KT Corp (KT) 2017 Q2 法說會逐字稿

(foreign language) Good morning, and good evening. First of all, thank you all for joining this conference call. And now we'll begin the conference of the 2017 second quarter preliminary earnings results by KT. We would like to have welcoming remarks from Mr. Youngwoo Kim, KT IRO; and then Mr. Kwang-Suk Shin, CFO, will present earnings results and entertain your questions. This conference will start with a presentation followed by a Q&A session. (Operator Instructions)

Now we would like to turn the conference over to Mr. Youngwoo Kim, KT IRO.

(foreign language) Good afternoon. I am Youngwoo Kim, KT's IRO. Let us begin the second quarter 2017 earnings presentation. This earnings release call is being webcast-ed via our website, and you can follow the slides and listen in on the call at the same time.

(foreign language) Please note that KT has been releasing consolidated numbers under the IFRS standard since the first quarter of 2011. We will begin with our CFO Shin's opening remarks, followed by Q2 2017 results.

(foreign language) Good afternoon. This is Kwang-Suk Shin, KT's CFO. Supported by robust GiGA Internet and media business and steady earnings from the group's subsidiaries, KT recorded a sound operating profit of around KRW 400 billion over 2 consecutive quarters.

(foreign language) First of all, the Internet business acquired 3.2 million GiGA subscribers as of the end of the second quarter. This is 91% of this year's GiGA Internet subscriber target of 3.5 million, and as such, we believe we will be able to achieve the target ahead of schedule.

(foreign language) IPTV also recorded a net addition of more than 100,000 subscribers in the second quarter, following the Q1 trend. And the group's media revenue posted a double-digit growth year-over-year. KT tapped into the market ahead of others by launching GiGA Genie, the AI set-top box, and by expanding quality subscribers, supported by competitive content. And to increase this in platform revenue from PPVs and home shopping commission fees, the company is strengthening its position as Korea's top media player, and we believe this will work as a solid basis for achieving annual BEP for the media business.

(foreign language) We are also seeing visible results from 5 main platform businesses, which is very pivotal to the future of the company. In smart energy, first half revenue already surpassed full year revenue of last year. KT will soon introduce a new platform for energy efficiency services and focus on building a market leadership in the smart energy market.

(foreign language) Korean telecom operators, including KT, are currently facing a critical crossroad, and I'm quite aware of the concerns of investors and shareholders on the direction forward. KT will consider countermeasures from various different angles, in line with the changing telecom business environment, and do its upmost to make sure that our growth and bottom line are not undermined. With that, I will move on to Q2 2017 earnings results.

(foreign language) Q2 operating revenue was up 2.9% year-over-year, coming in at KRW 5,842.5 billion. Operating profit was up 4.8% year-over-year, recording KRW 447.3 billion. And even if we exclude one-off gain of KRW 40.7 billion from sale of MasterCard shares held by BC Card, operating profit was still more than KRW 400 billion.

(foreign language) Net income was up 1.1% year-over-year to KRW 258.1 billion, and EBITDA was at KRW 1,288.3 billion. Next is our operating expense.

(foreign language) Q2 operating expense was KRW 5,395.2 billion, up 2.8% year-over-year. Marketing expense increased marginally Q-on-Q on increased fixed and wireless subscribers and launch of premium handsets by domestic handset makers, but it was down 4% year-over-year. Next is on the financial position.

(foreign language) Second quarter debt-to-equity ratio was 113.2%, down 17.1 percentage points year-over-year. Net debt ratio was 37.3%, down 4.4 percentage points year-over-year. Next is on CapEx.

(foreign language) Total CapEx spend up to the second quarter was KRW 688.6 billion. In the first half, investments remained into new spectrum and commercialization of NB-IoT, which is a dedicated network for Internet of Small Things. And there are various investment schedules for the second half, but we will effectively manage it within the annual CapEx by line of KRW 2.4 trillion. Next, earnings results for each business line.

(foreign language) Wireless revenue was down 5.2% year-over-year to KRW 1,781.4 billion. And due to a temporary operational stop in June for an upgrade to next-generation IT systems, MNO net add dipped marginally Q-on-Q. But on sustained net adds trend for second device and IoT subscribers, total wireless subscribers posted a growth of 287,000 Q-on-Q. But with increases in tariff discount subscribers and the impact from accounting changes to handset insurance from last September, wireless service revenue declined 1.7% year-over-year. Wireless ARPU was at KRW 34,554, almost flat Q-on-Q. Next is on the fixed line business.

(foreign language) Fixed line revenue was down 4.7% year-over-year, recording KRW 1,226.1 billion. Telephony revenue declined cumulative 10.2% for the first half of the year, which is within our original prediction. But Internet revenue was up 1% Q-on-Q and 4.4% year-over-year, continuing the top line growth for 8 consecutive quarters since the second quarter of 2015, when GiGA Internet subscriber acquisition actually took off, and is defending the PSTN erosion. Next is on media and content business.

