KT Corporation (KT) Q4 2020 Earnings Report, Transcript and Summary

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference for the 2020 fourth quarter earnings results by KT. We'd like to have welcoming remarks from Mr. Seung-Hoon Chi, KT IRO. And then Mr. Kyung-Keun Yoon, CFO, will present earnings results and then entertain your questions. [Operator Instructions] Now we would like to turn the conference over to Mr. Seung-Hoon Chi, KT IRO.

Good afternoon. I'm Chi Seung-Hoon, KT's IRO. This earnings release call is currently being webcasted 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 includes 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 will invite our CFO, [Kim Young-jin], for his welcoming remarks and presentation on 2020 earnings.

Good afternoon. I'm [ Kim Young-jin ], KT's CFO. I've been newly appointed as the CFO of the company. And I think that was a minor mistake by the operator, so I would just like to make that correction before I begin. Now let's begin with KT's 2020 key business highlights. First, consolidated revenue was KRW 23.9167 trillion. Service revenue was KRW 20.8461 trillion, and operating profit recorded KRW 1.1841 trillion. On handset sale decline on the back of COVID-19 pandemic, total revenue declined, but improved profitability of KT's key cash cow businesses and expansion of our growth businesses -- operating profit posted a 2.1% growth year-over-year. On a stand-alone basis, there was growth across our B2B platform, wireless and media, which all supported service revenue to rise 1% on year, breaking the KRW 15 trillion 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 upturn 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 1.3 million to 2.470 million. 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 KT mhows, 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 value enhancement, we have also decided on a stronger shareholder return. On top of the decision for KRW 300 billion share buyback announced last November, in line with KT's profit improvements for 2020, we decided to pay out KRW 1,350 per share, which is up KRW 250 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-19 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, et cetera; and have been building big data capabilities in many areas, including health care and climate. With the recent revision of the Data 3 Act, 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 #1 native cloud provider, we offer not only the hybrid cloud services but, on top of that, recently launched a DX platform through which we are providing Korea's top-level cloud services. 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 #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 industries 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&As and equity investments. We can work with partners to provide convergent services or can gain capabilities that we lack through M&As and equity investments. Second, 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 million 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 our 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 wireless communications and Internet business, we will expand on high-quality subscribers of 5G and GiGA Internet so as to grow our top line revenue and will 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 trillion. Now I will present on 2020 full year performances. Total revenue was down 1.7% on year to KRW 23.9167 trillion on 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 1.1841 trillion. Net profit was up 5.6% on year to KRW 703.4 billion. EBITDA was up 0.6% on year, reporting KRW 4.8184 trillion. On the next page is operating expense. Operating expense was down 1.9% on year to KRW 22.7326 trillion -- and sustained cost efficiency measures. Next is on our financial position. 2020 year-end debt-to-equity ratio was 116.5%, 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 2.872 trillion. Next is on the performances from each of our respective businesses. Wireless revenue was up 1.3% year-on-year to KRW 6.9338 trillion. Driven by 5G subscriber growth, wireless revenue was up 1.6% on year, reporting KRW 6.5427 trillion. As of end of 2020, total wireless subscriber was 22,310,000. And there were 3,620,000 5G subscribers, which is 25% of total handset subscriber base. Next is fixed line and IPTV business. On declines in subscribers, PSTN revenue was down 7.3% on year to KRW 1.4655 trillion. 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 2.0012 trillion. IPTV revenue reported KRW 1.7232 trillion, up 7.7% 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 KRW 2.774 trillion. And with faster take of digital transformation across industries, AI and DX 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-19 pandemic; and restructuring of low-margin businesses. Next is on subsidiary performances. With decline in inbound foreign travelers and contraction of spending on the back of COVID pandemic, BC Card revenue was down 4.2% on year, reporting KRW 3.3864 trillion. 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 in -- KT Telecop in August, revenue fell 24.9% on year to KRW 364.4 billion. On increases in telecom service revenue, Skylife revenue was up 0.6% on year to KRW 698.7 billion. For the content subsidiary revenue, as platform-based revenue increased for all of the main companies like KTH, mhows, Genie Music and Storywiz, revenue was up 9.6% on year to KRW 772 billion. 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, who are 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've previously circulated. And now we will be very happy to take any of the questions that you may have. [Operator Instructions]

[Operator Instructions] The first question will be provided by Joonsop Kim from KB Securities, and the next question will be provided by Hoi Jae Kim from Daishin Securities.

I would like to ask two questions. I'm Kim Joonsop from KB Securities. My questions relate to, first, CapEx; and your -- second, your 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 or cloud equipment? I think it will be helpful if you could make comparisons with your past practices. Second 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've recently set up KT Genie Studio. And there are multiple number of OTTs that are going to be launched in Korea, so it will be helpful if you could provide us with your understanding and the way you see this content market.

Yes, Mr. Kim Joonsop. Thank you very much for your questions. 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 AI, DX and media. With regards to wireless investment, you've asked about the base station sites and in-building coverage. As of end of 2020, KT was able to complete the coverage, this is 5G network-based, across the 85 common locations. Now for 2021, basically we will be expanding the 85 regional, the 5G 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 the competitive 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 web novels 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 #1 media platform provider in Korea with about 12 million 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 Storywiz, we actually own IPs when it comes to web novels and webtoons. Also, through skyTV, which is an MPP provider, basically we will continue to strengthen the portfolio of original content and really strengthen the lineup of such contents. 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 million 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 contents as well. When it comes to planning and making these contents and productions, the resources that will be required could be 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 contents.

