Earnings Call: Q1 2021

May 11, 2021

Slides

Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference of the 2021 First Quarter Earnings Results by KT. We would like to have welcoming remarks from Mr. Seung Hoon Ji, KT IRO and then Mr. Yong Jin Kim, CFO will present earnings results and entertain your questions. This conference will start with a presentation followed by a Q and A session. Now we would like to turn the conference over to Mr. Seung Hoon Ji, KT IRO. Good Good afternoon. I'm Chi Seung Hoon, KT's IRO. We are webcasting this earnings release call and you can also follow the slides as you listen in on the call. Let us now begin KT's Q1 2021 earnings presentation. Before we begin, please note that today's presentation includes financial estimates and operating results based on K IFRS standards and are yet to be reviewed by an outside auditor. As we cannot ensure accuracy and completeness of financial and data except for historical performances. Please be reminded that these figures are subject to changes. Now I will invite our CFO, Kim Young Jin for his greetings and presentation on Q1 2021 earnings. Good afternoon. I'm Kim Young Jin, KT's CFO. I will begin with Q1 'twenty one key business highlights. KT's consolidated revenue was KRW 6,29,400,000,000. Service revenue was KRW 5,230,400,000,000 And operating profit came in at KRW 444.2 billion. Driven by balanced growth across B2B, Financial Media and Content and Other Platform Businesses and Incumbent core businesses of 5 gs and Internet, revenue was up 3.4% on year and operating profit was up 15.4% year over year. Separate basis revenue was up 3.3 percent on year to KRW 4,574,500,000,000, While operating profit was up 21.4 percent on year, reporting KRW 366 1,000,000,000. KT in Q1 has aggressively expanded its platform businesses, We organized business portfolio around growth businesses and once again was able to confirm the feasibility of success KT's main core business, which is AI and DX, was up 7.5% on year, driven by the growth of platform businesses, including AI and cloud. Also, untapped or contact free environment has geared up data traffic, which led to top line growth of B2B, including enterprise messaging. In the midst of company's growing demand for digital transformation, KT has been launching DX services, mostly around areas that KT can excel in and that which has potential for growth. For instance, AI contact centers provide services that adopt DX on top of existing telecom services for insurance and financial, which are the sectors that traditionally operate call centers, and we are expanding to other service areas, I. E, public and retail. In development currently is a voice call DX for small merchants, which uses voicebot for booking and information delivery. For CITS, which is a next generation intelligent digital based transport system, we started off with a successful reference in Jeju and one project from Ulsan and Gwangju City and we will continue to expand on the service area. Also to prepare for the upcoming era where robots become available for mass market use, we are undertaking platform development for robotics distribution and service offerings. We first launched serving robots, hotel robots and barista robot and plan to expand the lineup to include care, quarantine and information robots as well. Growth trend from Telecom Business was also sustained On growing 5 gs subscriber base, despite declines in the roaming revenue, both wireless ARPU and service revenue were up year over year. We also reported market share number 1 in quarterly net additions with broadband Internet subscribers increasing more than 100,000. We actively revamped group's businesses and engaged in investment for transformation into 8 digit Studio Genie, which is an entity specializing in content was established back in January and KT's equity in STORYWIZ and Skylife TV was invested into Studio Genie, which laid the foundation for maximizing synergies across media and content businesses within the group. Also, by acquiring RT Media, which supplies key solutions of the media platform, we were able to secure core technical capabilities There were much progress in the financial sector as well. K Bank, whose deposit as of end of 2020 was KRW5 1,000,000,000,000 with customer base of KRW1,720,000, By expanding its partnerships and offering differentiated benefits, was able to grow total deposit to KRW 12,100,000,000,000 with 5,370,000 customers as of April end of 2021. We plan to further speed up the upward trend through additional capital increase Also to further bolster KT Group's competitiveness in data and broaden business cooperation Finance and Telecom, we decided to make strategic equity investments into Bank Salad, which is an asset management service And as you know, we also sold off KT Powertel as we believed there is limited potential for synergies with the group. Now moving on to Q1 2021 earnings. Total revenue was up 3.4 percent year on year to report KRW6 1,000,000,000,000 to KRW29.4 billion on growth business expansions coming under full force. Operating profit driven by top line growth went up 15.4% on year Net profit was up 43.7 percent on year