[Non-English content ] Good morning and good evening. First of all, thank you all for joining this conference call. 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. If you have a question, please press star one.
That is, star and number one on your phone during the Q&A session. Now, we would like to turn the conference over to Mr. Seung-Hoon Chi, KT IRO.
[Non-English content]
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 webcast via our website. You can refer to the presentation slides as you listen in on the call.
[ Non-English content]
Please note that today's earnings results include pre-audited financial earnings and business results estimates prepared using the K-IFRS standards. We cannot guarantee the accuracy and completeness of all financial and business performance data other than the fixed past data and note that they may change in the future.
[ Non-English content]
We will begin with CFO Kyung-Keun Yoon's opening remarks, followed by 2020 Q1 earnings presentation.
[ Non-English content]
Good afternoon. I am KT CFO Kyung -Keun Yoon. Despite the difficult business environment, including COVID-19 in the first quarter, it has been a meaningful time heralding a new leap forward with the new CEO taking office and stable transition of the management amid support from investors and analysts.
[ Non-English content]
In today's ICT market, which includes telecommunications, 5G is becoming the mainstream. All industries are accelerating the pace of digital transformation. We are experiencing great changes in our daily lives since the outbreak of COVID-19, which includes the greater adoption of the untact culture.
[ Non-English content]
With the new management structure in place from the beginning of this year, and in tandem with such social 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.
[ Non-English content]
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.
[ Non-English content]
The new B2B revenue has three business areas: traditional corporate lease lines, corporate IT solutions, which includes SI business, and AI DX, which includes IDC and cloud business.
[ Non-English content]
The product revenue has also been simplified by excluding the SI business to represent only the handset revenue. We have separated the earnings performance of KT and its affiliated group companies to more clearly present the performances of individual group companies.
[ Non-English content]
We expect to further raise your understanding of the KT group with the realignment of the revenue categories.
[ Non-English content]
Let me now present our first quarter earnings performance. Q1 total revenue was KRW 5 trillion, 831.7 billion, a similar level on-year. While handset revenue fell 6.9% YoY due to the decline in the handset sales volume from the COVID-19, service revenue grew 1.0% YoY with the stable performances from core businesses, including wireless, internet, and media, as well as the growth of the B2B and AI DX businesses.
[ Non-English content]
Operating profit was KRW 383.1 billion, down 4.7% on-year with a small decline in the profit from group companies due to the impact of COVID-19. Net income was KRW 226.6 billion, down 12.8% YoY and EBITDA was KRW 1,295.8 billion, down 1.0% YoY.
[ Non-English content]
On the next page, I will talk about our operating expense.
2020[ Non-English content]
In 2020 Q1, operating expense was KRW 5,448.6 billion, up 0.3% on-year through continued cost controlling efforts. On the next page, I will explain KT's financial highlights.
[ Non-English content]
As of the end of 2020 Q1, debt to equity ratio was 116.5%, down 9.1 percentage points on year, and net debt ratio was 37.6, up 10.2 percentage points on year. I will talk about our CapEx.
[ Non-English content]
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.
[ Non-English content]
As we are in the second year of launching the 5G service, KT plans to focus on expanding the coverage to the outdoor, shadow, and indoor areas to improve its user service quality. Now, on each business.
[Non-English content]
Wireless revenue was up 1.9% on year to KRW 1,735.7 billion. Of this, wireless service revenue was up 2.2% on year to KRW 1,632.4 billion, backed by the increasing number of Prime subscribers since the launch of 5G, and in spite of the great decline in roaming revenue as a result of the COVID-19 outbreak.
[ Non-English content]
In Q1, 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 enter the second year, we have 1,780,000 5G subscribers.
[ Non-English content]
KT has been leading the market with innovative tariff plans, and in the first quarter, we have expanded our 5G age group with the launch of the 5G Y-teen tariff plan for the 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, et cetera, has been positively received with more than half of new 5G subscribers opting for this plan.
[ Non-English content]
Also, the 5G streaming game service, currently in open beta, has surpassed 40,000 subscribers. After the service upgrade, daily average game playing time has increased by around 40%, and the number of weekly visitors has increased close to twofold. 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 the growth momentum. Next, fixed line and IPTV businesses.
[ Non-English content]
Fixed line revenue was down 7.0% YoY to KRW 372.5 billion with a decline in subscribers. In broadband internet, KT reinforced its number one 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 the continued growth in GiGA internet .
[ Non-English content]
With the increase in Wi-Fi connections in the future, we will broaden our customer base by evolving our services to cater to the changing trend in the internet usage.
[ Non-English content]
IPTV revenue is maintaining its robust double-digit growth. With the continued increase of high-quality subscribers, revenue grew 11.9% on-year to KRW 417.7 billion.
