year to KRW 1.4655 trillion, while broadband internet revenue remained stable at KRW 2.0012 trillion due to growth in GiGA Internet subscribers and significant sales of GiGA WiFi. IPTV revenue grew by 7.7% year-over-year to KRW 1.7232 trillion, driven by an increase in high-end subscribers and revenue generated from our media platform. When it comes to our B2B business, revenue rose by 2% year-on-year, totaling KRW 2.774 trillion. The faster pace of digital transformation across industries resulted in an 11.8% year-over-year growth for our AI and DX business. However, the B2B IT and solutions segment faced a slight contraction due to subdued global SI business activity as a result of the COVID-19 pandemic and the restructuring of low-margin businesses. In terms of income from our subsidiaries, revenue for BC Card fell by 4.2% year-on-year to KRW 3.3864 trillion due to reduced spending amid the pandemic. Real estate revenue dropped by 24.9% year-on-year to KRW 364.4 billion, impacted by decreased hotel rental income and lower real estate sales following the pandemic, along with the transfer of our building management business to KT Telecop. On a positive note, revenue for Skylife rose by 0.6% year-on-year to KRW 698.7 billion, thanks to increased telecom service revenue. Content-related revenues also saw a 9.6% year-on-year increase to KRW 772 billion due to the growth in platform-based income across major subsidiaries like KTH, mhows, Genie Music, and Storywiz. However, the pandemic adversely affected profit margins, leading to a significant decline in operating profits for BC Card and KT Estate, impacting overall profit contributions year-on-year. This concludes KT's annual performance briefing for 2020. As a digital platform company, KT is poised to lead Korea's digital transformation and provide enhanced, convenient services to our customers. By leveraging the strengths of the KT Group, we will aggressively pursue growth opportunities while striving to improve our corporate value. We appreciate the ongoing interest and support from our investors and analysts. Thank you very much.

Seung-Hoon Chi, KT IRO

For more details, please refer to the earnings presentation that we've previously circulated. And now we will be very happy to take any of the questions that you may have.

Operator, Operator

The first question will be provided by Joonsop Kim from KB Securities, and the next question will be provided by Hoi Jae Kim from Daishin Securities.

Joonsop Kim, Analyst

I would like to ask two questions. I'm Kim Joonsop from KB Securities. My questions relate to CapEx and your strategies on content investment. This year, could you provide some guidance on your CapEx? Will you be focusing your capital expenditure more on expanding coverage based on sites and base stations, or will you concentrate on specific areas like in-building coverage or cloud equipment? A comparison with your past practices would be helpful. My second question is about the content industry. Recently, there have been significant changes in the content landscape. Could you share your insights on the current content market? I understand that you've recently established KT Genie Studio and that multiple OTTs are set to launch in Korea, so any information you could share about your perspective on this content market would be appreciated.

Kim Young-jin, CFO

Yes, Mr. Kim Joonsop. Thank you very much for your questions. First, responding to your question on CapEx. Now in terms of the total size of the CapEx, we're looking at about a flat year-on-year size. However, if you look at the breakdown of what comprises that CapEx, we are planning to make more resource allocations on growth areas such as AI, DX and media. With regards to wireless investment, you've asked about the base station sites and in-building coverage. As of the end of 2020, KT was able to complete the coverage, this is 5G network-based, across the 85 common locations. Now for 2021, basically we will be expanding the 85 regional, the 5G coverages, nationwide. And also, nationwide we will complete the coverage for the subways as well. And when it comes to in-building coverage, we will focus on locations where multiple people are using the network. That will be our focus in improving and increasing our coverage. Moving on to your second question. I understand your second question relates to what our strategy is for content investment as well as how KT sees the competitive landscape. Now if you look at the domestic media content industry, with the expansion of the OTT services and gaining popularity of K content, we are seeing a significant growth in terms of production of original IPs, including web novels and webtoons. And we are seeing a lot of video content being produced as well as facilitated distribution of such IP-based content. Now already, if you look at key media players in Korea based off of their in-house capabilities and based off of their channel basis, they are building on their influence. And also, if you look at the platform providers, underpinned by the original IPs that they own, they are very fast developing and utilizing the web novels and webtoon and really expanding the reach of such content. So that's the backdrop, so now let me move on to what our competitive strategy is. Now as you know, KT is a #1 media platform provider in Korea with about 12 million subscriber base across IPTV satellite and cable TV. And on top of that, we actually have capabilities across the entire value chain of media content. For instance, by setting up Storywiz, we actually own IPs when it comes to web novels and webtoons. Also, through skyTV, which is an MPP provider, basically we will continue to strengthen the portfolio of original content and really strengthen the lineup of such contents. We also own Season, our OTT service. We also distribute music titles through Genie Music as well. Also on top of that, underpinned by our 12 million subscriber base, we can analyze the programs that viewers like, and we can also study the viewing behavior of the audience. Based on that information, we can develop targeted programs. And also, underpinned by our capabilities in IP, intellectual property, we will be able to make further expansions. Now KT, with its capabilities in IP platform, channel and OTT, we will focus on producing and distributing original content. And we feel that, that will be a good basis for earnings generation going forward. We also plan to cooperate and collaborate with production studios both home and abroad, and through such cooperation, we will focus our efforts on producing such contents as well. When it comes to planning and making these contents and productions, the resources that will be required could be funded with KT's own resources, but we're also planning to bring outside funding as well. In light of the size of the captive market that KT currently enjoys, we believe that we will be able to set a very steady structure for production and distribution of such contents.