to KRW326.5 billion, While EBITDA was up 3.7 percent on year to KRW1345.3 billion. Next is on operating expense. Operating expense was up 2.5% year on year to KRW 5.85 5,200,000,000 on higher business related expenses and sales expenses. Next on the financial position. Debt to equity ratio as of end of Q1 2021 was 118.7%, down 1.4 percentage points year over year. The net debt ratio was down 5.1 percentage points year on year to 32.4%. Next is on CapEx. CapEx spend for Q1 was KRW 289.4 billion. Next, let's take a look at performances of each of the business Wireless revenue was up 2% year on year to KRW1770.7 billion. Wireless service revenue was up 2.2 percent year on year to KRW1667.6 billion on the back of steady 5 gs subscriber growth. As of end of Q1 2021, total wireless subscriber were 22,430,000, While there were 4,400,000 5 gs subscribers, which accounts for 31% of handset subscriber base. Next is on the fixed line and IPTV business. Fixed line telephony revenue was down 0.3 percent on year to KRW377.3 billion. On growth in enterprise subscribers, fixed rate based product sales were quite positive slowing the speed of top line erosion. Despite declines in interconnect revenue On continuous rise in high quality subscribers, broadband Internet revenue was up 0.1% on year to KRW 503.2 billion. On the back of subscriber growth and sustained revenue growth based on the media platform, IPTV revenue was up 6.8% year on year to KRW446.2 billion. Next is B2B Business. B2B revenue was up 2.3% year on year to KRW684.2 billion. Demand around contact free or online led to increases in data traffic driving up B2B revenue 0.7%. While B2B IT and Solutions revenue was up 1.5% year on year on the back of digital new deal project from the government. For the AI and DX business on greater demand from customers on digital transformation, which includes cloud, IDC, AICC and block Revenue was up 7.5% year on year as the uptrend in revenue continued. Next is on subsidiary performance. Despite subdued consumption on the back of the COVID pandemic, DC card revenue was up 5% on year to KRW 839.5 billion, driven by increase in domestic acquiring volume. On lower real estate sales and sluggish hotel business impacted by COVID as well as transfer of building management business to a group affiliate, KT Estate revenue was down 41.3 percent on year to KRW 62,600,000,000. Life revenue was down 0.6 percent on year to KRW 166.9 billion due to the decline in OTS service subscribers. One of the key pillars of KT's digital transition is revenue from our content subsidiaries such as KTH, M House, Genie Music and NAS Media, which was up 12.2% on air, reporting KRW199.6 on the back of higher platform revenue from these key business subsidiaries. Despite business constraint posed by the COVID we are seeing better performances from the financial affiliates as well as growth from affiliates in the content business. So that ends KT's Q1 2021 earnings highlights. This year, KT's key focus is transitioning to a digital and underpinning of growth. Our guidance for 2021 was stand alone service revenue growth of above 4% year on year and consolidated revenue of more than KRW 25 trillion. And with Q1 as the beginning, We expect our growth as a digital platform company will further accelerate as we go forward. We will continue to bring stable revenue from our telecom business while generating tangible results from growth businesses of B2B and platform. Also, we plan to bolster synergies across group affiliates and actively pursue revamping of our business structure. We look forward to your investors and analysts' support and encouragement, and thank you. For more detailed information, please refer to the documents that we have previously circulated. We will now begin the Q and A. In order to provide more opportunity for many people to ask questions, please restrict your questions to 2 per person. The first question will be provided by Kim Joon Seok from KB Securities. And the next question will be provided by Choi Min from Samsung Securities. Mr. Kim Jong Seop, please go ahead with your question. Hello, I'm Kim Joon Seok from KB Securities. First of all, congratulations to you for such a great performance. We'd like to first understand what management's assessment is behind such a good performance this quarter. That's the first question. Second is, it seems like your PSTN top line erosion speed has slowed. Once again, what's the reason behind that? Thank you, Mr. Kim Joon so for your question. I will respond to both of those questions. First question relates to what KT's management view is regarding Well, as mentioned during the presentation that I had just made, basically the good performance is attributable to good results from KT's core businesses as well as from AI and DX and growth in top line from our affiliates and subsidiaries, which drove an year over year improvement in operating profit. Now first of all, we call this business, our traditional telecom business, the NIT business, which includes mobile Internet and TV. We've seen both on the wireless and Internet increases in 5 gs subscribers as well as overall improvement in the acquisition of premium