Earnings Call Transcript - KT Q1 2024

Young-Yoon Yun, IRO

Good morning. I'm KT's IRO, Young-Yoon Yun. We will commence KT's first quarter 2024 earnings presentation. This earnings release call is being webcast live on our website and you can make use of the presentation slides as you listen in on the call. Please be reminded that today's presentation includes financial estimates and operating results under the K-IFRS standards, which are yet to be reviewed by an outside auditor. We hence cannot ensure accuracy nor completeness of financial and business data aside from historical actuals. So we ask that you note that these figures may be subject to changes. With that I invite our CFO, Min Jang for his welcoming message and presentation on Q1 2024 earnings.

Min Jang, CFO

Good morning. I'm Min Jang, KT's CFO. At the Mobile World Congress 2024 held last February, KT announced its vision to believe and transform into an AI CT company. By combining AI and IT with our CT capabilities, we will seek to reinforce our core competitiveness and explore new business opportunities powered by AI. We will be steadfast in finding a sustainable growth engine for the future by way of innovation and rationalization of our business structure that is based on AI-driven digital transformation. With that said, let's go into the details of KT's Q1 highlights. Supported by well-balanced growth from B2C and B2B businesses on top of growth momentum from the group's core business portfolio which includes IDC and cloud, KT's consolidated revenue reported KRW 6,654.6 billion and separate basis revenue was at KRW 4,694.8 billion, both reporting growth versus last year. Separate basis operating profit was up 1.5% year-on-year, coming in at KRW 393.8 billion, driven by revenue growth and efficient marketing activities. Consolidated operating profit increased 4.2% year-on-year to KRW 506.5 billion backed by profit growth from major subsidiaries, including BC Card, KT Cloud, and KT Estate among others. On April 30, KT announced a cash dividend of KRW 501 per share for the first quarter, marking the first quarterly dividend payment since the beginning of the company. Following that, KT's Board of Directors made the decision on May 9 to cancel 2% out of the 4.41% of treasury shares owned by the company. KT will continue to do what it can to enhance corporate value by strengthening shareholder return underpinned by profit growth. Now moving on to the earnings of the first quarter of 2024. Operating revenue increased 3.3% year-over-year to KRW 6,654.6 billion. Despite a rise in business expenses due to inflation, there was solid revenue growth, which drove operating profit up 4.2% year-on-year to KRW 506.5 billion. On top of operating profit growth stemming from improved non-operating income such as higher dividend income, net income increased 26.9% year-on-year, reporting KRW 393 billion. EBITDA posted 4.6% year-over-year growth, reaching KRW 1,480.2 billion. Next on operating expenses: due to increases in business expense and cost of goods sold, operating expenses increased 3.2% year-on-year to KRW 6,148.1 billion. Next, the financial position: the debt-to-equity ratio as of March end 2024 was 129.8%. The net debt-to-equity ratio came down 8.1 percentage points year-on-year to 38.5%. Next, CapEx: total CapEx spend for KT and its main subsidiaries in Q1 amounted to a total of KRW 507 billion. KT's separate basis CapEx was KRW 318.1 billion, while CapEx from group subsidiaries in key growth areas, including finance, media, IDC, and cloud recorded KRW 188.9 billion. Next is the performance from each of the lines of business. Wireless revenue was up 1.7% year-on-year to KRW 1,736.5 billion. 5G subscribers now account for more than 74% of total handset subscribers, surpassing 9.95 million subscribers. Meanwhile, higher roaming revenue and MVNO business expansion drove wireless revenue growth. In January, we introduced ten rate plans under the 5G mid-tier scheme and eight different types of direct rate plan called YoGo, giving more choices for 5G tariffs to our customers. KT will continue to innovate its rate scheme and distribution to elevate customer services to the next level. Next is fixed-line business: Broadband Internet revenue grew 2.1% year-on-year to KRW 620.8 billion, backed by net addition from GiGA Internet subscribers and differentiated value-added services, such as the new WiFi models. The media business posted 2.3% year-over-year growth, thanks to momentum behind the premium rate plans and IPTV subscriber base expansion. As announced during the Media Day event held on the 29th, KT will lead AX at the group level underpinned by specialized AI technologies for media such as the Magic platform. Home telephony revenue decreased 5.7% year-on-year to KRW 183 billion. Next is B2B services: driven by robust growth in enterprise broadband Internet and data business along with higher demand for AI transformation services, B2B service revenue increased 5% year-on-year. Revenue from five major growth drivers posted 4.9% year-over-year growth, supported by the adoption of AI contact center services by the financial vertical and activated IoT project wins for remote command, control, and security solutions. Strategically catering to businesses' growing demand for AI transformation following the technology shift ignited by generative AI, we plan on providing distinctive AI transformation services for each industry sector as well as AI communication services that combine AI solutions with the incumbent telecom service. Next, results from our major subsidiaries: BC Card revenue decreased by 1.8% year-on-year to KRW 935.6 billion due to a narrowing acquiring volume impacted by the economic slump. Despite the decline in pay TV service subscribers, Skylife revenue was buoyed by growth from Internet resale and MVNO business, with revenue being flat year-on-year at KRW 254.4 billion. For the content subsidiaries, KT Genie Studio reported a decline of 2.8% year-on-year due to decreases in non-media revenue following industry downturns, and on downsized production and airing of content. For KT Cloud, higher IDC revenue primarily coming from global clients and project wins led to a revenue increase of 17.8% year-over-year. To align with growing demand for AI infrastructure, KT Cloud expanded its IDC business as well as the service model to cater to a full-fledged move towards native cloud, as we plan to sustain the growth trajectory. On balanced growth between sales and rental business, KT Estate revenue increased 20.3% year-on-year. The operation of the Le-Meridian Moxy Hotel, which opened back in November 2022, is now fully stabilized, and the occupancy rate has also increased year-on-year, sustaining a secular uptrend. This has been an update on the earnings of KT for Q1 of 2024. With its focus on fundamentals, KT solidified its business competitiveness, achieving balanced growth both on a consolidated and stand-alone basis. We will endeavor to drive quality growth through fundamental business innovation to enhance profitability mid- to long-term and work to enhance KT's corporate value. We ask for your continued interest and support from investors and market analysts. Thank you.

