Earnings Call: Q4 2020

Feb 9, 2021

Conference call. And now we will begin the conference of our 2020 4th quarter earnings results by KT. We do like to have welcoming remarks from Mr. Seung Won ji, KT IRO and then Mr. Kyung Keun Yoon, CFO, will present earnings results and then entertain your questions. This conference will start with a presentation followed by a Q and A session. Start when that is, start and one on your phone during the Q and A. Now we would like to turn the conference over to Mr. Seung Won Ji, KT Good afternoon. I'm Chi Seung Moon, KT's IRO. This earnings release call is currently being web casted via our website, and you can follow the slides as you listen in on the call. Let us now begin KT's Q4 2020 earnings presentation. Before we begin, please note that today's presentation include financial estimates and operating results under the K IFRS standards and have not yet been reviewed by an outside auditor. As we cannot ensure accuracy and completeness of financial and business data except for historical performances. Please be reminded that these figures are subject to change. Now I invite our CEO, Lee Young in, for his welcoming remarks issued on 2020 earnings. Good afternoon. I'm Kim Young jin, KT's CFO. I've been newly appointed as the CFO of the company. I think there was a minor mistake by the operator, so I would just like to make the correction before I begin. Now let's begin with KT's 2020 key business highlights. First, consolidated revenue was KRW 23,900 and KRW13.7 billion. Service revenue was KRW2846.1 billion and operating profit reported KRW1 184.1 billion. On handset sales decline on the back of COVID-nineteen pandemic, total revenue declined with improved profitability of KT's key cash cow businesses and expansion of our growth businesses, operating profit posted Wireless and Media, which also ported service revenue to rise 1% on year, breaking the KRW 15,000,000,000,000 threshold in 9 years. Last year, with the launch of B2B brand KT Enterprise, we bolstered our B2B platform business, while AI and DX Business posted a 11.8% growth on year, which is the highest uptrend out of all of KT's business portfolio. Existing core businesses of Wireless and Media are also sustaining their growth trajectory. There's also been many changes for the group as a whole. Since the rights offering for K Bank last July, operations normalized, leading to a rise in total deposit from KRW 1.8 trillion in June of 2020 to KRW 4.5 trillion as of 21st January end, which is more than 2.5x increase, while number of customers surged from 1,300,000 to 2,470,000. And also to further expand on the company's media platform, Edge, KT SkyLife is in the process of acquiring HCN, and we've made the decision to merge KTH, a T Commerce Company and KTH M House, a B2B Mobile Commerce Company, to further bring growth to the Media Commerce Business. And based on the confidence we have on earnings improvement and corporate to enhancements. We have also decided on a stronger shareholder return. On top of the decision for KRW 300,000,000,000 share buyback announced last November, In line with KT's profit improvements for 2020, we decided to pay out KRW1351 per share, which is up KRW 2.51 year over year. Next is our business direction for year 2021. Last year, KT declared that we will make the transformation from a telco to a digico and be a digital platform company with a telecom foundation. While in 2020, we brought improvements to our fundamentals in order to change into a digico. In 2021, we plan to bring tangible business results as a digico and bring growth befitting a digital platform company. In the post COVID-nineteen world, contact or contact free culture has become a daily norm, calling upon consumers and companies to make the necessary digital conversion. Government is also adding speed to digital transformation of the public sector through digital new deal policies. We believe this backdrop brings big opportunities to KT. As you know, KT is already providing best domestic fixed wireless network and telecom services and have been sharpening its competitiveness in AI, big data and cloud, which are the essential elements of digital transformation. Now starting with IPTV set top boxes, we've been successful in adopting and expanding AI services to a B2B model, including AI hotel, real estate and AI contact centers. Currently, KT has the biggest AI subscriber base of 2,720,000 and provides AI services to around 7,200 hotel rooms and 500,000 apartments nationwide. Big data is another business that KT takes pride. KT Group has great amount of data on fixed wireless communications, video, financial, commercial zones, etcetera and have been building big data capabilities in many areas, including health care and climate. With the recent revision of the DATA3 app, Things have become more favorable when it comes to data usage. Therefore, there is now greater value and opportunities for data utilization. As Korea's domestic number 1 native cloud provider, We offer not only the hybrid cloud services, but on top of that recently launched DX platform through which we are providing Korea's top level cloud services. On this call. Next, let me brief you on the key directions for the company this year. First, as a digital transformation partner of Korean Industries, KT will push for the growth of B2B Business in earnest. In B2B Communications, where KT is market share number 1. We will combine our AI, big data and cloud to develop a new DX business model to further expand the market. To be more specific, we can add AI chatbots, customer support and big data failure predictions to the current product offerings, including call, messaging, leased line services. Based on the segmentation by sector size and industry such as public, financial and large corporates, We plan to design and provide services for each customer segment. But KT alone cannot do this on its own. To further enhance our competitiveness, we plan to actively pursue partnerships, M and As and equity investments. We can work with partners to provide convergence services or can gain capabilities that we lack through M and As and equity investments. 