Earnings Call: Q1 2020

May 13, 2020

Slides

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2020 21st quarter earnings results by KT. We would like to have welcoming remarks from Mr. Seung Hoon Chi, KT IRO and then Mr. Kyung Eun Yoon, CFO, will present earnings results and entertain your questions. This conference will start with a presentation followed by a divisional Q and A session. Now we would like to turn the conference over to Mr. Seung Hoon Ji, KTIRO. Good afternoon. I am Sung Hoon Ji, KT's IRO. Let us now begin KT's 2020 Q1 earnings presentation. This earnings release call is being webcasted via our website and you can refer to the presentation slides as you listen in on the call. Please note that today's earnings results include pre audited financial earnings and business results estimate prepared using the K IRFS standards. Thus, we cannot guarantee the accuracy and completeness of all financial and business performance data other than the fixed path data and note that they may change in the future. We will begin with CFO, Kyung Keun Yoon's opening remarks followed by 2020 Q1 earnings presentation. Good afternoon. I am KT's CFO, Dong Geun Yoon. Despite the difficult business environment, including COVID-nineteen in the Q1, 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. In today's ICC market, which includes telecommunications, 5 gs is becoming the mainstream. All industries are accelerating the pace of digital transformation, and we are experiencing great changes in our daily life since the outbreak of COVID-nineteen, which includes the greater adoption of the untapped With the new management structure in place from the beginning of this year and in tandem with such social changes, KT has created the AICX 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. 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 D2C core businesses, including wireless, fixed line and media, starting from 2020, we have 2 main categories, B2C and B2B. The new B2B revenue has 3 business areas: traditional corporate leased lines corporate IT solutions, which includes SI Business and AIDX, which includes IDC and Cloud Business. The product revenue has also been simplified by excluding the SI business to represent only the handset revenue. Moreover, we have separated the earnings performance of KT and its affiliated group companies to more clearly present the performances of individual group companies. We expect to further raise your understanding of the KT Group with the realignment of the revenue categories. Let me now present our Q1 earnings performance. Q1 total revenue was KRW5831.7 7,000,000,000, a similar level on year. And while handset revenue fell 6.9% y o y due to the decline in the handset sales volume from the COVID-nineteen, service revenue grew 1 point 0% y o y with a stable performances from core businesses, including wireless, Internet and Media, as well as the growth of the B2B and AIC and GX businesses. Operating profit was KRW383.1 billion, down 4.7 percent on year with a small decline in the profits from group companies due to the impact of COVID Net income was KRW226.6 billion, down 12.8 percent YOY and EBITDA was KRW 1,295,800,000,000, down 1.0 percent Y o Y. On the next page, I will talk about our operating In 2020 Q1, operating expense was KRW 5,448,600,000,000, up 0.3 percent on year through continued cost controlling efforts. On the next page, I will explain KT's financial highlights. 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. Next, I will talk about our CapEx. At the beginning of this year, we presented our annual CapEx guidance to be around KRW 3.1 trillion. CapEx the Q1 was KRW406.9 billion, which is 13.1% of the annual plan. As we are in the 2nd year of launching the 5 gs 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. Wireless revenue was up 1.9 percent on year to KRW1735.7 billion. Of this, wireless service revenue was up 2.2 percent on year to KRW1632 point 4,000,000,000,000 backed by the increasing number of Prime subscribers since the launch of 5 gs and in spite of the great decline in roaming revenue a result of the COVID coronavirus outbreak. 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 1st 5 gs service in April 2019, as we enter the 2nd year, we have 1,780,005 gs subscribers. Heiichi has been leading the market with innovative tariff plans. And in the Q1, we have expanded our 5 gs age group with the launch of the 5 gs Y teen tariff plan for the teens and the Y super plan for the 20. In particular, within 1 month of the launch of the super plan plus the new tariff plan with a variety of content based benefits for video, music, VR and etcetera have been positively received with more than half of new 5 gs subscribers opting for this plan. Also, the 5 gs 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 percent 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. AT will cement its leadership by strengthening its fundamental 5 gs competitiveness and differentiated 5 gs service offering and secure the growth momentum. Next, fixed line and IPTV businesses. Fixed client revenue was down 7 point 0% y o y to KRW 372.5 billion with the decline in subscribers. In broadband Internet, KT reinforced its number one position fueled by the increase in the number of Siga Internet subscribers. Broadband Internet revenue was 0.5 percent on year to KRW 502.5 billion with the continued growth in giga Internet. 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. 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 1,000,000,000. With the greater adoption of the untapped trend, KT's media service is creating changes as an integral part of our customers' daily lives. KT has strengthened its market leadership by quickly responding to customer needs with the kids' plan 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. Moreover, the Super VR, which attracted much interest with the launch of the Korea's first 4 ks wireless VR service in 2019, showcased the 8 ks VR streaming for the first time in the world. With the COVID-nineteen affecting outdoor activities, March's monthly usage volume increased by 60% and per subscriber average usage time increased by 20% as well. Season, the new OTT service launched last November, is showing its potential by surpassing 2,240,000 MAU within just 4 months. Season 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. Next is the B2B business. B2B revenue was KRW674,800,000,000, up 8.2 percent on year. The B2B business' value as a new growth driver has been confirmed with the growing demand from companies for digital transformation. 