[ Non-English content]
With the greater adoption of the untact trend, KT's media service is creating changes as an integral part of our customers' daily lives.
[ Non-English content]
KT has strengthened its market leadership by quickly responding to customer needs with the Kids Land service, specializing in the kids segment, homeschooling-affiliated content, and AI-based English education service for the opening of the online schools, and the industry's first membership program for kids.
[ Non-English content]
Moreover, the Super VR, which attracted much interest with the launch of Korea's first 4K wireless VR service in 2019, showcased the 8K VR streaming for the first time in the world. With the COVID-19 affecting outdoor activities, March's monthly usage volume increased by 60%, and per-subscriber average usage time increased by 20% as well.
[ Non-English content]
Seezn, the new OTT service launched last November, is showing its potential by surpassing 2.24 million MAU within just four months. Seezn is the only OTT service in Korea that has all the domestic broadcasters' content, such as terrestrial, cable TV, and general programming channels, and we will further strengthen its competitiveness in the future.
[ Non-English content]
Next is the B2B business.
B2B [ Non-English content]
B2B revenue was KRW 674.8 billion, up 8.2% on-year.
B2B [ Non-English content]
The B2B business's value as a new growth driver has been confirmed with the growing demand from companies for digital transformation.
[ Non-English content]
KT, in particular, has the competitive edge as Korea's leading IDC operator with 12 internet data centers. Consequently, the growth was led by the increase in AI DX revenue by 28.5% on-year, with the greater sales of the cloud service to public and financial sectors.
[ Non-English content]
Korea's number one AI, GiGA Genie, attracted more than 2.3 million subscribers and showing tangible progress by leading the AI special market, including AI apartments and hotels.
[ Non-English content]
Within the B2B market, a new opportunity to leverage AI technology is opening with the acceleration of the digital transformation from COVID-19 and the greater need for companies to build a business environment to increase productivity. KT plans to lead the B2B market by assisting the innovation of other industries with the channel infrastructure and know-how in the B2B market that it has built over a long period of time, and combining its leading-edge network and AI/DX capabilities.
[ Non-English content]
Next, earnings performances of key group companies.
BC Card [ Non-English content]
BC Card revenue was KRW 799.4 billion, down 7.7% YoY due to the reduction in domestic merchant fees and the decline in the credit card usage amount from the COVID-19 impact. SkyLife's revenue was KRW 167.9 billion, down 1.6% YoY due to the decline in satellite TV subscribers.
[ Non-English content]
Content subsidiaries revenue was KRW 177.9 billion, up 12% on year, fulfilling its role as the growth engine for KT group companies with the increase in Genie Music subscribers and the growth in KTH's T-commerce business.
KT Estate [ Non-English content]
KT Estate's revenue was KRW 106.7 billion, down 8.4% YoY due to underperformances of the hotel and leasing businesses from COVID-19's impact.
[ Non-English content]
This brings us to the end of KT Group's first quarter earnings results. Presently, the world is waging a fight with an invisible enemy called the COVID-19. While there is some impact to 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 with the growth of our core businesses and efficient cost execution.
[ Non-English content]
Now is the time for us to prepare for the post-COVID-19 era. Along with the greater prevalence of the untact culture, we see demand for digital transformation in our cherished daily activities that we had been taking for granted. Crisis and challenge await, but rather, this is an opportunity for KT. Backed by KT's leading network quality and digital capabilities, we will quickly respond to customer needs and assist the changes in people's daily lives and the innovation of other industries.
[ Non-English content]
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.
[ Non-English content]
For further details, please refer to the earnings presentation material we have provided. Now we will start the Q&A session.
[ Non-English content] . Now Q&A session will begin. Please press star one if you have any questions. Please press star two if you want to cancel question.
In order to allow as many Q&A chances as possible within the restricted time, we would appreciate only two questions per each participant. [Foreign language] The first question will be provided by Hoe-jae Kim from Daishin Securities, and the next question will be provided by Hongsik Kim from Hana Financial Investment. Please go ahead with your question.
[ Non-English content]
Good afternoon, 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%. 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 other two companies. That is why I am interested in what sort of guidance you can share with the market related to the KT performance in wireless service. If you can give us some information related to the outlook for 5G subscriber base number or what ARPU or revenue would look like, that would be very helpful. Thank you.
[ Non-English content]
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 actually come up with a dividend policy that is more predictable for the market. Based on this consensus, the BoD and the management are currently discussing the midterm dividend policy outlook. Once we have closed discussion and this is confirmed, we will communicate with the market as soon as possible.
[ Non-English content]
To address 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. In respect to some positive points related to the wireless service, compared to the past, we see a continued improvement in the areas of net additions of handset subscribers.