2nd, in order to gain ground for platform business development, we plan to accelerate group portfolio restructuring around mainly around growth businesses. As mentioned, on top of B2B, we have selected Media, Content, Commerce and Financial businesses as our core growth areas and plan to support their growth with a strong focus. Recent announcement for the launch of Studio Genie, a specialized content provider, is also in line with such objectives. Securing original IPs and content is becoming ever more important at this juncture and KT wishes to make investments into content business by leveraging more than 12,000,000 subscribers for the media platform. There were also quite some changes in the makeup of the management with a view to strengthen our competitiveness. For all the financial businesses, outside financial experts have been appointed as CEOs, and we also hired global talent for AI and Robotics business. Also, by allowing group subsidiary CEOs to hold multiple positions, We plan to maximize synergies across the group. Lastly, we will bolster profitability of the current cash cow business. So for Fixed and Wireless Communications and Internet Business, we will expand on high quality subscribers of 5 gs and giga Internet so as to grow our top line revenue and to strengthen profitability through efficient spending. Guided by these directions, we commit to growth. And for 2021, on a stand alone basis, we will bring more than 4% growth for service revenue with consolidated revenue of more than KRW 25,000,000,000,000. Now I will present on 2020 full year performances. Total revenue was down 1.7 percent on year to KRW 23,916,700,000,000, a decline in handset revenue. Operating profit was driven by increase in service revenue as well as cost efficiency efforts, leading to a 2.1% growth on year, reporting KRW 1,184,100,000,000. Net profit was up 5.6 percent on year to KRW 703,400,000,000. EBITDA was up 0.6 percent on year, reporting KRW 4,818,400,000,000. On the next page is operating expense. Operating expense was down 1.9 percent on year to KRW 22732 KRW600 1,000,000,000 on sustained cost efficiency measures. Next is on our financial position. On the financial results. 2020 year end debt to equity ratio was 100 8.5%, down 11 percentage points year on year. Net debt ratio was down 2.8 percentage points to 30.1%. Next is on CapEx. Total CapEx spend for 2020 was KRW 2872 1,000,000,000. Next is on the performances from each of our respective businesses. Wireless revenue was up 1.3 percent year on year to KRW 6,933,800,000,000. 1. Driven by 5 gs subscriber growth, wireless revenue was up 1.6 percent on year, reporting KRW 6,542,700,000,000. As of end of 2020, total wireless subscriber was 22,310,000 and there were 3,620,005 gs subscribers, which is 25% of total handset subscriber base. Next is fixed line in IPTV Business. On declines in subscribers, PSTN revenue was down 7.3 percent on year to KRW1465.5 billion. Despite lower interconnect revenue on growth in giga Internet subscribers and sales of giga WiFi really taking off, Broadband Internet revenue came in flat year on year reporting KRW 2,000,000,000,001,200,000,000. IPTV revenue reported KRW1723.2 billion, up 7.7 percent on year on the back of increase in high end subscribers and revenues based on the media platform. Next is B2B Business. B2B revenue was up 2% on year, reporting KRW2.774 billion and with faster take of the presentation across the geographies. AI and the business posted 11.8% year over year growth. B2B IT and Solutions business showed slight contraction on the back of subdued global SI business following COVID-nineteen pandemic and restructuring of low margin businesses. Next is on subsidiary performance. With declines Inbound foreign travelers and contraction of spending on the back of COVID pandemic, BC Card revenue was down 4.2% on year, reporting KRW3386.4 billion. For the estate revenue, due to declines in hotel rental revenue on the back of decrease in travelers from COVID pandemic and declines of revenue from real estate sales and also as we transferred Building Management Business to KT Telecom and Telecom in August, revenue fell 24.9% on year to KRW 364,400,000,000. On increases in telecom service revenue. Skylight revenue was up 0.6% on year to KRW698.7 billion. For the content subsidiary revenue. As platform based revenue increased for all of the main companies like KTH, M Health, Genie Music and StoryWhiz, Revenue was up 9.6 percent on year to KRW 772,000,000,000. However, in terms of profit, due to the COVID pandemic impact, there was sizable decline in the operating profits of BC Card and KT Estate for big companies driving down overall profit contributions on a year over year basis. This has been KT's 2020 annual performance briefing. Now as a digital platform company, KT will lead Korea's digital transformation and provide fun and convenient services to our customers. By bringing together KT Group's capabilities, We will be bold with growth businesses. And based on that, we'll endeavor to further enhance our corporate value. So I ask our investors and analysts for your continued interest and support. Thank you very much. For more details, please refer to the earnings presentation that we previously circulated. And now we will be very