Earnings Call Transcript - KT Q1 2020

Operator, Operator

Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2020 first quarter earnings results by KT. We would like to have welcoming remarks from Mr. Seung-Hoon Chi, KT IRO; and then Mr. Kyung-Keun Yoon, CFO, will present earnings results and entertain your questions. This conference will start with a presentation followed by a divisional Q&A session. Now we would like to turn the conference over to Mr. Seung-Hoon Chi, KT IRO.

Seung-Hoon Chi, KT IRO

Good afternoon. I am Seung-Hoon Chi, KT IRO. Let us now begin KT's 2020 Q1 Earnings Presentation. This earnings release call is being webcasted via our website, and you can refer to the presentation slides as you listen in on the call. Please note that today's earnings results include pre-audited financial earnings and business results estimates prepared using the K-IFRS standard. Thus, we cannot guarantee the accuracy and consistency of all financial and business performance data other than the fixed past data and note that they may change in the future. We will begin with CFO Kyung-Keun Yoon's opening remarks followed by 2020 Q1 earnings presentation.

Kyung-Keun Yoon, CFO

Good afternoon. I am KT's CFO Kyung-Keun Yoon. Despite the difficult business environment, including COVID-19 in the first quarter, it has been a meaningful time holding a new-look Board with the new CEO taking office and stable transition of the management amidst support from investors and analysts. In today's ICT market, which includes telecommunications, 5G is becoming the mainstream. All industries are accelerating the pace of digital transformation, and we are experiencing great changes in our daily lives since the outbreak of COVID-19, which includes the greater adoption of the untapped culture. With the new management structure in place from the beginning of this year and in tandem with structural changes, KT has created the AI/DX organization and strengthened its B2B organization. The field organization has also transitioned to the regional HQ system in order to quickly respond to various customer needs. Reflecting these changes, KT has decided to change how we present our revenue categories from this year. While the revenue structure in the past was driven by key B2C core businesses, including Wireless, Fixed-Line and Media, starting from 2020, we have two main categories: B2C and B2B. The new B2B revenue has three business areas: traditional corporate lease line; corporate IT solutions, which includes SI business; and AI/DX, which includes IDC and cloud business. The product revenue has also been simplified by excluding the SI business to represent only the handset revenue. Moreover, we have separated the earnings performance of KT and its affiliated group companies to clearly present the performances of individual group companies. We expect to further raise your understanding of the KT Group with the realignment of the revenue categories. Let me now present our first quarter earnings performance. Q1 total revenue was KRW 5.8317 trillion, a similar level on year, and while handset revenue fell 6.9% Y-o-Y due to the decline in the handset sales volume from COVID-19, service revenue grew 1.0% Y-o-Y with stable performance from core businesses, including Wireless, Internet and Media as well as the growth of the B2B and AI/DX businesses. Operating profit was KRW 383.1 billion, down 4.7% on year, with a small decline in the profits from group companies due to COVID-19's impact. Net income was KRW 226.6 billion, down 12.8% Y-o-Y, and EBITDA was KRW 1.2958 trillion, down 1.0% Y-o-Y. In 2020 Q1, operating expense was KRW 5.4486 trillion, up 0.3% on year through continued cost control efforts. The debt-to-equity ratio as of the end of 2020 Q1 was 116.5%, down 9.1 percentage points on year, and net debt ratio was 37.6%, up 10.2 percentage points on year. At the beginning of this year, we presented our annual CapEx guidance to be around KRW 3.1 trillion. CapEx in the first quarter was KRW 406.9 billion, which is 13.1% of the annual plan. As we are in the second year of launching the 5G service, KT plans to focus on expanding the coverage to outdoor shadow and indoor areas to improve its user service quality. Wireless revenue was up 1.9% on year to KRW 1.7357 trillion. Of this, Wireless service revenue was up 2.2% on year to KRW 1.6324 trillion, backed by the increasing number of prime subscribers since the launch of 5G despite the great decline in roaming revenue due to the COVID-19 outbreak. In Q1, the total number of Wireless subscribers reached 21,980,000 with a net addition of 181,000 