5G [ Non-English content]
Furthermore, since the launch of KT 5G services, we are currently maintaining a much higher market share in 5G compared to the market share we have for the LTE handsets. Such efforts have 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 very high ARPU for the new 5G subscribers. As I mentioned previously, related to the new tariff plans that we have announced and is selling to the market, we are using these up-selling opportunities to continue to do better.
COVID-19 [ Non-English content]
Furthermore, with the impact of COVID-19, we have seen a drop in the roaming revenue, and also a slowdown in the growth of net additions. We continue to see growth momentum in the 5G services. In the second half, we also have a greater lineup of handsets available, and we will also anticipate that the growth rate of 5G subscribers will also pick up pace in the second half as well. Of course, on a full year basis, growth rate may be slightly below what we had anticipated. In terms of revenue and ARPU, we believe that we'll continue to grow in these two areas.
[ Non-English content]
Moreover, we had actually forecasted that by the end of 2020, in terms of the growth rate on a handset basis, that we can see a growth of around 25%-30%. We believe that the upper higher level, the 30%, may not be achievable.
[ Non-English content]
I would say that you should assume the growth rate to be around 25%.
[ Non-English content]
[Foreign language] The next question will be provided by Hongsik Kim from Hana Financial Investment. Please go ahead with your question.
[Non-English content]
Thank you. I have two questions related to the profits outlook for the company. Related to the first question, I want to actually know a little bit more about what the outlook of the KT standalone profit will be on a full year basis. I know that originally we had anticipated KT to actually post a higher depreciation cost, but that wasn't the case in Q1, not as much as we anticipated. As a result, we're seeing a very better than expected performance when it comes to posting operating profit, and you have enjoyed a YoY growth. Can you give us additional information related to what the standalone KT full year operating profits would look like? Also, if possible, give a little bit more information to us related to what the depreciation will be for this year.
My second question is related to the overall turnaround that KT will be recording. Of course, in Q1 it did not happen. Of course, if you look at what's going to happen in Q2, Q3, you will be starting off with a low base effect. Can you actually give us in terms of how we should be looking at the KT's bottom line performance in 2020?
[ Non-English content]
You asked two questions, since they all deal with profits, I'll just give you the answer for both. If you look at what's happening for this year, KT's primary focus is to improve its bottom line. For our labor cost and depreciation, we'll control it at a 1%-2% level, and we also have to deal with the deferral effect of last year's selling expenses. We believe that we'll be able to overcome this, and thus, we will continue to do a very tight cost control in terms of reducing the marketing expenses as well. In so doing, in terms of standalone basis, we will exert great effort so that we will be maintaining the performance in profits to last year's level.
[ Non-English content]
[ Non-English content]
[ Non-English content]
[Foreign language] The next question will be provided by Sin Lee from Citigroup . Please go ahead with your question.
[ Non-English content]
Thank you for this opportunity. This is the first earnings call we're having after the appointment of the new CEO, Mr. Hyun-mo Koo. Thus, I'm interested to know in terms of KT's strategic direction with the new CEO, have there been any new changes? Are there any specific areas that KT is now focusing on?
[ Non-English content]
To talk about the key focus of our new CEO and to do this by business. In terms of the wireless, the focus is to really realize a market stability in 5G and to make sure that we are very prudent in terms of how we present our products and marketing. Through product and marketing differentiation to be able to drive our revenue and our ARPU. If we move on to fixed line, we want to leverage the leadership that we have in GiGA interne t and to continue to drive the growth of IPTV and also to expand our GiGA Genie AI platform. When we move on to the B2B AI DX area, this is where we believe that it's going to serve as a new growth driver for KT. For the group management, in terms of our business size, our capabilities, growth, and synergy.
Taking all of these into consideration, we will continue to be working on improving our portfolio.
[ Non-English content]
In the near future, as soon as feasible, our new CEO will communicate with the market related to the overall corporate vision, strategy, and shareholder return policy.
[ Non-English content]
[Foreign language] The next question will be provided by Tae Won Kim from UBS Securities. Please go ahead with your question.
[ Non-English content]
[ Non-English content]
Thank you for the opportunity. I have a question related to the dividend policy. I have heard that the company is considering also doing a quarterly dividend payout. My fundamental question is why the company is considering quarterly dividend payment. Is it possibly because of the dividend windfall they can get and ultimately to be able to stabilize KT's share prices? For the market investors, what's most important is really the total annual dividend payout amount. Just wondering if you can actually share the management view on whether it's a quarterly dividend payment, whether we can anticipate a full year dividend payment amount to increase.
[ Non-English content]
I think that 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 what I said, that 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.
[ Non-English content]
[ Non-English content]
[ Non-English content]
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 schedule, and we will close the 2020 first quarter earnings conference call.