Earnings Call: Q3 2020

Nov 6, 2020

Slides

Good morning and good afternoon. First of all, thank you all for joining this conference call. And now, we will begin the conference of the 2023rd Quarter Earnings Results by KT. We would like to have welcoming remarks from Mr. Seung Eun 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 Q and A session. Now, we would like to turn the conference over to Mr. Seung Eun Chi, KTIRO. Good afternoon. I am Chi Seung Hoon, KT's IRO. This earnings release call is being webcasted via our website, and you can follow the slides as you listen in on the call. Let us now begin KT's Q3 2020 earnings presentation. Before we begin, please note that today's presentation includes financial estimates and operating results under the IFRS standards and has 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 changes. Now I will invite our CFO, Yoon Kyung Geun for his welcoming remarks and presentation on Q3 2020 earnings. Good afternoon. I am Yoon Kyung Geun, KT's CFO. Although mired with uncertainties both at home and abroad due to the prolonged COVID-nineteen pandemic rising from the current crisis, KT was able to bring stable top line growth and uncover hidden opportunities for growth. In the post COVID world where untapped culture became the new normal, we sustained subscriber growth from the telecom business, while laying a foothold for new growth as a digital innovation partner to other industries underpinned by KT B2B capabilities in IDC, cloud, AI among others. Last May, when we communicated our mid term financial guidance as part of the shareholder return policy, we also communicated that our dividend payout ratio will be 50%. In addition to further enhanced corporate value, BOD decided on KRW 300,000,000,000 of share buybacks on November 5. We will continue to exert best efforts to bring sustainable growth to drive shareholder value enhancements. Now moving on to Q3 2020 financials. Total Q3 revenue declined 3.4% year on year to KRW6 1,200,000,000. On the COVID-nineteen impact, handset revenue was muted, but there were revenue declines from financial, real estate and other subsidiaries. However, supported by steady growth from wireless, media and B2B business, service revenue increased 0.8% on year. Despite efforts towards efficient spending, COVID-nineteen constrained subsidiary profit and as a result, operating profit fell 6.4 percent year on year to KRW292.4 billion. But owing to continuous efforts on operational innovation, which improved the non operating earnings, net income was up 7.9 Next page is on operating For operating expense, despite the wage increment being retroactively paid out this quarter, following the 2020 collective bargaining, thanks to cost controls and efficiency measures, operating expense was down 3.3% year on year to KRW 5708.8 billion. Next is on the financial position. As of Q3 end was 129%, up 8 percentage points year on year. Net debt ratio was up 2.9 percentage points year on year to 31%. Next is on CapEx. CapEx spend up to the 3rd quarter was in total KRW1784.1 billion. In the remaining year, we plan to expand 5 gs coverage centering around shadow zones and underground subway to the extent that users can actually feel the difference. Next, I will elaborate on individual business segments in terms of their performance and future outlook. Wireless service revenue was up 0.9 percent year on year to KRW1742.1 billion. With prolonged COVID-nineteen impact, roaming revenue fell by a large margin but on a robust growth of 5 gs quality subscribers, wireless service revenue was up 0.6% year on year to report KRW 1,636,200,000,000. If you took out the roaming impact and accounting changes on the membership points, wireless service revenue increase was 3% versus last year. Total wireless subscribers in Q3 increased 200,000, reaching 22,323,000. As of Q3, there was 2,810,005 gs subscribers, accounting for 20% of the handset subscribers. Following the super plan choice plan, we introduced mid to low end tariff plan in October. And for 5 gs customers who value the media experience, we launched a Netflix bundled plan, giving more choice to our customers. KT with its long track record of know how as the first to introduce iPhone in the domestic market drove 5 gs expansion through iPhone 12, which was launched back in October 30. And by solidifying core competitiveness, we will continue to drive growth going forward. Next is on fixed line in IPTV Business. 