MNO subscribers. Since starting the world's first 5G service in April 2019, as we entered the second year, we have 1,780,000 5G subscribers. KT has been leading the market with innovative tariff plans. In the first quarter, we expanded our 5G age group with the launch of the 5G Yteen tariff plan for teens and the Y Super Plan for the 20s. In particular, within one month of the launch of the Super Plan Plus, the new tariff plan with a variety of content-based benefits for video, music, VR, etc., has been positively received with more than half of new 5G subscribers opting for this plan. The 5G streaming game service, currently in open beta, has surpassed 40,000 subscribers. After a service upgrade, daily average game playing time has increased by around 40%, and the number of weekly visitors has nearly doubled. The service is scheduled to be officially released as a monthly fixed-rate subscription offering in the first half. KT will cement its leadership by strengthening its fundamental 5G competitiveness and differentiated 5G service offering and secure growth momentum. Fixed-line revenue was down 7.0% Y-o-Y to KRW 372.5 billion with the decline in subscribers. In broadband Internet, KT reinforced its #1 position fueled by the increase in the number of GiGA Internet subscribers. Broadband internet revenue was 0.5% on year to KRW 502.5 billion with continued growth in GiGA Internet. IPTV revenue is maintaining its robust double-digit growth with revenue growing 11.9% on year to KRW 417.7 billion. KT's Media service is creating changes as an integral part of our customers' daily lives. KT has strengthened its market leadership by responding quickly to customer needs with the Kids' Land service, homeschooling-affiliated contents, and AI-based English education service. Moreover, the Super VR launched Korea's first 4K wireless VR service in 2019, showcasing 8K VR streaming for the first time in the world. With COVID-19 affecting outdoor activities, March's monthly usage volume increased by 60%, and per subscriber average usage time increased by 20% as well. Season, the new OTT service launched last November, is showing its potential by surpassing 2.24 million MAU within just 4 months. Season is the only OTT service in Korea that has all the domestic broadcasters' content, and we will further strengthen its competitiveness in the future. B2B revenue was KRW 674.8 billion, up 8.2% on year. The B2B business' value as a new growth driver has been confirmed with the growing demand for digital transformation. KT, in particular, has the competitive edge as Korea's leading IDC operator with 12 internet data centers. Consequently, the growth was led by an increase in AI/DX revenue by 28.5% on year with greater sales of cloud services to public and financial sectors. Furthermore, Korea's number one AI, GiGA Genie, attracted more than 2.3 million subscribers and is showing tangible progress by leading the AI spatial market, including AI apartments and hotels. The growth for B2B has been opening up a new opportunity to leverage AI technology with the acceleration of digital transformation from COVID-19 and the growing need for companies to build productive business environments. KT plans to lead the B2B market by assisting in the innovation of other industries with the channel infrastructure and know-how in the B2B market that we have built over a long period of time and combining our leading edge network and AI/DX capabilities. This brings us to the end of KT group's first quarter earnings results. Presently, the world is fighting an invisible enemy called COVID-19. While there is some impact on the business plan and field operations than what we had initially planned at the beginning of the year, we are exerting efforts to minimize the negative impact through the growth of our core businesses and efficient cost execution. Now is the time for us to prepare for the post-COVID-19 era. Along with the greater prevalence of the untapped culture, we see demand for digital transformation in our cherished daily activities that we have previously taken for granted. Crisis and challenge await, but rather, this is an opportunity for KT. Backed by KT's leading network quality and digital capability, we will quickly respond to customer needs, assisting the changes in people's daily lives and the innovation of other industries. In line with the management direction of our new CEO, KT will turn this adversity into an opportunity by focusing on customer-centric innovation and profitability enhancements. I ask for great interest and support from you, investors and analysts. Thank you.