The next question will be presented by Hoi Jae Kim from Daishin Securities. And the following question will be presented by Jae-min Ahn from NH Investment & Securities.

I am Kim Hoi Jae from Daishin Securities. It seems like your wireless ARPU trend is quite favorable. Could you share with us what your projection is for your wireless ARPU? And with the launch of the lower-end 5G tariff plan, there are some concerns that this may actually curb the ARPU 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 has expected, and with your business performance improving for 2021, can we expect on an absolute basis bigger dividend payouts 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?

Yes, Mr. Kim Hoi Jae. Thank you for that question. Now for ARPU outlook: On our side, we're looking at around 3% ARPU growth for this year. You then asked about the lower-end -- mid- to low-end 5G rate plan and whether that would have a curbing impact on ARPU growth. As you know, we had introduced a high-end 5G rate plan. And that successfully converted the LTE users' inflow into 5G, but there are also a group of subscribers using the low-end LTE rate plan and we wanted to attract them. Hence, we decided to launch the 5G mid- to low-end rate plan. We believe that with the launch of this mid- to low-end 5G rate plan we will be able to further grow the subscriber as well as ARPU for 5G. You also asked about that question in relation to the marketing competition. Well, for 2021, we expect a 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 coopetition, a win-win for all of the players. There will be joint investments on 5G. 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 aspects. 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 midterm financial guidance which we announced in May of 2020 based on the OP target of KRW 1 trillion of 2020, for 2021 we will endeavor to further enhance the operating profit on a year-over-year basis. So in line with improvement in the profit, the profitability, we will do our best to make sure that we can further expand on dividend payouts.

The next question will be presented by Jae-min Ahn from NH Investments and Securities, and the following question will be presented by Min Jun Jang from Kiwoom Securities.

I am Ahn Jae-min from NH Securities. Before asking the question, I would like to congratulate you on becoming the new CFO. I know you used to work at the IR department, so I think that's why the market has quite a bit of expectation 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 a higher penetration of 5G. What is your forecast for 5G subscriber going forward? And second question, there was a recent decision to sell off one of your subsidiaries, KT Powertel. Could you share with us what the group's position is on the restructuring of these affiliates and companies?

Yes, Mr. Ahn, thank you for the kind words, for the congratulations that you've given me and the expectations that you've shared. First, on the 5G subscriber forecast: In 2021, we expect 5G 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 Powertel, so let me briefly share with you what our efforts were 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 contents. So under that objective, in order to further bolster our media platform capabilities, last July, we've started to -- started on, embarked on the process to acquire HCN. KT Skylife, that is. And also in July, we successfully completed the rights offering by K 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; and KT mhows, a mobile platform-based company, so that we may take a step further towards becoming a digital contents platform. And this year, we announced that we will sell KT Powertel and that we will set up and establish KT genie studio -- KT Studio Genie, 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 re-highlight 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 in 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.

The next question will be presented by Min Jun Jang from Kiwoom Securities, and the following question will be presented by Neale Anderson from HSBC.

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 AI, DX, that would be helpful. Second, I know there was a question on 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 5G as well as 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's perspective, can we expect same level of DPS or payout ratio for this year?

Yes, Mr. Jang Min Jun, thank you for that question. I understand that you asked question about annual growth trend of AI, DX 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 same time. Now supported by our network business, basically when it comes to cloud IaaS 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, 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 that I cannot disclose any specific figures. 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 5G and B2B investments. 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.

The next question will be presented by Neale Anderson from HSBC.

I have 2 questions, please. The first one relates to 5G. And specifically it's when KT plans to see commercial benefits, revenues from some of the newer features of 5G such as edge computing, low latency or network slicing. And the second is really a follow-up from the previous question, and it relates again to 5G and which specific areas of the market are likely to adopt 5G services first. So would that be in the smart city domain or factory automation, et cetera? It would be very helpful to get your view on that.

Yes. Neale 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 factory. Now for the specialized services for differential application of 5G traffic, we would need network slicing as well as the B2B basis. Now you asked about the commercial benefit being materialized. First, in terms of the regulatory basis of providing 5G 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 equipment and the technologies are ready, service would not be able to be deployed. Now based on KT's B2B or private 5G 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 these specialized services underpinned by 5G. And you also asked which sector or segment will be first to adopt 5G B2B services. At this point in time, it is 5G 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 investments into that entity. Now when it comes to 5G smart factory, we were able to win orders for 42 collaborative robots. The 5G smart factory collaborative robot is basically a blended product where a robot is provided together with the services. So not only in manufacturing but shipbuilding, construction, health care, media and public sector. We're currently developing multiple number of B2B use cases. For instance, we are providing technology that is 5G-based that enable the operation of unmanned forklifters at Hyundai construction and machinery. And also, together with Samsung general medical hospital, based off of 5G 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 solutions. And for mid-sized companies, we will be able to provide platform services underpinned by cloud. And so we plan to customize our 5G services and technology according to the customer segment.

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&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.