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 percent on year with the greater sales of cloud service to public and financial sectors. Furthermore, Korea's number one AI, GiGA Genie, attracted more than 2,300,000 subscribers and showing tangible progress by leading the AI spatial market, including AI apartments and hotels. Within the B2B market, a new opportunity to leverage the AI technology is opening with the acceleration of the digital transformation from COVID-nineteen and the greater need from 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 AIDX capabilities. Next, earnings performances of key group companies. DC car revenue was KRW799.4 billion, down 7.7 percent y o y due to the reduction in domestic merchant fees and the decline in the credit card usage amount from the coronavirus impact. Skylight's revenue was KRW167.9 billion, down 1.6 percent y o y due to the decline in satellite TV subscribers. Content subsidiary's revenue was KRW177.9 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 Estates revenue was KRW106.7 billion, down 8.4 percent on year due to underperformances of the hotel and leasing businesses from COVID-nineteen impact. This brings us to the end of KT Group's 1st quarter earnings results. Presently, the world is waging a fight with an invisible enemy called the COVID-nineteen. 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 Now is the time for us to prepare for the post COVID-nineteen era. Along with the greater prevalence of the untapped culture, we see demand for digital transformation in our daily 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 life and the innovation of other industries. 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. For further details, please refer to the earnings presentation material we have provided. And now we will start the Q and A session. And the next question will be provided by Hoi Jae Kim from Hana Financial Investment. Please go ahead with your question. 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 at around 40%. So can you provide additional color to what the dividend would look like in the future? And my second question is related to your performance in wireless service. You have already have successfully done the turnaround for the wireless service revenue and your wireless ARPU is highest compared to other 2 companies. And 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 subscriber base number or what ARPU or revenue would look like, that would be very helpful. Thank you. 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. And based on this consensus, the BOD and the management are currently discussing the mid term dividend policy outlook. And once we have closed discussion and this is confirmed, we will communicate with the market as soon possible. And to address your second question related to the wireless service revenue and ARPU. First of all, thank you very much for the kind words. But to be frank, we believe that we need to do better. And in respect to some positive points related to the wireless service, compared to the past, we see a continued improvement in term in the areas of net additions of handset subscribers. And furthermore, since the launch of KT's 5 gs services, we are currently maintaining a much higher market share in 5 gs compared to the market share we have for the LTE handsets. And 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. And at present, we continue to maintain a very high ARPU for the new 5 gs subscribers. But as I've mentioned previously related to the new Terra plans that we have announced and is selling to the market, we are using this upselling opportunities to continue to do better. And furthermore, with the impact of COVID-nineteen, we have seen a drop in the roaming revenue and also a slowdown in the growth of net additions. But we continue to see growth momentum in the 5 gs services. And in the second half, we also have a greater lineup of handsets available, and we will also anticipate that the growth rate of 5 gs 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. But in terms of revenue and ARPU, we believe that we'll continue to grow in these two areas. And 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% to 30%. But we believe that the upper higher level, the 30% may not be achievable. And so I would say that you should assume the growth rate to be around 25%. The next question will be provided by Hongshik Kim from Hana Financial Investment. Please go ahead with your question. Thank you. And 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 stand alone 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 Y o Y growth. But can you give us additional information related to what the standalone KT's full year operating profits would look like? And 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. And of course, in Q1, it did not happen. But of course, if you look at what's going to happen in Q2, Q3, you will be starting off with a base low base effect. So can you actually give us in terms of how we should be looking at the KT's bottom line performance in 2020? Profits, I'll just give you the answer for both. And 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% to 2% level. And we also have to deal with the deferral effect of the last year selling expenses, but 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. And so in so doing, in terms of stand alone basis, we will exert great efforts so that we'll be maintaining the performance in profit to last year's level. The next question will be provided by Shin Lee from Citigroup. Please go ahead with your question. Thank you for this opportunity. This is the first earnings call we're having after the appointment of the new CEO, Mr. Hyunmoo Gu. And thus, I'm interested Is there any specific areas that KT is now focusing on? 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 5 gs and to make sure that we are very prudent in terms of how we present our products and marketing. So through product and marketing differentiation to be able to drive our revenue and ARPU. If we move on to fixed line, we want to leverage the leadership that we have in giga Internet and to continue to drive the growth of IPTV and also to expand our driver for KT. And 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. And 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. The next question will be provided by Taewon Kim from UBS Securities. Please go ahead with your question. Thank you for the opportunity. And I have a question related to the dividend policy. I have heard that the company is also doing a quarterly dividend payout. And my fundamental question is why the company is considering quarterly dividend payment. I said possibly because of the dividend windfall that you can get and ultimately to be able to stabilize KT's share prices. But for the market investors, what's most important is really the total annual dividend payout amount. And so 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? 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. And so 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. If there are no more questions, we will close the Q and A session. Thank you once again for your questions and interest. Thank you, participants, for your time despite your busy schedules. And we will close the 20 2Q1 earnings conference call.