(foreign language) Media and content revenue was up 19.2% year-over-year to KRW 561.4 billion. Next is on financial and other services.

(foreign language) Financial revenue was up 6.6% year-over-year, growing to KRW 914.7 billion, driven by one-off gains from sale of MasterCard shares and increases in domestic acquiring volume. Other services revenue was up 7.2% year-over-year, recording KRW 585.5 billion on good performance from real estate, IDC and overseas SI business.

(foreign language) For more details, please refer to the distributed documents. And we will now entertain your questions.

(foreign language) (Operator Instructions)

(foreign language) The first question will be provided by Mr. Kim Hoi Jae from Daishin Securities, and the next question will be provided by Mr. Yang Jong In from Korea Investment & Securities.

(foreign language) I would like to pose 2 questions. Could you provide some color as to what your dividend payout policy will be like in the second half of this year and also provide us some direction in terms of a mid- to long-term horizon? We asked this question to your other competitors as well. I would like to understand what KT's position is with respect to the government's recent move or measures to try to reduce the burden of household telecom costs in Korea.

(foreign language) Your first question was on the dividend, and as we have mentioned this during our Corporate Day, we have planned to expand our dividend on a year-over-year basis in 2017. However, in terms of the actual amount of the dividend, it will be determined by our Board of Directors' meeting based on the annual performance, and the decision will take place in the beginning of 2018. And even after 2017, we would do our best to improve our profitability and also efficiently make use of our capital so that we can increase the size of the shareholder return. And also, we have plans to increase payout ratio. (foreign language) You asked about KT's position with respect to the government's recent plan to relieve the household burden on telecom cost. We do understand, basically, the spirit of that approach, and we do agree with the fact regarding the lessening of the burden for the people. But it is quite regrettable that this measure is solely focusing or targeting against the telecom companies. We have to be mindful of the fact that the data traffic is growing very rapidly, and in order for us to maintain high service quality and also to prepare ourselves for the fourth industrial revolution, we need to make investments into the 5G network. And doing that groundwork is an urgent matter from the company's perspective, hence, we do have some concerns. And also, the whole effort to reduce the telecom cost for the household should not be solely borne by a telco itself, but there are other stakeholders such as the government, the handset maker and the portal companies. I believe that there needs to be a sharing of role across these entities. And also, we believe that there is a role that the government can also play because the actual prices for the spectrum, the usage fees for the frequencies as well as other telecom-related fund, actually, is funded by all the telecom-related expenses that the people of a nation actually bears. Hence, we believe that it will be important for other stakeholders in this ecosystem to actually participate, namely the handset makers as well as the portal companies in overall reducing the burden of the household.

[Foreign Language] The next questions will be presented by Mr. Yang Jong In from Korea Investment & Securities, and the following questions will be presented by Mr. Kim Hongsik from Hana Investment & Securities.

(foreign language) I would like to pose 2 questions. First, I would like to understand the recent update on your GiGA Genie product. I would like to know how much of it that you are selling. And do you have a specific target for either this year and next year, 2018? And also, is there any way for you to try to connect this not only with the VOD and the music side but also with the commerce side? My second question is that come June of next year, the [SO-related] regulations is going to be lifted in terms -- and with that, what impact would that have on your media business in terms of the subscriber as well as potential impact to the platform? If there is that deregulation, if the restructuring is removed, then if KT were to actually acquire an [SO] player, would that be positive?

(foreign language) GiGA Genie, which is an AI set-top box, which we launched in the first quarter, recently saw its subscribers rise above 100,000 level, and it is rapidly taking root in the market. Going forward, we want to build GiGA Genie as a hub inside households, where people could actually enjoy different multimedias, like the TVs and the music. And we, therefore, would like to set it up as a home IoT hub. And also, such artificial intelligence technology can be expanded to other areas like the intelligent apartment, finance, education and shopping as well. We would like to utilize this platform as such an expanded AI platform. (foreign language) To elaborate a little more, we have entered into an MOU with construction companies like Daelim, Hanwha and [Lotus] and basically -- so that we can conduct an AI-based apartment project. And also, we plan to provide financial services based on AI, and we will collaborate with companies like Mirae Asset and Woori Bank. And also, together with KTH's K shopping services, we will launch a conversation-based commerce services. And also, by opening up our software development kit, we wish to actually foster and create an AI ecosystem. (foreign language) You asked about any specific target for GiGA Genie. In terms of subscribers, our target is to reach 500,000 subscribers. After we launched in January, we saw 30,000 subscribers in Q1 and 100,000 in Q2, so we see a very fast traction in terms of growth. In terms of plans afterwards, we do not have any specifics as of yet, but we would be mindful of how this AI ecosystem matures, and we will make appropriate decisions based on that. (foreign language) You asked about our future direction for media business. We've seen a subscriber growth, and also, we've seen our subscribers become high-quality based on the differentiated services that we have provided and also, with growth in the platform revenue, actually driven by items such as the home shopping commission fees, received both an improvement in terms of size and quality. So regardless of how the regulation actually plays out, we are going to continuously maintain the current business direction and approach. (foreign language) In terms of the media business, we will continuously consider different approaches that could further expand the value of this business, but we do not have any concerns -- measures, including any plans, to actually acquire an [SO] at this point in time. However, we are of the view that the combined regulations between these types of entities, we think these types of regulations -- we believe it is only natural that it shall be repealed. That is KT's position.