6 slide telephony revenue was down 7% year on year to KRW369,200,000,000 on reduced subscribers. Broadband Internet revenue was down 0.3 percent on year to KRW 498,700,000,000 on stronger retention activities, I. E, targeting of giga Internet subscribers with nearing expiry of contracts. In the post COVID age, in home Internet environment has become ever more important. And in June, we launched a new Wi Fi concept service called Giga Wi, growing market responses and expanding our subscriber base. By providing a complete set of Internet services from fixed line Internet to Wi Fi inside people's homes, KT can further solidify its leadership in the broadband Internet market. Driven by double digit growth of subscriber net addition and revenue, IPTV revenue was up 11.9 percent year on year to KRW 459,300,000,000. Supported by Netflix partnership, exclusive showing of popular total performance and through trend setting content, OLED TV, which was the biggest which has the biggest content pool in Korea with 250 live channels and 210,000 VOD titles, had a further boost in competitiveness, which drove increase in onboarding of high quality subscribers. KT will respond nimbly to fast transforming media market so that it may continue to strengthen its position as a number one pay TV provider. Next is on the B2B business. B2B revenue was up 0.8% on year to KRW 690,300,000,000, Especially the AI DX business, which we used as a foothold for expanding digital transformation demand, recorded a growth of 8.1% year on year. As a leading company in DX, namely digital transformation, we plan to ramp up growth in the B2B B2B market. On October 28, we launched KT Enterprise, which is a B2B exclusive brand and also opened Yongsan IDC on November 4, which is our 13th IDC, which all further built up our position as a number one IDC and cloud service provider. We are also actively introducing on tech solutions of KT to be utilized in many areas, including education, entertainment, call centers and remote working. We also successfully won government projects on digital new deal initiatives. And as such, we expect B2B business growth will come under full force. Through the distinct DX platform underpinned by the so called AEC, which stands for AI, Big Data and Cloud and KT's network infrastructure prowess, we will be a digital innovation partner to companies helping them grow and accelerate digital transformation for Korea as a nation. Next is on performances of group subsidiary. Due to the extended impact from COVID-nineteen, profit contribution from affiliates declined 25.4 percent year on year to KRW 85,600,000,000. BC Card revenue was down 0.6 percent on year to KRW 863,400,000,000 on lower acquiring volume following the pandemic outbreak. K Bank, which resumed operations from July, saw its new product and services like the online apartment mortgage loans drive strong performance, leading to a 6 fold increase in daily new customers, yet again confirming market potential. As Korea's 1st Internet only bank, we plan to expand the contactless financial services in not only B2C, but also in B2B segment. And under the objective of turning profit in 2022 and going IPO in 2023, we will seek synergies with KT, BC Card and other shareholder companies and holding events that create the buzz, we will go full force at acquiring new customers. Skylight revenue was down 3.1% year on year to KRW176.6 billion and declines in subscribers for satellite products. Skylife has decided to acquire Hyundai HDN worth KRW 490,000,000,000 and by completing the acquisition process, we will make this an opportunity to further enhance our media capabilities. Revenues from content subsidiaries, which include KTH, Genie Music, NAS Media, on strong performance from content and ad business was up 8.6% year on year, reporting KRW 194,000,000,000. This has been KT Group's Q3 2020 earnings results. With only 2 months left, if we look back at 2020, all of us felt the changes brought on by the COVID-nineteen pandemic. And for us at KT, it was a year when we raced forward to show a new side of KT, different from the past. We were steadfast at generating stable business performance and being equipped with a new growth engine of B2B business and building out a robust governance structure and also notched up our efforts to enhance shareholder value from setting up the dividend policy to share buybacks. Last but not least, we expect 2020 financials will be an improvement from last year and will exert our best efforts to bring better performances for next year. We ask for your support and interest and wish only the best to investors and analysts. Thank you. For more information, please refer to the IR document that we circulated and we will now entertain your questions. Only 2 questions for each participant. The first question will be provided by Hojae Kim from Pexin Securities. Mr. Hojae Kim, please go ahead with your question. I would like to post your questions. You have announced plan to buy back your shares. Would like to understand what the purpose of that share buyback is. Is it for cancellation? Or would you be using that for M and A purposes going forward? And is it okay for us to consider share buyback as separate to your dividend payout? Second question is on a stand alone basis, we see that your cumulative net profit has gone up by 29% year on year and also that figure had actually outperformed 2019 net profit figure. Would like to know if there are any changes that actually took place on your operating side? And also, since Q4, usually typically, the