Earnings Call Transcript - KT Q3 2021

Operator, Operator

Good morning and good evening. Thank you for joining this conference call. We will begin discussing the 2021 third quarter earnings results for KT. Mr. Seung-Hoon Chi, KT IRO, will start with welcoming remarks, after which Mr. Young Jin Kim, CFO, will present the earnings results and answer your questions. The conference will include a presentation followed by a Q&A session. Now, I will hand it over to Mr. Seung-Hoon Chi, KT IRO.

Seung-Hoon Chi, KT IRO

Good afternoon. I am Chi Seung-Hoon, KT's IRO. This earnings release call is currently being webcasted live on our website, and you can follow the slides as you listen to the call. Let us now begin KT's Q3 2021 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 business data, except for historical performances, please be reminded that these figures are subject to possible changes. I will now invite the CFO, Young Jin Kim, for his remarks and presentation on Q3 '21 earnings.

Young Jin Kim, CFO

Good afternoon. This is Kim Young Jin, KT's CFO. Let's begin with key earnings highlights for Q3 2021. Consolidated revenue was KRW 6,217.4 billion, while service revenue reported KRW 5,402.4 billion, and operating profit reported KRW 382.4 billion. Driven by growth from the legacy telecom business, including 5G and Internet as well as platform businesses, which include B2B, media, content, and financial services, there was overall performance improvement for KT and its affiliates, which drove revenue up 3.6% on year and operating profit up 30% year-over-year. On a separate basis, revenue was up 3.2% on-year, reported KRW 4,664.7 billion, with operating profit up 24.3% on-year to KRW 259.1 billion. In particular, there was a salient service revenue growth as standalone service revenue increased KRW 114.1 billion, with Q3 cumulative revenue of KRW 312.7 billion. This is attributable to steady top-line growth from KT's traditional telco business and the expansion of its B2B and platform business. KT has classified its business domain into four segments: Digico and telco in accordance with the characteristics of the business, and B2C and B2B based on the customer. KT's legacy business was in B2C telco business, which comprises wireless Internet, fixed-line telephony, and they account for around 61% of the top-line revenue. Since KT's Digico transformation announced back in 2020, we've been focused on the platform-based Digico domain, especially B2C-based Digico domain exemplified by IPTV and B2B-based Digico. This represents cloud and IDC, which have benefited from the content-free habits becoming prevalent following the pandemic and greater digital demand from the corporate market to which KT responded swiftly. We've seen greater revenue uptrend versus 2019, the pre-Digico era. With Digico KT transformation, we plan to expand this domain from 39% as of today to 50% by 2025. Yet again, in Q3, we've seen meaningful results from the B2B Digico domain. In Q3, B2B businesses orders booked amounted to around KRW 1 trillion, reporting a record high quarterly figure. On a Q3 '21 cumulative basis, the order book amounted to KRW 2.5 trillion, significantly outpacing 2020's full-year amount. Another core business of KT Digico is AI and DX, which was up 29.7% year-over-year. This was mainly driven by the full-fledged initiation of the AI contact center business or AICC, an expanded user base for IDC and cloud. For the IDC business, on top of steady revenue stream from current IDCs received, revenue base expanding on the back of newly opened Yongsan IDC and KT's first branded South Curo IDC. Also from the DBO business, which we newly launched, we are gaining new clients and building a new basis for further growth. KT recently announced that it will place full momentum behind the AI business by employing AI-based active conversation technology that enables human-like speech. KT already employs AI technology in our own contact centers and provides AICC to major financial institutions and logistics companies. We are also actively considering adopting KT's ICC center to the public domain for central and local government for the benefit of disaster and safety management and care for the vulnerable. Furthermore, for small merchants run by a single person, hair salons and small mom-and-pop eateries, we introduced KT AI Secretary that would take reservations, orders, and respond to questions 24/7 all year round, doing what customer centers do. As such, KT will be the frontrunner in the domestic AI CC market and launch many services that employ AI technology. We also embarked on the AI service robot business with the release of serving robots. This service is currently used by restaurants and cafes as well as hospitals and golf driving ranges, as it sets the ground for popularizing the use of robots. We will continue to enhance the operating platform and launch many different types of new robots so that we may become Korea's frontrunner and robotics service provider. KTDS, one of KT's affiliates, is a software developer and designer who builds IT data systems for clients. They are broadening our digital business by winning projects on business platforms and AI-based predictive systems from financial institutions and government agencies as well. To strengthen our competitive edge and quickly respond to the needs of global customers in the fast-growing global data market, we acquired a global data specialist company called Epsilon based in Singapore. Epsilon is a company with global infrastructure, technical capabilities, and sales bases all across the world. Through this acquisition, KT will expand its global data business from Asia to North America and Europe, and we expect to win new business customers from both home and abroad. We also saw solid top-line growth, both in terms of size and quality, mainly around premium subscribers from KT's incumbent telecom business. 