Earnings Call Transcript - KT Q3 2024

Operator, Operator

Good morning, and good evening. Thank you all for joining this conference call. And now, we will begin the conference of the Third Quarter of Fiscal Year 2024 Earnings Results by KT. We would like to have welcoming remarks from KT IRO, and then CFO will present earnings results and entertain your questions. This conference will start with a presentation followed by a Q&A session. Please note that a detailed explanation of how the Q&A session will be conducted will follow.

Young-Kyun Yoon, IRO

Good morning. I am Young-Kyun Yoon, IRO of KT. We will now begin the earnings presentation for the third quarter of 2024. This earnings call is being webcast live on the Company website. Slides are also available for you to follow while listening to this call. Please note that today's presentation includes estimates of financial and operating performance based on K-IFRS that have not been reviewed by an outside auditor. Therefore, other than confirmed historical data, we cannot guarantee the accuracy and completeness of financial and business-related information and may change in the future. Now, Min Jang, CFO of KT will present the earnings for the third quarter of 2024.

Min Jang, CFO

Good morning. I am Min Jang, CFO of KT. The business direction that KT has set for the future is transformation into an AICT company. We plan to lay the foundation for sustainable growth by innovating our core businesses with AICT transformation and expanding customized offerings to customers as an AX partner in the B2B segment. To this end, we have been striving to achieve structural innovation in our skills, businesses, and workforce this year. On September 28, in order to strengthen our capacity as an AICT company, we aimed to establish a strategic partnership with Microsoft. The two companies will be engaging in a full range of cooperation in the AI and cloud areas for the next five years, such as jointly developing the Korean AI cloud service. We will also work together to occupy new markets in the AI IT sector by establishing a company specializing in AX and jointly implementing talent development programs. In addition, we are improving the business portfolio to achieve fundamental and sustainable growth. As these efforts lead to stronger profitability of the B2B business, the mid- to long-term profitability improvement should become more evident. More recently, as part of our AICT transformation efforts, we are innovating the HR structure. To strengthen the competitiveness of the data business, we are planning to merge KT NXR, a subsidiary specializing in big data, while redistributing core capabilities and establishing two new subsidiaries specializing in network services. On November 5, KT announced a value program, which includes the mid-term plan to boost shareholder and corporate value. The mid-term target is to reach a consolidated ROE of 9% to 10% by 2028. To this end, we plan to triple the AI and IT business revenue compared to 2023, generate a consolidated operating profit margin of 9%, liquidate non-core assets, and implement a share buyback and cancellation program of KRW1 trillion in cumulative terms. Also, on October 15, we declared a cash dividend of KRW500 per share for Q3. In Q4, we will continue to implement a stable shareholder return program based on the mid- and long-term shareholder return policy. Now, I will go over the financial highlights of 2024 Q3. The group's total consolidated revenue slightly decreased on a year-over-year basis to KRW6,654.6 billion due to weak performance from the content subsidiary despite the growth of core businesses such as real estate, IDC, and cloud. On a separate basis, revenue rose by 2.0% to KRW4,765 billion, thanks to stable growth of the B2C and B2B businesses. Consolidated operating income jumped 44.2% on a year-over-year basis, which was mainly driven by the base effect from wage negotiations of 2023 Q3 and profitability enhancement of core businesses. Now, I will go into more detail. Operating revenue amounted to KRW6,654.6 billion, which is similar to the previous year. Operating income increased by 44.2% to KRW464.1 billion, primarily driven by the base effect of the 2023 Q3 wage negotiations. Net income rose by 32.9% to KRW383.2 billion, thanks to the growth of operating income. EBITDA increased by 13.4% to KRW1,428.9 billion. I will go over the operating expense on the next page. Operating expense decreased by 2.9% year-over-year to KRW6,190.5 billion due to the reduction in labor cost, SG&A, and cost of service. I will now move on to the balance sheet on the next page. As of September 2024, the debt ratio was 122.8%. The net debt ratio decreased by 8.2 percentage points year-over-year to 30.3%. Next, I will go over CapEx. Cumulative CapEx by KT and its main subsidiaries as of 2024 Q3 amounted to KRW2,033.8 billion. On a separate basis, cumulative CapEx expenditure as of Q3 was KRW1,416 billion. The cumulative CapEx of subsidiaries was KRW617.8 billion. Next, I will go over the performance of each business unit. Wireless revenue increased by 1.9% year-over-year to KRW1,740.4 billion. 5G subscribers take up 76% of total handset subscribers and continue to grow. KT is expanding contactless distribution channels to increase customer convenience and boost profitability. We already have Yogo, a direct online brand, which incorporates eight types of payment plans. In August, we released Yogo Season 2 and launched a promotion campaign for online-only flagship devices. We will continue to work to expand our customer base through contactless channels. Now, I will move on to the fixed-line business. Broadband revenue stood at KRW618.5 billion, which is a 0.4% year-over-year growth, supported by an increase in the portion of Giga subscribers. In the media business, IPTV subscribers maintained a net growth trend. However, PPV and advertising revenue declined, resulting in a revenue decrease of 1.2% on a year-over-year basis. In Q4, we will be launching the on-device AI setup box to recover revenue and proactively apply AI technology to the entire process of production and distribution of content. Home telephony revenue decreased by 7.6% to KRW172.2 billion. Next is B2B service. The demand for AX has increased, and steady growth of services, including dedicated lines, has contributed to a 2.5% year-over-year growth in B2B service revenue. I'd like to note that AICC, one of the main drivers of AX, is generating double-digit growth with the expansion of the subscription model. We will continue to pursue quality growth by improving the profitability of low-profit businesses. The next page is on major subsidiaries. BC Card posted revenue of KRW931.4 billion, which is a 6.5% decrease year-over-year, mainly due to the decline in credit card sales. However, in contrast, operating income jumped, thanks to diligent management of the soundness of financial assets. Revenue of Skylife declined by 1.4% to KRW246.9 billion year-over-year due to the reduction in the pay TV subscription base. The content subsidiary experienced a 19.3% year-over-year decline in revenue due to a shrinking market. Despite the slow market, drama series that were released in Q3, namely Your Honor and Dear Harry, were successful, demonstrating strong future growth potential. Revenue of KT Cloud grew by 6.8% year-over-year, thanks to higher IDC utilization by global customers and stronger retention of public sector customers and cloud services. KT Estate experienced a revenue growth of 3.6% year-over-year, mainly driven by lease revenue from offices and hotels. The occupancy and average room rate of the five hotels in Seoul that the Company operates are continuously on the rise, solidifying the foundation for revenue growth. This concludes the earnings presentation for Q3 2024. KT will strive to jump to the next level in terms of corporate value by structurally transforming into an AICT company and successfully implementing the corporate value enhancement plan. I ask for the continued support and interest of investors and analysts. Thank you.