expense level is not that high. So can we expect higher level of net income at the end of the year? And has there been any certain changes that took place on your non operating business side? Let me first respond to your question about share buyback. The assessment of the management is that the current share price compared to the intrinsic value of KT is significantly undervalued. As we have communicated in May, we even at a very conservative forecast, we think that we will be able to achieve KRW 1,000,000,000,000 of stand alone operating profit come year 2022. We are confident of further improving our fundamentals, and we expect our equity prices, share prices to actually show an uptrend going forward. And so we decided that the meaningful size of capital allocation is necessary, and that is why we've decided a 300,000,000,000 of share buyback. In light of a very fast changing operational backdrop, we felt that we needed to have an option with regards to capital allocation. And in terms of the potential for canceling the shares that are bought back In light of the future business earnings as well as changes in the business backdrop, we feel that, that is one of possible options. Responding to your next question on dividend, we have made an announcement in the previous Corporate Day event that we will be paying out 50% of our stand alone basis adjusted net profit for the coming 3 years. This policy dividend policy still is valid. And in terms of the actual amount of the dividend, we will communicate with the market once our BOD is convened for Q4. Our decision to do a share buyback was once again based on the assessment of the management that the compared to the intrinsic value of the company that current share prices are significantly undervalued. That was the basis for the decision to do a share buyback, and it is separate from our decision on dividend. In terms of your question on our net profit and any changes that we can identify on the non operating side, basically, in terms of the employee welfare fund, which used to be under the non OP item, had been changed to an operating expense. As a result, the size of that impact is about €60,000,000,000 to €70,000,000,000 per annum basis. And also, we've seen a quite steady trend for both disposition losses for both the tangible and intangible assets, and those aspects contributed to the net profit on the non OP side. Yes. And in Q4, we do expect some seasonality. But compared to previous years, we expect more improvements as we go forward. We will take the next question please. The next question will be presented by Choi Min Ahn from NH Investment Securities. And the following question will be presented by Cheongsop Kim from KB Securities. Mr. Chaemin Ahn, please go ahead with your question. And from NH Securities, I am Anjemin. We'd like to ask you 2 questions. First is on your B2B business. I see that your B2B revenue on an year on year growth aspect seems to be a bit weaker. Can you explain as to the reason why? You've shared with the market your vision and announced KT Enterprise as a brand, and it seems like you're going to be quite aggressive in providing services based off of your new IDC center at Yongsan. If possible, can you give us what your growth projection If possible, can you give us what your growth projection is for your B2B AI and DX business after next year? If that's difficult, at least can you provide some color on the strategy going forward? And if there are any updates with your collaboration with Microsoft and Cloud, could you also share that with us as well? Why you've seen a bit of a weaker performance is because some of the large scale projects that were originally scheduled, the speed had gone a bit slow. And you are right, we are going to push and give a very strong growth momentum behind B2B business. But while we're doing that, we are still going to be very mindful of growth potential as well as profitability. And if we see need for any rationalization, we will, of course, definitely take that route. But the mainstream trend will be definitely an upward trend. Yes. Regarding KT's B2B business, we have numerous on numerous occasions communicated that we will become a platform provider underpinned by our telecom infrastructure. As a number 1 B2B Telecom Service Provider, we have been engaged not only in the basic network provision, but also we were engaged in the national disaster safety network, maritime and railway network. We have experience of participating in such large scale national infrastructure build up project. And we have also been engaged in IDC Business as well. Since the launch of 5 gs services, we were able to gain about 170 B2B use cases. Through such efforts, we want to be able to create a business and be able to create a new market segment for us. And Doctor. KT is committed to expanding the B2B market through its DX services. On top of the 5 gs service and network capability that we have, we also have a competitive edge in terms of AI, big data and cloud. In