Operator, Operator

The first question will be provided by Hoi Jae Kim from Daishin Securities. And the next question will be provided by Hong-sik Kim from Hana Financial Investment.

Hoi Jae Kim, Analyst

I have two questions. My first question is related to your dividend policy. Taking into consideration the one-off issue, I believe that the dividend payout ratio is set around 40%. So can you provide additional color to what the dividend would look like in the future? My second question is related to your performance in Wireless service. You have already successfully done the turnaround for the Wireless service revenue, and your wireless ARPU is highest compared to the other two companies. I am interested in what sort of guidance you can share with the market related to KT's performance in Wireless service. If you can give us some information related to the outlook for our 5G subscriber base number or what ARPU or revenue would look like, that would be very helpful.

Kyung-Keun Yoon, CFO

To address your first question on the dividend policy for next year, currently, the management and the Board of Directors have a consensus that we need to come up with a dividend policy that is more predictable for the market. Based on this consensus, the BoD and management are currently discussing the midterm dividend policy outlook. Once we have closed discussions and this is confirmed, we will communicate with the market as soon as possible. Regarding your second question related to the Wireless service revenue and ARPU, first of all, thank you very much for those kind words. To be frank, we believe that we need to do better. We see continued improvement in the areas of net additions of handset subscribers. Since the launch of KT's 5G services, we are currently maintaining a much higher market share in 5G compared to our market share for LTE handsets. The first half fundamentally helped us to make the turnaround as early as possible. However, we do believe that we need to further improve the growth potential of our Wireless business. At present, we continue to maintain a high ARPU for the new 5G subscribers. As I mentioned previously, with our new tariff plans, we are using the upselling opportunities to continue doing better. Because of COVID-19, we have seen a drop in roaming revenue and a slowdown in the growth of net additions. However, we continue to see growth momentum in 5G services. We anticipate that the growth rate of 5G subscribers will also pick up in the second half as well. On a full-year basis, the growth rate may be slightly below what we had anticipated. But in terms of revenue and ARPU, we believe that we will continue to grow in these two areas. We forecast that by the end of 2020, in terms of growth on a handset basis, we can see growth of around 25% to 30%, but the higher level, the 30%, may not be achievable. So I would say that you should assume the growth rate to be around 25%.

Operator, Operator

The next question will be provided by Hong-sik Kim from Hana Financial Investment.

Hong-sik Kim, Analyst

I have two questions related to the profit outlook for the company. For the first question, I want to know more about what the outlook for KT's stand-alone profit will be on a full-year basis. I know that originally, we had anticipated KT to post higher depreciation costs, but that wasn't the case in Q1. As a result, we're seeing a better-than-expected performance in posting operating profit, and you enjoyed Y-o-Y growth. Can you give us additional information related to what stand-alone KT's full-year operating profits would look like? If possible, could you also provide a bit more information related to what the depreciation will be for this year? For the second question, I'm interested in the overall turnaround KT will be recording. Of course, in Q1 it did not happen. However, if you look at what's going to happen in Q2 and Q3, you'll be starting off with a low base effect. Can you explain how we should view KT's bottom line performance in 2020?

Kyung-Keun Yoon, CFO

You asked two questions, but since they all deal with profits, I'll just provide the answer for both. This year, KT's primary focus is to improve its bottom line. We will control our labor cost and depreciation at a 1% to 2% level. We also have to deal with the deferral effect of last year's selling expenses, and we believe we can overcome this. We will continue to exert tight cost control, reducing marketing spend as well. Therefore, we aim to maintain the profit performance at last year's level on a stand-alone basis.

Operator, Operator

The next question will be provided by Sean Lee from Citi Group.

Sean Lee, Analyst

This is the first earnings call we're having after the appointment of new CEO, Mr. Hyeon-Mo Ku. I am interested in knowing about KT's strategic direction. With the new CEO, have there been any new changes? Is there any specific areas that KT is now focusing on?

Kyung-Keun Yoon, CFO

To discuss the key focus of our new CEO by business, in terms of Wireless, the focus is to really achieve market stability in 5G and to ensure prudent presentation of our products and marketing. Through product and marketing differentiation, we aim to drive our revenue and ARPU. For fixed line, we want to leverage our leadership in GiGA Internet and continue to drive growth of IPTV while expanding our GiGA Genie AI platform. In the B2B, AI/DX area, we believe this will serve as a new growth driver for KT. Regarding group management, considering our business size, capabilities, growth, and synergy, we will continue to improve our portfolio. In the near future, our new CEO will communicate with the market related to the overall corporate vision, strategy, and shareholder return policy.

Operator, Operator

The next question will be provided by Taewon Kim from UBS Securities.

Taewon Kim, Analyst

I have a question related to the dividend policy. I have heard that the company is also considering a quarterly dividend payout. My fundamental question is why the company is considering a quarterly dividend payment? Is it possibly because of the dividend windfall to stabilize KT's share prices? For market investors, what's most important is really the total annual dividend payout amount. So I'm wondering if you can share the management view on whether we can anticipate an increase in the total annual dividend payout amount?

Kyung-Keun Yoon, CFO

I think there was a misunderstanding of what I commented earlier. When I mentioned our dividend policy going forward, I said midterm, not quarterly dividend payment. Just to repeat, once the company is able to finalize its midterm dividend policy outlook, we will reach out to the market as soon as possible and communicate what we have decided.

Seung-Hoon Chi, KT IRO

If there are no more questions, we will close the Q&A session. Thank you once again for your questions and interest. Thank you, participants, for your time despite your busy schedules. We will close the 2020 first quarter earnings conference call.