Earnings Call Transcript - KT Q3 2022

Operator, Operator

Good afternoon. Let's start KT's Third Quarter 2022 Earnings Presentation. This earnings call is currently being broadcast live on our website, and you can view the slides while listening. Before we start, please be aware that today's presentation contains financial estimates and operating results according to the K-IFRS standard that have not been externally audited. As we cannot guarantee the accuracy and completeness of financial and business data other than historical figures, please keep in mind that these numbers may change in the future. Now, I will hand it over to our CFO, Kim Young-Jin, for the Q3 2022 earnings presentation.

Kim Young Jin, CFO

Hello. I'm Kim Young-Jin, KT's CFO. I will begin with the performance highlights for Q3 2022. During the third quarter, we continued our digital platform transition and made preemptive responses to the uncertain external environment. As a result, we are seeing stronger growth and profitability from DIGICO and B2B. On a cumulative basis for the third quarter, consolidated service revenue was KRW 16,980.8 billion, which is up 6.3% on year, and operating profit reported KRW 1,538.7 trillion, up 18.1% on year. Cumulative standalone service revenue for Q3 was KRW 11,843.9 billion, and standalone operating profit reported KRW 1,057 billion, recording growth of 2.0% and 8.3% year-over-year, respectively. Under the DIGICO strategy of expanding the playing field, we are seeing explosive growth from core businesses, which include B2B, DX, media and content, finance, and cloud and IDC. In the B2B business, supported by KT's nationwide coverage, fixed wireless infrastructure, and customized DX services for customers in different segments, we are leading the market by driving business DX digital transformation demand. The order volume is usually a leading indicator for top-line revenue growth. On a Q3 cumulative basis, orders were up by 21% year-over-year, reaching KRW 2.97 trillion. AICC, which is a flagship service for B2B and DX, is witnessing expanding demand from the financial sector. Since embarking on a full-fledged business in 2021, we've been sustaining an uptrend in growth, driving Q3 2022 cumulative revenue up by more than 100% year-over-year. KT Cloud continues to post growth, leading the public cloud market, gaining market share, holding the #1 position in terms of the number of services and winning businesses that migrate over to public cloud. Leading the innovation and development of the pay TV market, KT's IPTV reinvented itself under a new brand name, Genie TV, back in October, positioning itself as one of the growth pillars of the DIGICO business. We also plan to adopt an AI-powered curation service and make the leap as a media portal, cutting across VOD and OTT and the media content platform. Following the success of Attorney Woo, the original dramas; Recruit, Good Job, Love Is for Suckers, and I Am Solo, which is an entertainment program, continue to create buzz and had a popular run. For K Bank, Q3 deposits were KRW 13.5 trillion; loans were KRW 9.8 trillion, and we have 8.01 million customers, with all operational indicators displaying an uptrend, widening the profit. To broaden the DIGICO domain and strengthen our capacity, we are pushing for alliances and cooperation with leading businesses from respective segments of our core business. To bolster growth and competitiveness in the OTT business, KT and CJ ENM decided to merge their respective OTT businesses, and we received relevant approval from the KFTC in October, and we'll see the merger take place as of December 1st. KT Submarine, which is a specialized construction contractor for submarine cables, onboarded LS Cable & System, one of Korea's biggest cable manufacturers, as a strategic shareholder to prepare for another leap forward. Following the strategic partnership with Shinhan Financial, CJ, and Megazone, we also partnered with Hyundai Motor Group to be at the very forefront of future mobility. There was also a share swap to guarantee long-term implementation and business cooperation. We plan to identify opportunities to cooperate and create business synergies across connected cars, UAM, and 6G-based autonomous driving and many more. Now, I will run through the financial highlights for Q3 '22. Operating revenue was up 4.2% on year to KRW 6,477.2 billion, while operating profit was up 