happy to take any of the questions that you may have. And to allow for as many people to ask Now Q and A session will begin. In order to allow as many Q and A chances as possible within the restricted time. We would appreciate only 2 questions per participant. The first question will be provided by Joongseok Kim from KB Securities. And the next question will be provided by Hee Jae Kim from Daishin Securities. Mr. Junsuk Kim, please go ahead with your question. Thank you. I would like to ask 2 questions. I'm Kim Joon Seo from KB Securities. My questions relate to, 1st, CapEx and your second year strategies on content investment. This year could you for this year, could you provide some color as to what your CapEx guidance is? Would you be focusing your capital expenditure more on expanding the coverage based on the sites and the base stations? Or would you focus on specific areas such as in building coverage for Cloud Equipment. I think it will be helpful if you could make comparisons with your past practices. 2nd question relates to the content industry. Recently, we've seen quite a bit of change around the content landscape. Could you provide some color as to what your take is on the current content landscape. I know that you recently set up KT Genie Studio and there are multiple number of OTTs that are going to be launched in Korea. It will be helpful if you could provide us with your understanding and the way you see this content market. Yes, Mr. Kim Kim Seo, thank you very much for your question. First, responding to your question on CapEx. Now in terms of the total size of the CapEx, we're looking at about a flat year on year size. However, if you look at the breakdown of what comprises that CapEx, we are planning to make more resource allocations on growth areas such as AIDX and Media. With regards to wireless investment, you've asked about at the base station site and in building coverage. As of end of 2020, KT was able to complete the coverage. This is 5 gs network based across the 85 common locations. Now for 2021, basically, we will be expanding the 85 regional, the 5 gs coverages nationwide. And also for the nationwide, we will complete the coverage for the subways as well. And when it comes to in building coverage, we will focus on locations where multiple people are using the network. That will be our focus in improving and increasing our coverage. Moving on to your second question. I understand your second question relates to what our strategy is for content investment as well as how KT sees additive landscape. Now if you look at the domestic media content industry, With the expansion of the OTT services and gaining popularity of K content, we are seeing a significant Growth in terms of production of original IPs, including web novels and webtoons, and we are seeing a lot of video contents being produced as well as facilitated distribution of such IP based content. Now already, if you look at key media players in Korea based off of their in house capabilities and based off of their channel basis, they are building on their influence. And also if you look at the platform providers underpinned by the original IPs that they own, they are very fast developing and utilizing the webnovel and webtoon and really expanding the reach of such content. So that's the backdrop. So now let me move on to what our competitive strategy is. Now as you know, KT is a number one media from provider in Korea with about 12,000,000,000 subscriber base across IPTV satellite and cable TV. And on top of that, we actually have capabilities across the entire value chain of media content. For instance, by setting up story whiz, We actually own IPs when it comes to web novels and webtoons. Also through Sky TV, which is an NPP provider. Basically, we will continue to strengthen the portfolio of original content and really strengthen the lineup of such content. We also own Season, our OTT service. We also distribute music titles through Genie Music as well. Also on top of that, underpinned by our 12,000,000 subscriber base, We can analyze the programs that viewers like, and we can also study the viewing behavior of the audience. Based on that information, we can develop targeted programs and also underpinned by our capabilities in IP, intellectual property, we will be able to make further expansions. Now KT, with its capabilities in IP, platform, channel and OTT, We will focus on producing and distributing original content, and we feel that, that will be a good basis for earnings generation going forward. We also plan to cooperate and collaborate with production studios, both home and abroad. And through such cooperation, we will focus our efforts on producing such content as well. Now when it comes to planning and making these contents and productions, the resources that will be required could funded with KT's own resources, but we're also planning to bring outside funding as well. In light of the size of the captive market that KT currently enjoys. We believe that we will be able to set a very steady structure for production and distribution of such content. We will take the next question please. The next question will be presented by Hei Jae Kim from Daesun Securities. And the following question will be presented by Jamie Nan from NH Investments and Securities. Mr. Hasegim, please go ahead with your question. I am Kim Hae Jae from Taejin Securities. It seems like your wireless ARPU trend is quite favorable. Could you share with us what your production is for your wireless ARPU. And with the launch of the lower end 5 gs tariff plan, there are some concerns that this may actually curb the ARPU on growth. So in light of the marketing backdrop, could you share with us what your