subscribers, which drove top line growth. In terms of Internet, we've seen growth in subscriber base for GIGAWAY as well. And also we've seen monthly IPTV related fees actually been we were making the usage fees of IPTV had also gone up and also home shopping. Transmission Commission has also had a positive impact, while the revenues from advertising and platform business have also Also on top of that, if you look at our one of our DX, digital transformation platform related businesses, which is a messaging business, we've been able to achieve double digit growth. And also, we launched a subscriber numbers as well as top line revenue. For IDC, with the opening of the Yongsan IDC Center, We've been starting to get some inflow of good performance being booked and represented in the 1st quarter numbers. And also for the cloud business, By acquiring new customers, we were able to sustain high growth rate of more than double digit. In terms of our group affiliate contribution, we are seeing both financial media and commerce, advertising, The so called digital based platform businesses, we will make sure we continue to sustain growth from these areas of growth. From a per annum perspective, in terms of our annual forecast, we will continuously pursue growth from both our core Telecom business as well as our digital platform based businesses so that we can continue on with the top line growth and also improve on the cost efficiencies so that we may realize year on year operating profit improvement. 2nd question relates to the reason why we are seeing slowing down of The first reason is that we were able to drive up the subscriber base for enterprise Internet based telephony. And basically, with the spread of the untagged or contact free environment, we've seen revenues from the enterprise intelligence network based businesses rise. And also the decline in the home telephony, the speed at which it is declining has slowed. And we by introducing a flat rate tariff product, we were able to further slow down or stabilize that decline in home telephony. Next question please. The next question will be presented by Choi Min from Samsung Securities. And the following question will be presented by Kang Min joon from Kium Securities. Mr. Chaemin, please go ahead with your question. Thank you. I'm from Samsung Securities. I'm Choi Min Ah. I would like to ask you two questions. We have seen quite steady and stable growth from your wireless business, including the number of subscribers and the earnings and revenue. And the earnings from your media and content subsidiaries have been quite positive. But overall, there seems to be subsidiaries that have been negatively impacted by COVID pandemic. Could you provide some color as to What your projection is going forward for these affiliates? And also if you could give us a hint as to when on a total aggregate basis you Thank you. Mr. Choi Min, you asked question regarding group affiliate. You asked about our forecast of group affiliate earnings going forward. We believe Key subsidiaries are BC Card, KT Estate and KT Sky Life. In terms of BC Card, last year on the back of the COVID pandemic, The overall domestic acquiring volume as well as union paid based acquiring volume with the fall in the Chinese inbound tourists have fallen. In terms of the domestic acquiring volume Q1 and a year over year basis, there was an upward impact of around KRW40 1,000,000,000 with the recovery of consumption and that had a positive impact. Now on the union fee based credit cards, still we haven't been able to recover the inbound tourist demand or consumption. So that still had some negative impact. So all in all, we will make sure that we exert our utmost effort so that in terms of the profit, we can at least achieve Now for KT Estate last year, there were some one off On an year to date basis, we are seeing some signs of recovery, but still there is lingering impact from the pandemic. So we are currently taking a quite conservative projection on that business. However, there is a slight increase from the rental related revenue. So all in all, if you look at KT Estate, once again, because that one off sales related revenue impact is now ended, We expect on an overall basis, there should would be a slight dip in terms of the top line. For Sky Life, They actually have their earnings release call scheduled for 5 p. M. Today. But in terms of the subscribers for show that we effectively come up with bundled products, including TPS with mobile and Internet. And once the HCN acquisition process is completed, we could also leverage off of what HCN process is completed, we could also leverage off of what HCN can offer. Also aside from these subsidiaries, we also have media and advertisement related In terms of digital commerce, we have KTH and KTM House. Basically, we have seen increases in volume when it comes to T Commerce and enterprise messaging and other B2B types of services. So we are seeing a growth trend of revenue from that business area. So we and also we have an advertising on NAS Media. We've seen greater increase of demand and sales of advertisement relating to games, commerce and other verticals. So we expect