Operator, Operator

For more information, please refer to the earnings presentation that we circulated previously, and we will now entertain your questions. To allow as many questions as possible, we would like to ask that you please limit your questions to two per person.

Soojin Kim, Analyst

Good morning. I would like to ask you two questions. First is that this quarter we've seen a double-digit growth from KT Cloud. I would like to understand what the key drivers are behind the sustained growth of your KT Cloud business. This year, it is expected that due to the economic slump, companies' IT expenditure will be quite conservative. What is your annual outlook for your KT Cloud business? Second question: back in February, you announced that you will be hiring about 1,000 IT employees. What impact will that have on your annual labor cost?

Min Jang, CFO

Yes, responding to your first question on KT Cloud. If you look at our first quarter numbers, we've seen IDC business grow, underpinned by our colocation and DMO businesses. Now, the global clients or customers, including AWS, Microsoft, and Google, have started to use our colocation services. That has worked as a strong driver behind our performance. In 2024, our objective is yet again to further grow our revenue and operating profit, with a revenue growth plan of about 26% and forward profit growth of 51%. Regarding your second question, the impact of hiring 1,000 IT personnel on the labor cost line item will be in the range of KRW 20 billion to KRW 30 billion. As you are aware, going forward for about five to six years, we will have around 1,000 people retiring from the company. So all in all, we do not expect there to be any significant labor cost impact. We will have about 700 people leaving the company due to their retirement.

Jisoo Jeong, Analyst

I am Jeong Jisoo from Meritz Securities. Thank you very much for taking my question. I have two questions. The first one is: what is KT's overall approach to your AI strategy going forward? And you've made the decision to pay out a quarterly dividend of KRW 500 per share. Does that mean that we can expect about KRW 2,000 per share on an annual basis? Also, if you could provide some color regarding any additional shareholder return plans that you have in place.

Min Jang, CFO

Yes, I will first respond to your question about the details of our AI strategy. Our mid-term strategy focuses on three different areas to eventually become an AI CT company. The first pillar is combining AI with our IT capabilities to strengthen our core competitiveness. A good example I could cite is by incorporating AI capabilities into our customer service centers, which will help us reduce the time spent on counseling our customers and automate certain processes. The second pillar is exploring and identifying new business opportunities by applying AI capabilities to our existing IT and data cloud businesses. We plan to develop specialized services and models for different verticals like the financial sector and public sector. Lastly, we aim to apply AI capabilities to our media and platform business, helping us innovate the platform powered by AI. An example is studying and developing user experiences and interfaces that will be more convenient for our user base by examining different viewing patterns, especially for media services. Regarding dividends, we have paid down KRW 500 per share as a quarterly dividend payout. Yes, there would need to be a resolution and decision made at the Board of Directors level, but we will ensure that we do not fall short of market expectations when conducting the quarterly dividend. In terms of additional shareholder returns, as we've done today, we have canceled some of the treasury shares we were holding. Going forward, we will continue to explore various ways to ensure that we expand shareholder return.

Joonsop Kim, Analyst

Thank you for taking my question. I'm from KB Securities. I just have one question. I see that the growth you’re seeing from the B2B services business is notable compared to the past. Are there any particular trends or aspects we need to be mindful of regarding the types of projects you're winning or their size?

Min Jang, CFO

I will respond to that question about the earnings from our B2B services and our direction moving forward. In our B2B services, we've seen solid growth in our Internet broadband business and data. I previously mentioned that our focus is more on driving profit and concentrating on projects that yield fundamental boosts and visibility in terms of the returns we gain. We have experienced a year-over-year growth of 5.6%, and we will continue to strive for tangible results. I see that there are no other questions waiting in the queue. This brings us to the end of the first quarter 2024 earnings call of KT. Once again, thank you very much for joining us despite your busy schedule. Thank you very much for your continued interest and support.