18.4% on year, reporting KRW 452.9 billion. Net profit was down 3.4% on year to KRW 326.2 billion. EBITDA was up 6.4% on year, reporting KRW 1,359.7 billion. On the next page, I will talk about the operating expense. On the back of inflation and the rise in prices and spending for DIGICO and B2B business expansion, operating expense was up 3.2% year-over-year, reporting KRW 6,024.3 billion. Next is financial position. The debt-to-equity ratio as of September end '22 reported 127%, down 4.1 percentage points quarter-on-quarter. The net debt ratio was down 2.3 percentage points on quarter, reporting 40.6%. Next is CapEx. KT Group's Q3 cumulative CapEx was in total KRW 2,386.3 billion. KT's separate basis CapEx spend was KRW 1,864 billion. Major subsidiaries' CapEx comprising financial, media and content, cloud and IDC, and real estate amounted to KRW 522.3 billion. Next is on the breakdown of performance by each business line. Driven by subscriber growth from premium services of wireless and Internet, telco B2C business revenue was up 0.6% year-over-year, reporting KRW 2,356.7 billion. On the back of 5G subscriber growth, wireless revenue was up 1% year-over-year, reporting KRW 1,547 billion. 5G subscribers came in at 7,950,000, expanding to 57% of the total subscriber base. Through combined management of our MVNO and the MNO market business, we were able to sustain the total wireless subscriber net addition trend. Broadband Internet revenue was up 2.6% year-over-year to KRW 600.3 billion, driven by subscriber growth around GiGA Internet. Fixed line revenue was down 7.8% year-over-year to KRW 209.4 billion. Next is DIGICO B2C business. DIGICO B2C business saw sustained growth of media and mobile platform users, with its revenue growing 3.6% on year, reporting KRW 558.5 billion. IPTV business was up 5.8% year-on-year on the back of high ARPU, subscriber expansion, and growth from platform-based revenue. Next is on Telco B2B business. Telco B2B business saw growth from enterprise Internet data and voice call, with its revenue up 9.5% year-over-year, reporting KRW 546.4 billion. Backed by the DX transition, we've seen continuous growth in data traffic usage by businesses. And with the growing demand for premium services, enterprise Internet and data revenue posted 10.9% year-over-year growth. Enterprise voice call posted 6.8% year-on-year growth in response to the MVNO market expansion and net addition trend from enterprise voice calls. Next is DIGICO B2B. DIGICO B2B business is growing in step with the expanded DX demand from businesses, which is a structural change to which we are responding proactively. As such, revenue, which includes KT Cloud, was up 9.9%, reporting KRW 592.4 billion, with its steep uptrend continuing. Enterprise DX posted 8.3% year-over-year growth, driven by differentiation of incumbent telco services like enterprise messaging underpinned by DX. Thanks to the growth from AICC and the smart mobility business, AI and new biz revenue reported a 14.1% rise year-over-year. Regarding our major subsidiaries, driven by a rise in credit card acquiring volume and new business additions such as issuing a BC branded credit card, BC card revenue was up 10.8% on year, reporting KRW 984.2 billion. Skylife revenue was up 50.3% year-over-year to KRW 268.1 billion, supported by growth from MVNO and Internet resale businesses and content business from SkyTV. Content subsidiary revenue was up 24.7% on year, reporting KRW 301.2 billion, driven by a rise in e-commerce revenue, digital ads, and ramping up KT's StudioGenie's business. So far, this was an update on KT's Q3 '22 earnings. Despite rate hikes, inflation, and an uncertain macro backdrop, which created a challenging business environment, KT was still able to achieve both revenue and profit improvements underpinned by robust growth of KT's DIGICO core portfolio of businesses, including B2B, DX, media and content, finance, and cloud and IDC. We will continue to elevate our corporate value by placing momentum behind the growth of our business portfolio around DIGICO and B2B and by improving profitability, underpinned by cost structure innovation. Once again, my gratitude to investors and analysts for joining us today, and I look forward to greater interest and support going forward. Thank you. For more details, please refer to the document that we have previously circulated. We will now begin the Q&A session.