5G subscribers continue to display an uptrend with wireless service revenue up 3.8% on year and wireless ARPU up 2.7% on year, reporting KRW 32,476. Driven by higher sales of Giga-based products and offerings for single-member households, the broadband Internet business also saw sustained subscriber expansion. Restructuring of the group business geared towards digital transformation is also ongoing, which drove a significant rise in both revenue and profit of group affiliates. K Bank, after its first turnaround in Q2, reported a net profit of KRW 16.8 billion in the third quarter, recording an annual cumulative profit. Following a successful capital increase last July, subscribers surpassed 6.6 million as of the end of Q3, with total deposits of KRW 12 trillion and lending of more than KRW 6 trillion, which drove a stable loan-to-deposit spread. By offering online mid-price range products and launching products leveraging alliances with other group companies, K Bank is actively broadening its business. K Bank will continue to expand its product coverage, upgrade its application, seek marketing partnerships, launch diverse loan products, and dial up synergies with group affiliates to position itself as a differentiated financial platform. In media content, we've completed the governance structure around StudioGenie and further enhanced business competitiveness. We completed the acquisition of Hyundai HCN, Hyundai Media and took an equity stake in Korea's #1 subscription-based e-book startup, Millie's Library, and also spun off KT Season. StudioGenie completed Bites offering, and its capital base now amounts to KRW 227.8 billion and recently showcased Crime Puzzle, its first original content as its content production came under full swing. On the back of Millie's Library acquisition, Genie Music will expand its business from music to audio book and other audio content with the objective of becoming Korea's best AI audio platform provider. Audio book content will be placed first on Genie, the AI music platform, and we plan to produce and add a diverse array of audio content as we go forward. By offering Millie's Library via wide-ranging bundled services of KT, we expect growth of the subscriber base of respective companies will also be supported. Now moving on to third quarter '21 earnings results. Total revenue was up 3.6% year-over-year to KRW 6,217.4 billion. Operating profit was up 30% on year, reporting KRW 382.4 billion. Net profit was up 46.9% year-over-year to KRW 337.7 billion. EBITDA was 6.5% on year to KRW 1,277.5 billion. Next on the operating expense. Operating expense, on the back of the rise in business expense was up 2.2% year-over-year to KRW 5,835 billion. Next is on the financial position. The debt-to-equity ratio as of Q3 '21 was 122.6%, down 10.2 percentage points year-over-year. The net debt ratio was up 1.9 percentage points on year, reporting 33%. Next is on CapEx. CapEx Spend in Q3 '21 was KRW 600.7 billion, and Q3 cumulative CapEx was a total of KRW 1,464.8 billion. The amount of orders placed for IE equipment was flat year-over-year. But due to the COVID-19 pandemic, actual spending somewhat declined. Next, moving on to performances from respective businesses. Wireless revenue was up 3% on year KRW 1,794.7 billion. On the back of 5G subscriber growth, wireless service revenue was up 3.8% year-over-year, reporting KRW 1,697.8 billion. As of Q3 end '21, there was a total of 22,740,000 wireless subscribers. 5G subscribers were 5,610,000, which accounts for 39% of total handset subscribers. Next is on fixed-line and IPTV business. The next slide. Revenue was down 1.2% on-year to KRW 368.4 billion. Sustained growth from enterprise subscriber Voice GX service revenue stream started to take off significantly mitigating the revenue downfall. Broadband Internet revenue saw subscriber growth up 2.4% on-year to KRW 510.7 billion, driven by active sales of products for single member households and offering of stronger customer benefit. On the back of enhanced offerings of kids content and launch of OLED TV tab, there was growth in subscribers, driving IPTV revenue up 3.1% on year to KRW 473.4 billion. Next is on the B2B business. B2B business was up 6% on year to KRW 727.7 billion. Due to COVID pandemic infrastructure projects, including global ones, were delayed and in the process of reorganizing low-margin businesses, B2B IT Solutions revenue declined. However, as growing data traffic and digital transformation demand inched up, bringing corporate fixed-line revenue up 2.7% year-over-year. For the AI and DX business, revenue posted a steep growth of 29.7% year-over-year, driven by higher AICC revenue following AI solution adoption by the financial sector and new projects in public and financial cloud and growth in IDC DBO design-build operate business. Next is on group affiliate earnings. BC Card revenue on higher domestic acquiring volume was up 2.9% on year to KRW 888.1 billion. Skylife revenue was up 1% year-over-year to KRW 178.4 billion, driven by MVNO business expansion and higher Internet reselling. As one of core businesses of KT digico transformation, content subsidiary revenue was up 24.6% on year to KRW 241.6 billion, on the back of a rise in platform-based revenue from major companies. That was a brief update on KT's Q3 2021 results. Ever since its proclaimed transformation from a telco to a digico, we are crystallizing the changes as a digico. In 2021, together with revenue and profit growth, we reorganized the group's business portfolio around B2B and platform, laying the basis for mid- to longer-term growth. We will continue to endeavor to bring success to digico performance. Last but not least, with respect to the network failure that we experienced previous month, we once again would like to express our commitment that through process improvement, we will endeavor and exert our utmost efforts so that we could operate our network stably. Once again, we look forward to your interest and support. Thank you. For more details, please refer to our earnings presentation deck, which we previously circulated. We will now move on to Q&A.