ARPU outlook is? And second, with respect to 2020 dividend per share that actually I believe that was higher than what market had expected. And with your business performance improving for 2021. Can we expect on an absolute basis bigger dividend payout compared to 2020? What is your outlook for your dividend payout for 2021? And also could you make some clarifications or more elaborations on the interim dividend of May. Mr. Kim Hejae, thank you for that question. Now for ARPU outlook, on our side, we're looking at around 3% on ARPU growth for this year. You then asked about the lower end mid to low end 5 gs rate plan and whether that would have on a curbing impact on ARPU growth. As you know, we had introduced a high end 5 gs rate plan and that successfully converted the LTE users inflow into 5 gs, but there are also group of subscribers using the low end LTE rate plan, and we wanted to attract them. Hence, we decided to launch the 5 gs mid- to low end rate plan. We believe that with the launch of this mid- to low end 5 gs rate plan, We will be able to further grow the subscriber as well as ARPU for 5 gs. You also asked about that question in relation to the marketing competition. But for 2021, we expect the stabilized environment for marketing competition will continue for the year. 2021, we are expecting all of the 3 telcos to engage in the so called co petition, a win win for all of the players. There will be joint investments on 5 gs and also there will be quite active cooperations and collaborations on other VAS services, value added services such as V coloring. All in all, KT will depart from any subsidy based futile competition and focus more on the fundamental aspect. Your next question related to dividends. In terms of the size of the dividend payout for 2021, First of all, as you know, we've announced that for the interim dividend, we will be paying out 50% of the adjusted net profit. So in accordance with the mid Term financial guidance, which we announced in May of 2020, based on the OP target of TRY 1,000,000,000,000 of 2020 for 2021, we will endeavor to further enhance the operating profit on an year over year basis. So in line with improvements and the profit the profitability, we will do our best to make sure that we can further expand on dividend payout. We'll move on to the next question. The next question will be presented by Choi Minan from NH Investment and Securities. And the following question will be presented by Minjun Jang from Qum Securities. Mr. Seminar, please go ahead with your question. Hello. I am Anja Min from NH Securities. Before asking the question, I would like to congratulate you on becoming the new CEO. I know you used to work at the IR department, so I think that's why the market has quite a bit of expectations for your contributions going forward. Now moving on to my question. It's on wireless subscriber. You've mentioned that you are looking to see higher penetration of 5 gs. What is your forecast for 5 gs subscriber going forward? And second question, there was a recent decision to sell off one of your subsidiaries, KT Powertell. Could you share with us what the group's position is on the restructuring of these affiliates and companies? Mr. Ahn, thank you for that kind words, for the Congratulations that you've given me and the expectations that you've shared. First, on the 5 gs subscriber forecast. In 2021, we expect 5 gs to become much more mainstream. And according to the handset base for KT, we think that the portion is going to increase to 45%. You then asked about the group restructuring, including the decision to sell KT Palatale. So let me briefly share with you what our efforts first since last year when it comes to group restructuring. Now as you know, last year in May, during our Corporate Day, We announced that we will be restructuring the group portfolio focusing on group growth industries such as B2B, Financial and Media Content. So under that objective, in order to further bolster our media platform capabilities, last July, we started to started on embarked on the process to acquire HCN KT Skylight status. And also in July, we successfully completed the right offering by Kei Bank, really laying down the basis for further financial business growth. And in November, we decided to merge the 2 entities, KTH of T Commerce on KmHouse, a mobile platform based company, so that we may take a step further towards becoming a digital content platform. And this year, we announced that we will sell KT Power Tail and that we will set up and establish KT Genie Studio to Duijin. But such group restructuring was not just done on a top down perspective. Group companies or subsidiaries themselves starting last year redefined the business that they were in, and they started to rehighlight the customer base that they had, really trying to make preparations for further strengthening of competitiveness. Now KT will focus on its core businesses of IT and Communications Telecommunications and really realign and restructure its business portfolio centering around new growth businesses and growth areas such as in finance and in media content. In terms of the more specific restructuring plan, as the updates arise, we will promptly communicate with you. We will move on to the next question, please. The next question will be presented by Minjun Jang from Kion Securities. And the following question will be presented by Neil Anderson from HSBC. Mr. Min Jin Jang, please go ahead with your question. Thank you. I also have two questions. First, your AI and DX revenue, part of your B2B business is posting a double digit growth. Do you expect such growth trends to continue into the future? So if you could give us a guidance on your B2B growth, including AIDF, that would be helpful. 