Operator, Operator

The first question will be provided by Hoi Jae Kim from Daishin Securities.

Hoi Jae Kim, Analyst

I would like to ask two questions. We've seen earnings growth up until Q3. Can you provide some insight into your outlook for Q4 and the entire year regarding profit? Additionally, it would be helpful if you could share your dividend outlook as well. For my second question, your wireless ARPU has been maintaining an upward trend of around 4%. What is your outlook for next year?

Kim Young Jin, CFO

Thank you, Mr. Kim Hoi Jae, for your question. You asked about our positive growth up until Q3 and requested insights on the Q4 outlook and the year as a whole, including our dividend plans. As I mentioned, KT's Q3 performance in our B2B business, driven by demand for digital transformation in enterprises, has resulted in a growth of 21% in order volume, reaching KRW 2.97 trillion. This sets a strong foundation for our future revenue growth. Additionally, our telco business has seen robust top-line performance, with an increase in premium subscribers for our 5G services and GiGA Internet. In Q4, we will work hard to maintain this trend. Looking ahead, we will strive to preserve our revenue growth despite a challenging market environment. We plan to manage our costs efficiently, focusing on profitability and margins as we move into Q4 and the next year. In Q3, we showed improvement in profitability, and we aim to sustain this focus on efficiency to achieve year-over-year profit growth. Regarding our dividend, it will be set at 50% of the adjusted net profit for this year. KT has improved its profitability and has a history of increasing our per-share dividend. With our revenue growth and cost efficiency initiatives, we hope to enhance the dividend payout if we can increase profit levels year-over-year. Your second question was about wireless ARPU. In terms of wireless service revenue, we are anticipating around 2% growth for the year. With the increasing 5G subscriber base, we expect ARPU growth to align with 2021 levels. We'll provide more detailed guidance in our next conference call in February. We aim to maintain service revenue and ARPU growth at levels similar to this year. With more value-added services and choices for our customers, we anticipate an increase in VAS revenue, contributing to higher ARPU.

Operator, Operator

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

Joonsop Kim, Analyst

I'm Kim Joonsop from KB Securities. I have one question regarding the private 5G network project. I would like to know KT's perspective on this private 5G network and your strategies, especially with many players entering this space. I am interested in your outlook on the overall trajectory of this domain.

Kim Young Jin, CFO

Thank you, Mr. Kim, for your question. You asked about our strategies and outlook regarding the private 5G network. This year marks the beginning of the government initiative to promote private 5G network projects, which are considered very important. We have identified business opportunities in this area. The government has selected 11 different projects, and the KT Consortium has secured orders in four main sectors, including public health care, aerospace, private manufacturing, and education at 28 gigahertz. We are currently in the process of developing the 5G private network. KT has the potential to be both the builder of the private 5G network and its operator. We are also exploring various business opportunities in collaboration with other KT Group companies by obtaining 5G private network licenses. At the KT Group level, we can be very flexible in our approach to the 5G private network. Typically, the client constructs the assets, such as the 5G base station and core. However, to ease the financial burden on our clients, they will build the 5G base stations themselves, while KT will manage the 5G core using our internal cloud platform, which we are considering offering as a service to our clients.

Operator, Operator

The following question will be presented by Neale Anderson from HSBC.

Neale Anderson, Analyst

I would like to ask about the competitive dynamics in both the content and enterprise solutions market, please? The reason I’m asking is that I think all three large telcos are focused on this area. I’m curious if you’re experiencing any cost inflation, particularly in terms of labor costs or specifically in the content market, the cost of content itself. That’s my first question. My second question relates to network slicing and the ability to charge different groups of users different amounts depending on the technology parameters they’re receiving. When do you think you’ll be able to launch services using network slicing?

Kim Young Jin, CFO

Thank you very much for the question. I will first respond to your question about network slicing. If you consider the basic foundation that will support the future of 5G B2B services, we expect and hope that network slicing will provide an opportunity to reevaluate the value that a 5G network offers. As 5G network slicing has been recognized by government authorities as a specialized service, we now have an institutional basis to provide customized services in the B2B domain specifically for customers. This will enable us to diversify the pricing based on customized products, and we believe this will positively impact profitability in the mid- to long-term horizon. KT plans to release multi-slicing services before the end of the year that will divide the network based on the destination IP, providing specialized features on a standalone SA basis. We are currently working on developing and launching enterprise-only SA services. You also asked about our outlook regarding possible cost inflation, especially in content and the B2B business. KT is currently expanding its portfolio around content and B2B, but we have a clear differentiation compared to our peers. We are engaged in business supported by our physical network and sales capabilities. We see that there is structural growth in the industry as demand rises for digital DX services and content. Recently, against the overall inflationary backdrop, there is pressure pushing up costs. However, we are not focusing on competing in a small slice of the market; instead, we aim to expand the market pie itself driven by overall growth and demand. We believe there is significant potential on the top line. Even if costs increase slightly, we plan to respond by growing our top-line revenue, which ultimately can translate into improved profit. Many businesses today face rising cost structures, and they are looking to offset those rises through digital transformation. We believe this will continue to drive demand for DX-related services. If we can leverage our ICT capability effectively, we believe we will generate additional demand.

Operator, Operator

Currently, there are no participants with questions. We will wait a moment until another question comes in.

Kim Young Jin, CFO

With no further questions, we would like to close the Q&A session. Thank you very much for joining us this afternoon. This concludes KT's Q3 2022 earnings presentation. Thank you.