Operator, Operator

Now the Q&A session will begin. The first question will be from Hoi Jae Kim from Daishin Securities.

Hoi Jae Kim, Analyst

I'm Kim Hoi Jae from Daishin Securities. I'd like to start with a question about your results. The Q3 performance was quite strong, but typically in the fourth quarter, there are individual cost impacts and non-operational effects that tend to hinder the performance trend. While the extent of that eased last year, should we anticipate more significant or any one-off factors in Q4? Also, concerning StudioGenie, you mentioned the release of original content titled Crime Puzzle. What does the lineup look like for next year, and do you have any projections for top-line revenue?

Young Jin Kim, CFO

Thank you for those questions. You asked 2 questions. First, regarding our Q4 outlook, any seasonality factor or non-OP impacting factors and what our forecast is for Q4. Now first factor to mention is that with regard to the network failure that we experienced and the relevant compensation expense that we've set aside, that figure had not been reflected in Q3 numbers. So that impact is going to come through in Q4 figure. KT traditionally has seen seasonality factors that emerged in Q4, for instance, those would be fees and commissions paid in terms of repair costs, service costs and IT and outsourcing-related expenses that would feed through usually in Q4. Regarding our projection on one-off upcoming in Q4, back in 2020, there was impairment that was booked regarding the 28 gigahertz spectrum. So there was quite a significant one-off non-operating expense factor. But this year, we do not foresee any such massive or significant one-off factors that would come into play. Having said that, usually, at the end of the year, there is an accounting-based valuation done on invested equities and assets. So there is always a possibility that there may be some slight expense. The second question you asked related to StudioGenie's upcoming lineup for next year and revenue outlook. In order to have a very stable backdrop to be able to produce content comfortably, we've recently conducted a rights offering capital increase in the amount of KRW 175 billion. This year, we started off with Crime Puzzle, and we plan to produce about 6 different titles. And of those, 2 titles will be released in the second half of the year. Midnight Thriller is scheduled to be released through OTV and a sequel after the end of November. So next year, we are planning to produce about 15 different original content titles. By 2023, we want to make sure we have capability and system in place that could enable us to produce about 20 different titles every year. Based on those capabilities, we want to ensure that we secure an IP library of about 1,000 and around 100 drama IPs by 2025. The content that we produce from StudioGenie would, of course, be distributed through KT Group's platforms, such as OTV Season, Sky TV, and Media Genie. But we also plan to distribute such content to other platforms as well as program providers depending on the characteristics of the content. You did ask us about our top-line outlook for next year. For the time being, rather than focusing on financial performance for StudioGenie, we are emphasizing laying the appropriate environment for content production as well as driving synergy across the group affiliate. Next question, please.

Operator, Operator

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

Joonsop Kim, Analyst

Hello. I am Kim Joonsop from KB Securities. My first question relates to IDC, which is that I would like to understand what the company's take is on the IDC market. We see a lot of players entering into the market. Compared to those other players, what is KT's position? And what is your strategy? Second question relates to your OTT service Season. There will be Disney+ launched soon in Korea. So would there be any financial impact on Season? And with regards to strategy for Season, what is your strategic direction?