Young-Kyun Yoon, IRO

For more details, please refer to the earnings presentation, which has been circulated already. We will now begin the Q&A session. Today, we have Mr. Tan Ho Tong, OpenTech Innovation Lead, joining us to take questions. In order to allow as many Q&A opportunities as possible, we will appreciate only two questions per participant. Thank you.

Operator, Operator

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

Hoi Jae Kim, Analyst

I am Kim Hoi Jae from Daishin Securities. And I have two questions regarding the corporate value plan. The first question is regarding your ROE target. You have said 9% to 10% for 2028. The current number is around 6%. So, I believe this can be quite an ambitious goal. I would like to have a little bit more color on how KT plans to achieve these targets. The second question is regarding the share buyback and cancellation program. From 2025 to 2028, you mentioned that the buyback and cancellation will be around KRW1 trillion in cumulative terms. Will this program be implemented equally across the years? That is my first question regarding this. And if you look at the current shareholder return policy of KT, it's currently 50% of the adjusted net income and you pay a minimum DPS, and the resources remaining after the minimum DPS payment are to be used for share buyback. And given that you have launched a 2025, 2028 share buyback and cancellation program, I would also like to recommend that you may think about increasing your dividend payments with the resources that you have. So, I would like to hear some of your thoughts on that.

Min Jang, CFO

Yes. Thank you for your question. Regarding the ROE target, we have outlined the details in the presentation, but there are largely three ways that we are trying to achieve this target. The first strategy is transformation into an AICT company. I believe that this pillar of the strategy can be the most challenging for KT. Therefore, we are striving to transform ourselves from a CT company to an AICT company. To that end, we have been innovating the businesses, capacities, and workforce necessary to successfully adjust our business portfolio. The second part involves enhancing the efficiency of our assets. We may dispose of or develop some of the real estate that is not considered core to the business. We also have certain equity assets that may be disposed of or used to boost efficiency. Finally, there is the use of capital. Until 2028, as mentioned in the presentation, we will be utilizing excess cash to make investments aimed at enhancing ROE, and we can also allocate those resources to the KRW1 trillion shareholder return program. These are largely the three ways we are trying to achieve the ROE target. Regarding your second question about whether the share buyback and cancellation program will be implemented equally across the years, we anticipate that it will not be volatile but will gradually increase over the next couple of years. Therefore, we plan to implement the buyback and cancellation program in a steadily increasing manner. Lastly, regarding the mix between the share buyback cancellation and dividend payment, until next year, our current shareholder return policy remains effective. This policy is 50% of adjusted net income, with a minimum DPS of KRW1,961 per share, paid quarterly. Annually, it's around KRW2,000. This policy will continue until next year. The Board of Directors will decide how to proceed after that, but we believe that the shareholder return policy will strengthen in future years.