Hoi Jae Kim, Analyst

I am Kim Hoi Jae from Daishin Securities. Your wireless ARPU trend appears to be quite positive. Can you provide us with your forecast for wireless ARPU? Additionally, with the introduction of the lower-end 5G tariff plan, there are concerns that it may limit ARPU growth. Given the current marketing environment, what is your outlook for ARPU? Furthermore, regarding the 2020 dividend per share, it seems to have exceeded market expectations. With your business performance on the rise for 2021, can we anticipate larger dividend payouts in absolute terms compared to 2020? What is your outlook for dividend payouts in 2021? Could you also clarify or elaborate on the interim dividend scheduled for May?

Kim Young-jin, CFO

Thank you for your question, Mr. Kim Hoi Jae. Regarding our ARPU outlook, we are anticipating around 3% growth for this year. You mentioned the impact of the mid- to low-end 5G rate plan on ARPU growth. We previously introduced a high-end 5G rate plan that successfully transitioned LTE users to 5G, but we also want to attract users on lower-end LTE plans. Therefore, we decided to launch the mid- to low-end 5G rate plan, which we believe will help grow both the subscriber base and ARPU for 5G. You also inquired about marketing competition. For 2021, we expect a stabilized environment for marketing competition to continue throughout the year, with all three telcos engaging in what we call coopetition, which benefits all players. There will be joint investments in 5G, along with active cooperation on value-added services like V Coloring. Overall, KT will move away from subsidy-driven competition and concentrate more on fundamental aspects. Regarding dividends, we have announced that for the interim dividend, we will pay out 50% of the adjusted net profit. In line with our midterm financial guidance from May 2020, based on our operating profit target of KRW 1 trillion for 2020, we aim to enhance operating profit year-over-year for 2021. Consequently, as profitability improves, we will strive to increase dividend payouts further.

Jae-min Ahn, Analyst

I am Ahn Jae-min from NH Securities. Before asking the question, I would like to congratulate you on becoming the new CFO. I know you used to work at the IR department, so I think that's why the market has quite a bit of expectation for your contributions going forward. Now moving on to my question: It's on wireless subscriber. You've mentioned that you are looking to see a higher penetration of 5G. What is your forecast for 5G subscriber going forward? And second question, there was a recent decision to sell off one of your subsidiaries, KT Powertel. Could you share with us what the group's position is on the restructuring of these affiliates and companies?

Kim Young-jin, CFO

Thank you, Mr. Ahn, for your kind words and congratulations. Regarding the 5G subscriber forecast, we anticipate that by 2021, 5G will become significantly more mainstream, with KT's handset base expected to reach a 45% share. You inquired about the group restructuring, including the decision to sell KT Powertel. Last year, in May, we announced plans to restructure the group portfolio, focusing on growth industries such as B2B, finance, and media content. To enhance our media platform capabilities, we initiated the acquisition of HCN last July. Additionally, we successfully completed a rights offering for K Bank, which sets a foundation for further financial growth. In November, we merged KTH, a t-commerce entity, with KT mhows, a mobile platform company, to advance towards becoming a digital content platform. This year, we announced the sale of KT Powertel and the establishment of KT Studio Genie. The restructuring was not solely a top-down approach; our group companies began redefining their businesses and emphasizing their customer bases to strengthen competitiveness. KT will concentrate on its core IT and telecommunications businesses while realigning its portfolio around new growth areas like finance and media content. We will provide updates on the restructuring plan as they become available.