Young Jin Kim, CFO

Thank you for those questions. First question relates to KT's IDC positioning and strategy. As you've correctly pointed out, if you look at the IDC providers, including global providers, we see the number of players actually increase. I think that is a good testament to the fact that this market outlook is quite bright. Now companies are really speeding up their digital transformation. Accompanying that, we have a significant increase in the demand for data centers, and there's this explosive growth there. KT, as the #1 market player, I think we have around 40% of market share. We are responding to that demand. In order for us to solidify our market leadership, we will continue to make investments into additional IDCs. Now in terms of new IDCs, one has to seek out the appropriate location in sight, which is quite time-consuming. So providing new IDC, supplying that into the market cannot happen overnight or over a short period of time. Hence, we also developed a branded IDC business model, where we provide KT's network and command and control capabilities to other companies' IDCs. For the first time, we successfully opened the South Curo IDC, which is KT's first branded IDC, and we plan to continue to expand on such business model. Also, in the face of such exclusive demand growth, we are seeing new openings and new opportunities in various different types of business models, such as designing, building, and operating IDCs. We call this type of model DBO, for short, design, build, and operation. By adopting this business model, we will continue to strengthen our market dominance. The second question related to the Disney+ launch in Korea and what impact that will have on the outlook of Season's financials. KT also will launch Disney+ Affinity package, alliance package, as said on November 12, and we are at this point in the process of developing the pricing package and promotion for the customers. Now KT is well aware that the Korean consumers' level of demand or requirement when it comes to global standard content is quite high. At this point, we are developing a very reasonable and best offerings to better fit the needs of Korean consumers. We believe that it is meaningful that we are able to provide more options and more choices to the Korean viewers, and we will be able to provide more selection, which we think is meaningful as we can provide such abundant services through this extensive content library of Disney+. KT's Season business also has continuously beefed up its content offerings, and we have been able to drive growth with the 5G bundled lineup. Furthermore, we've shifted and changed the governance structure and have placed Season under the governance of StudioGenie. OTT subscribers, depending on the type of content that they want to view, tend to subscribe to multiple OTT services. Thus, we think that the launch of Disney+ is not going to have any direct impact on Season per se. Season, supported by the overall StudioGenie umbrella, will continue to strengthen its channel as well as competitiveness in terms of its content offerings so that we may continue to drive growth from this business. Next question, please.

Operator, Operator

The following question will be presented by Hong-sik Kim from Hana Financial Investments.

Hong-sik Kim, Analyst

I have two questions for you. First, looking at your earnings results up to Q3, the operating profit and cumulative asset basis for the parent company increased by 29%. However, with several upcoming expense factors in Q4, investors seem concerned. Given the current trends, do you believe you'll be able to maintain the upward trajectory of dividend payouts? Secondly, the CapEx for Q3 has been relatively slow from a bondholder's perspective, which might be seen as a positive. However, from our standpoint as equity investors and analysts, we don't completely welcome this because we believe that investments are necessary to drive top-line growth. Can you share your outlook on CapEx planning going forward?

Young Jin Kim, CFO

Thank you for those questions. First question related to the operating profit up-trend, can the market expect a higher dividend payout? As I stated previously, in Q4, there is going to be the network failure-related compensation figure that will be reflected and paid out in Q4, along with some of the seasonality factors. However, there are no non-OP operating profit items that will have any significant impact this year. Thus, the growth in operating profit, we believe will be connected to increases in dividend. Responding to your question on the slowness of the CapEx spend due to the impact of COVID and the shortage of semiconductor supply, it is true that CapEx spend somewhat was pushed back. However, if you look at the size of CapEx comparing last year's Q3 and this year in terms of the size of the orders placed, it is actually quite flat year-over-year. Because of these reasons, we think that CapEx spend is going to be focused mostly in Q4. Thus, on a per annum basis, we would most likely see a flat CapEx spend on a year-over-year basis. As you have correctly mentioned, CapEx is important for us to operate our telco business in a stable manner and make improvements in quality as well as for making investments focused on our digico business expansion. So we expect CapEx to be spent in accordance with plan.

Operator, Operator

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

Seung-Hoon Chi, KT IRO

Thank you. With no further questions, we would now like to close the Q&A session. Once again, thank you for joining us and giving us your interest as well as questions. This brings us to the end of the earnings call for Q3 2021. Thank you.