the AI segment, we started off by providing Gigagini set top boxes, and we very successfully expanded into other AI services, including hotels and apartments as well as AI call centers. So we have an experience of bringing to success new B2B business models. If you look at AI call center, we're currently engaged in this business together with our subsidiary, KTIS, and we have been able to win 12 customers as of today. If you look at big data, KT has its expertise in terms of telecom, location based and finance and payment data, And it is underpinned by these elements that we wish to further develop on these businesses. And also KT, as Korea's number 1 cloud and IDC business provider, we will very actively respond to a fast rising demand in this segment. We have actually opened Yongsan IDC only a couple of days ago, actually on the 4th November. And now we have a total of 13 IDCs in Korea, which really helped us further bolster our number one position in the domestic IDC space. Especially when it comes to cloud, we are providing very specialized and bespoke services to public and financial industry. And in November, with the launch of KTDX platform, we expect our cloud business capabilities will further strengthen. Our customers and actually we were able to actually win 7,000 clients at this point in time. And basically, by our B2B clients can enjoy KT's very strong network and the biggest scale IDC and cloud infrastructure, and we will also be able to provide them with the solutions. So our customer base will be able to enjoy integrated services going forward. And as I previously mentioned, we also launched our B2B brand KT Enterprise. Through this effort, we want to really solidify our image as a B2B specialized company. And on top of that, we have a very strong competitive edge in nationwide sales channel. So driven by all of these factors, we expect that for next year, just like we've done for this year, we will be able to sustain a 2 double digit growth. Regarding your question, particularly about Microsoft, because it involves another service provider, please understand that there are some confidentiality aspects to that. When it comes to the cloud business, rather than our arrangement with specific companies, I think what's important is that we will continuously be able to cooperate with companies both home and abroad in terms of IDC and cloud, and we will be able to expand on that collaboration in the future. We will take the next question please. The next question will be presented by Choonsok Kim from KB Securities. Mr. Choonsok Kim, please go ahead with your question. Thank you. I'm from KB Securities. I am Kim Joon Seok. We'd like to ask you two questions. The first, would like could you provide some more elaboration on this 5 gs mid- to low end tariff plan? Would there be any cannibalization with your existing 5 gs plans? And what impact would this have on your subscriber growth? And can you also share with us your financial impact from iPhone launch? In order for us to further increase on the penetration of 5 gs services on top of the current premium rate plan, in order to facilitate the migration of the mid- to low end rate users, the LTE subscribers, to migrate much faster to 5 gs, we introduced 4, 5, 6, 9 rate plans last October. It's been only a month since the launch of this rate plan. It's difficult to give you any specifics about its impact. But having said that, with if you look at the October figures, there has been some increase in the percentage of subscribers taking out this mid- to low end tariff plan below 80 ks. But still, we see that people who's actually taking out the super plan rate plan, which is above the premium tariff plan, above KRW 80,000, that percentage is still at around 80%. And also, especially at the end of October, we launched Netflix Choice rate plan. We think that this could actually help us attract more high end subscribers who take out rate plans in the range of KRW 90,000 or KRW 110,000 KRW 110,000 KRW. This new rate plan could have some of it could exert some pressure on the 5 gs ARPU decline, but we think that it is helpful in that we can expand the base for 5 gs subscribers and that it could have a bigger impact therefore on the top line. Responding to your iPhone question, iPhone 12 is selling quite well. And with the launch of iPhone in Q4, we expect there to be a more accelerated migration from LTE to 5 gs as a handset upgrade. And by the end of the year, we think 5 gs penetration based on the handset will increase to 25%. And most of the iPhone subscribers actually choose the selective discount rate plan. So we expect iPhone sales is not going to significantly increase the marketing expense on our side. So with more expanded 5 gs subscribers and lowering of the cost, we think that we will have an uplift support to profit. There are no further questions. So we would like to now close our earnings presentation. Once again, thank you very much for joining KT's Q3 2020 earnings presentation. Thank you.