Min Jun Jang, Analyst

I also have two questions. First, your AI and DX revenue, part of your B2B business, is posting a double-digit growth. Do you expect such growth trends to continue into the future? So if you could give us a guidance on your B2B growth, including AI, DX, that would be helpful. Second, I know there was a question on dividends already, but I just want to confirm that your increase in DPS this year, of course, is going to be positively received by the market, but it seems like you still have quite a bit of investment that's going to be needed for 5G as well as content and other growth businesses like B2B. So the company obviously then would have to think about whether it is not better to actually retain these resources, so from the market's perspective, can we expect same level of DPS or payout ratio for this year?

Kim Young-jin, CFO

Thank you for your question, Mr. Jang Min Jun. You inquired about the annual growth trends in AI, DX, and our projections for B2B growth. The AI and DX segment achieved a growth rate of 11.8%. We are not only looking at growth in our cloud and IDC businesses but are also making significant strides in AI-based contact centers. KT stands out as the only provider in Korea capable of integrating network, IDC, and cloud services simultaneously. With our robust network, we hold a competitive advantage in cloud IaaS, as well as in the public sector and financial cloud domains. This positions us well to expand effectively into PaaS and SaaS markets. For AICC, our focus will be on local governments, hospitals, and small to medium-sized merchants. In terms of guidance, we expect growth to exceed last year's 11.8%, though I cannot share specific figures. Regarding your second question on maintaining the current payout ratio, we recognize the substantial investment needed for 5G and B2B initiatives. We aim to keep our CapEx flat compared to last year, while reallocating resources towards growth areas. As for the payout ratio, we will maintain it at 50% of the adjusted net profit on a stand-alone basis through 2022.

Neale Anderson, Analyst

I have two questions, please. The first one relates to 5G. And specifically it's when KT plans to see commercial benefits, revenues from some of the newer features of 5G such as edge computing, low latency or network slicing. And the second is really a follow-up from the previous question and it relates again to 5G and which specific areas of the market are likely to adopt 5G services first. So would that be in the smart city domain or factory automation, etc.? It would be very helpful to get your view on that.

Kim Young-jin, CFO

Yes, thank you for that question. Recently, there have been revisions to the network neutrality-related guidelines, which we believe will create more B2B business opportunities in autonomous driving and smart factory sectors. For specialized services that require differential application of 5G traffic, we will need network slicing along with a B2B approach. Regarding the commercial benefits, we believe the regulatory foundation for providing 5G services, such as network slicing, is already established. However, we think that until the equipment and technology are ready, these services cannot be deployed. Based on KT's B2B or private 5G infrastructure, we are actively developing and testing various B2B use cases. We anticipate significant opportunities arising with these specialized services supported by 5G. Specifically, the sector that's currently leading in adopting 5G B2B services is the 5G smart factory. KT will continue to innovate in strategic industries related to smart factories and has cooperated closely with Hyundai Robotics through equity investments. In the realm of 5G smart factories, we have secured orders for 42 collaborative robots. This product combines robots with accompanying services, extending beyond manufacturing into areas like shipbuilding, construction, healthcare, media, and the public sector. We are developing numerous B2B use cases, such as providing 5G technology for operating unmanned forklifts at Hyundai construction and machinery. Additionally, in partnership with Samsung General Medical Hospital, we are facilitating real-time transmission of high-capacity pathological data, allowing pathologists to make accurate diagnostic decisions. For B2B, we plan to expand our focus on smart factories, connected cars, and highly immersive media experiences. For small and medium-sized enterprises, we will offer solutions based on high demand, while mid-sized companies will benefit from cloud-based platform services. We aim to customize our 5G services and technologies according to different customer segments.

Seung-Hoon Chi, KT IRO

With no further questions, we would now like to close the Q&A session. I would like to thank you all for your questions and your interest. And once again, thank you for joining us today. We would like to now wrap up Q4 2020 earnings presentation by KT. Thank you.