Operator, Operator

The following question will be presented by Joon-Sop Kim from KB Securities.

Joon-Sop Kim, Analyst

I am Kim Joon-Sop from KB Securities. And I have two questions regarding the AX subsidiary. You are working with Microsoft to establish an AX specializing subsidiary. I would like to have a better understanding of the types of services that this company will be offering. Additionally, what is the size of the business that you are expecting will be derived from this company? Perhaps you can also talk about the number of employees that will be reassigned to the AX company as well.

Tan Ho Tong, OpenTech Innovation Lead

Yes. Thank you for the question. Currently, we are discussing and cooperating with Microsoft to develop and establish the AX company. However, we are still in the development phase, so I'm unable to talk about the exact details of the services we are planning to offer. I can give you a more overall picture of this cooperation. AX is different from MSP. If a customer has the demand to transform some of its businesses, tasks, and projects to AX, they may need help defining where to start. They may require assistance in the development of the approach or coming up with concrete service types to utilize AX in transforming their business. Therefore, the primary role will be offering technical consulting. This will mainly consist of C-level consulting services or pre-consulting service, aimed at understanding the AX needs of the customer and advising on how they can leverage technology to achieve their AX goals. While this type of service requires a high level of expertise, we are committed to fostering talent within KT. We plan to recruit experts from the market and collaborate with Microsoft to ensure we have the necessary technology and capabilities. As for the size of the company, this has not been confirmed yet, but a preliminary estimate is about 100 employees, although this number is subject to change based on market needs at the establishment of the company. This high-performing, expertise-driven consulting service will allow us to differentiate ourselves in the market. While it is too early to discuss specific revenue, we foresee significant value from these consulting services. As the subsidiary works toward the POV stage, the customer will need to find a partner for the main project as well, which presents a considerable opportunity for KT that could ultimately contribute to higher revenues. We have successfully engaged in similar service offerings for the ESG parts of the company, and we have been working on AX POCs. The innovations in AI that are possible for our customers have already shown promise, and I believe there is significant potential here. We are already receiving inquiries from some of our customers, indicating that this market could grow considerably in the future.

Operator, Operator

The following question will be presented by Eun Jung Shin from DB Financial and Investment Securities.

Eun Jung Shin, Analyst

I have three questions. First, regarding the value program, one measure is that you will be tripling revenue from AI and IT by 2028. I would like to have a better understanding of your strategies to achieve this goal. Secondly, you mentioned the AX company being developed with Microsoft, and you referred to a revenue outlook around KRW4.6 trillion. What role will KT play in achieving that? Lastly, regarding the reassignment of workforce currently being implemented by KT, I would appreciate a status update and how much budget or impact that will have on the financials.

Tan Ho Tong, OpenTech Innovation Lead

Thank you for the questions. I will address the first and third questions, and Mr. Jang will take the second question. Regarding the plan to triple AI and IT revenue, the base assumption is that we will transform ourselves from a CT and LINE-based company into a B2B AI DX service company. Currently, AI IT revenue comprises about 6%, and we aim to increase this significantly by 2028, targeting an absolute number around KRW3 trillion. Regarding the reassignment of workforce, the process of receiving requests is nearly complete. We will reassign 1,700 employees to the newly established subsidiaries, while 28 employees have signed up for retirement programs. In total, 4,500 employees will be reduced from headcount. The impact on financials will reflect the payments for retirement, which will be booked in this year's accounting, while the salaries of reassigned employees will be paid as a fee from KT to the subsidiaries, likely resulting in savings compared to current expenses.

Min Jang, CFO

I will address your second question regarding the revenue outlook. When we mentioned KRW4.6 trillion, it was based on projections from a consulting firm. This estimate consists of two main pillars: AI and cloud. While this is not an exact number, we believe the breakdown between AI and cloud revenue will be about 50/50. As AI technology evolves and the AX market expands, we anticipate significant growth in this segment over the next few years. For our cloud business, this will be primarily driven by our partnership with Microsoft, focusing on the sovereign secure public cloud business, which is heavily influenced by government regulations. While the finance sector is experiencing more relaxed regulations, leading to higher demand for external cloud usage, it may take longer for the public sector to open up. Initially, we will target strategic large customers with a need for sovereign cloud services while monitoring the regulatory environment for future expansions into finance and the public sector.

Operator, Operator

There are no further questions. We will conclude the Q&A session. Thank you for your interest and questions.