(foreign language) The next questions will be presented by Mr. Kim Hongsik from Hana Investments & Securities.

(foreign language) I have one comment that I would like to make and then a question. I just would like to say that during the April 28 session, when the CEO was making certain statements, there was an executive from the CR division, and he promised us that we need not be worried about the regulation. Having said that, we now see that the rates are going down and things are quite difficult from our perspective. So I would like to ask you to actually make a complaint to the government so that you could actually keep to the promise that you've made to the market. Moving on to my question then. I would like to ask the management of KT, what is your priority across shareholders, government and employees? I asked this question because if I look at your recent business approaches, I do not think that you place high -- the foremost priority on the shareholders. So if you do not place shareholders as a #3 priority, I would like to understand what policies the company is willing to actually implement for the benefit of the shareholders.

(foreign language) No, I understand your concern regarding the shareholder aspect. I sympathize, and I accept your point. In terms of how we prioritize across shareholders, government and the employees, we are mindful of the importance and we are clearly aware of the importance of our shareholders. We believe that it is of our utmost responsibility to actually represent the benefits and the interest of the shareholders, and we will be very committed to that, and we would employ that approach as we deal with the -- as we respond to the government and also as we make our internal decisions. So we will be very much and clearly aware and mindful of that. (foreign language)

(foreign language) The next questions will be presented by Mr. Dan Kong from Deutsche Bank.

(foreign language) My question relates to your cost savings efforts for year 2018. In 2017, you were able to actually save cost, and that had a good impact on your bottom line. Come 2018, we've heard that you have quite a bit of an aggressive plan to hire additional headcount. And from investors' perspective, for KT, we've always seen the headcount issue as KT's inherent problem. So it seems like hiring new people is actually going against the whole intention. So in light of this additional hiring plan that you have, can you provide us with your projection in terms of the cost aspects for year 2018 and give us a split between the mother company and the subsidiaries? And do you have a specific target when it comes to your human resources or your headcount?

(foreign language) Now KT has put in significant effort to bring about cost savings, and the types of activities that we engaged in were actually improving the structure of the network and also making sure that we make appropriate investments in advance. And we brought about the impact of reducing the depreciation cost from the mid perspective. And also, we spend-ed off any excessive investment by setting up a disciplined principles to focus on profit-centric investment. And also, we implemented automation. We also reduced the amount of workflow when it comes to activation and [AS] dispatches. And such approach and direction is going to be quite similar in 2018 as well. We will continuously focus on further enhancing cost efficiencies and also really trying to strengthen our fundamentals so that we can better respond to uncertainties in the market. (foreign language) Responding to your second question on headcount, basically, in order to bring about a virtual cycle of the human resources and the utilization of such resources, we are hiring at a level that is required by necessity. What you have seen in the press is a figure that is at the group level. From the mother company and the subsidiary level, we will decide on the size of the hiring, [staying] mindful of the most optimized level. And such hiring is not -- such hiring leading to any increases in labor cost is going to be quite limited.

(foreign language) A follow-up question is coming from the investors' perspective. Whether the hiring and headcount is at the group level or headquarter level, since this is an investment based on a consolidated basis, I don't think that makes a big difference. So then can you give us what the net addition is as of end of either 2017 or 2018? Because we already heard the word that the -- we know the figure of 4,000. So I would like to understand how much of that is actually net addition and how much is a replacement.

(foreign language) So that 4,000 figure of hiring, that kind of makes it seem quite large. But if you look at some of our subsidiaries, we have call centers and we have companies that actually provide services, and in these entities, the turnover of employees is actually quite high. So it would be very difficult for us to actually carve out what the net addition -- or the size of the net addition is.

(foreign language) Currently, there are no participants with questions. We'll wait for a second until there is another question.

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(foreign language) If there are no further questions, we would like to now close the Q&A session. Thank you for your questions and your interest once again. Thank you for joining us today.