that the performances of these entities will start to on an aggregate basis when we expect a turnaround in operating profit from our group affiliates. I want to share with you what our annual projection is, if you look at financial and content media and advertisement In line with the growth that we are seeing from digital platform based businesses on an year over year basis, our objective is to make sure that we bring about a growth The operating profit, the bottom line the operating profit line. The next question will be presented by Changmin Joon from Kiong Securities. And the following question will be presented by Stanley Yang from JPMorgan. Mr. Chang Min Joon, please go ahead with your question. I am Chang Min Ju from Qum Securities. Two questions. First, in terms of your wireless business, beginning of the year, you communicated about 4% year over year growth as your guidance. Now that we have passed the Q1, the growth rate is around 2%. What guidance would you be able to give us for the entire year since we now have the track record of Q1? 2nd question, just want to confirm your plans or your position Regarding upping or increasing your payout ratio, there seems to be certain issues or talk around your dividend related, I guess, practices. So could you just share with us what your position is regarding dividend payout? Thank Thank you, Mr. Chang Min Jin for your question. First, you asked us about any possible adjustments or updates regarding the guidance of 4% growth of our service revenue. Regarding any updates on the 4% growth guidance for our wireless service revenue, that guidance still holds valid. As we see 5 gs taking up and increasing its penetration And we see number of subscribers taking high ARPU subscribers are also growing. And also by providing value added services like V, collar, ring and identifying other sources of revenue, we expect that we will be able to and our plan is to achieve this 4% revenue growth target. 2nd question, whether that 50% payout ratio is still valid. You asked for our confirmation. Back in May of 2020, we communicated KT's mid- to long term plan and we communicated that on a We will be paying out 50% and that is a commitment and promise that we've made to our investors and shareholders and we plan to keep to it. The next question will be presented by Stanley Yang from JPMorgan. And the following question will be presented by Heise Lee from Robeco. Mr. Stanley Yang, please go ahead with your question. Thank you. I would like to ask you two questions. First, you've communicated in terms of your growth projections that by 2022 on a stand alone operating profit basis, you're targeting KRW 1,000,000,000,000. But now that your Q1 performance has Do you think that you will be able to achieve this target ahead of that 2022 schedule? And if that is the case, would you be willing to increase that target for 2022? I ask this question because if you look at 2016, when you achieved 1,000,000,000,000 of operating profit, your Q1 performance or earnings was actually lower than what you have reported this quarter. So I would like to understand whether you think that you'll be able to achieve this target earlier than you had previously planned for. And second, Do you have plans to cancel your treasury shares? If not, where would you use the treasury shares? For what purpose? Thank you, Mr. Stanley Yang, for your question. You mentioned if we are able to achieve that operating profit target of KRW 1,000,000,000,000 on a stand alone basis earlier than 22 where we have planned to further increase our target. Basically, for this year, our plan is to bring about higher operating profit on an year over year basis. And after we look at that track record, we will it will be after the point in time that we will make a decision as to whether we will update our targets for 2022. Regarding second question of whether we are reviewing possibility of a share cancellation at this point, I think of that specificity is under review, then where would we use the treasury share for? Those will be used to further strengthen competitiveness of the company and also to generate synergies by entering into strategic alliances or partnerships or looking at possibility of M and A. But at this point in time, we do not have any specific plans that is confirmed yet. The next question will be presented by Heuser Lee from Robeco. Mr. Heuser Lee, please go ahead with your question. Shed some light on what the progress is for your share buyback of KRW 300,000,000,000 Thank you, Ms. Hsie Lee for your question. You asked about the progress of our share buyback process. On November 1, our BOD resolved for a share buyback. It's a trust arrangement through which we undertook buying back of KRW 300,000,000,000 treasury shares and that whole process has been completed as of March 17. Basically, we have acquired 12,150,000 shares, which account 4.7 percent of total outstanding. Thank you. This ends the Earnings release for KT Q1 2021. Thank you to all of you for your questions and your interest in the company. Thank you for joining our call despite your very busy schedules. This ends the Q1 2021 earnings presentation. Thank you.