2nd, I know there was a question in dividend already, but I just want to confirm that your increase in DPS this year, of course, is going to be positively received by the market, but it seems like you still have quite a bit of investment that's going to be needed for 5 gs as well content and other growth businesses like B2B. So the company obviously then would have to think about whether it is not better to actually retain these resources. So from the market perspective, can we expect same level of DPS or payout ratio for this year? Yes, Mr. Chang Min jun, thank you for that question. I understand that you asked question about annual growth trend of AIDX and also any B2B growth guidance. Now AI DX business posted a growth of 11.8%. Now not only cloud and IDC business growth, but we are really planning to enter full swing into AI, artificial intelligence based CC, contact centers. And if you look at KT's cloud, we are the sole provider in Korea that can bring together and integrate the network, IDC and cloud at the at Now supported by our network business, basically, when it comes to cloud EAS as well as Public Sector Cloud and Financial Cloud, we have competitive edge. Based off of that, we can very effectively expand into PaaS and SaaS as well. For AICC, we plan to focus on targeting customers such as local governments, on hospitals and small to medium sized merchants. In terms of the guidance, the growth is going to be higher than the 11.8% that we've seen previous year. But please understand, I cannot disclose any specific figures. With them. Your second question relates to whether it will be we will be able to maintain the current payout ratio in light of the fact that there will be quite a bit of resources that's required for 5 gs and B2B investment. Now I have already said that basically our plan is to maintain our CapEx level at a flat rate compared to the previous year, but the adjustment will be made within the portfolio. We will increase allocation to growth businesses. In terms of the payout ratio up until 2022. Basically, we will keep to the 50% of the adjusted net profit. This is on a stand alone basis. On NIMIDA. The next question will be presented by Neil Anderson from HSBC. Please go ahead with your question. Thank you very much and good afternoon. I have two questions, please. The first one relates to 5 gs and specifically When KT plans to see commercial benefits, revenues from some of the newer features of 5 gs such as edge computing, low latency on network slicing. And the second is really a follow-up from the previous question and it relates again to 5 gs and which Specific areas of the market allow you to adopt 5 gs services first. So would that be in the smart city domain on Factory Automation, etcetera, would be very helpful to get your view on that. Thank you. Yes, Neil Anderson, thank you for that question. Now recently, there's been revision on the network neutrality related guidelines. And on the back of that revision, we think that there's going to be more B2B business opportunities in the areas of autonomous driving and smart actually. For the. Now for the specialized services for differential application of 5 gs traffic, We would need network slicing as well as the B2B basis. Now you asked about the commercial benefits being materialized. 1st, in terms of the regulatory basis of providing 5 gs services, for instance, network slicing, The basis is already ready. It's all there. But we think that until from the industry's perspective, until the equipments and the technologies are ready, service would not be able to be deployed. Now based on KT's B2B or Private 5 gs infrastructure, we're currently developing and testing many different B2B use cases. And going forward, we think that there will emerge quite a bit of opportunities when it comes to the specialized services underpinned by 5 gs. And you also asked which sector or segment will be first to adopt 5 gs B2B services? At this at this point in time, it is 5 gs smart factory that's really at the forefront. KT is going to continuously really innovate on the strategic industries that relate to smart factory and we have very actively cooperated with Hyundai Robotics through equity investment into that entity. To 5 gs Smart Factory, we were able to win orders for 42 collaborative robots. The 5 gs Smart Factory Collaborative Robot is basically a blended product where a robot is provided together with the services. For instance, we are providing technology that is 5 gs based that enable the operation of unmanned forklifters at Hyundai Construction and Machinery. And also together with Samsung General Medical Hospital based off of 5 gs technology. We're enabling real time transmission of diagnostic pathological data, which is a high capacity, high volume data during the operation procedure. That data will be on a real time basis fed back to the Department of Pathology so that exact diagnostic can be made by the relevant professionals. Now in terms of B2B, we're going to really expand our positioning in smart factory, connected car as well as highly immersive media. For SMEs based off of high level of demand, we will be providing solution. And for midsized companies, We will be able to provide platform services underpinned by cloud and so we plan to customize our 5 gs Currently, there are no participants with questions. We will wait for a second until there is another question. With no further questions, we would now like to close the Q and A session. I would like to thank you all for your questions and your interest. And once again, thank you for joining us today. We would like to now wrap up Q4 2020 earnings presentation by KT. Thank you.