KT Corp (KT) 2017 Q4 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 will begin the conference of the 2017 fourth 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 Q&A session. (Operator Instructions) Now we'd like to turn the conference over to Mr. Seung-hoon Chi, KT IRO.

(foreign language) Good afternoon. I am Seung-hoon Chi, KT's IRO. Let us begin the 2017 annual earnings presentation. This earnings release call is being webcasted 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 is releasing its earnings figures based on consolidated financial statements under the IFRS standards. We will begin with our CFO, Kyung-Keun Yoon 's opening remarks followed by the 2017 earnings results as well as the Q4 results.

(foreign language) Good afternoon. I am Kyung-Keun Yoon, CFO of KT. For the past 3 years, KT overcame business management challenges and regained competitiveness in the core businesses, thereby laying a foundation for sustained profit generation. Also, the company further improved its business models in 5 platform segments, and recorded meaningful top line growth by expanding its customer base. In order to create a strong base for a long-term growth, we exercise leadership in new technology areas such as AI and 5G, while expanding into other business areas such as finance, energy and security services.

(foreign language) In 2017, KT subscriber base in wireless business continuously improved through targeted marketing, with the total number of subscribers reaching a 20 million mark. In the Internet segment, there was a net addition of 240,000 subscribers, thanks to the power of GiGA, which was the largest net addition since 2011. All end, GiGA Genie, Korea's first AI-based TV, saw its subscribers break above 500,000 level in just 1 year since its launch in January 2017.

(foreign language) Coupled with the growth of profit base in its core business, KT achieved meaningful results in 5 platform segments, which represent KT's growth business. As for smart energy business, the company recorded on year-over-year revenue growth of 300%, driven by solid growth in various business models, including new and renewable energy, energy efficiency and electricity demand management.

(foreign language) Also, we launched GiGA Eyes last August, which is leading the intelligent video security market. After successful commercialization of NB-IoT in July, we have continued to discover new business references.

In the connected car market, KT introduced GiGA Drive, a dedicated platform for intelligent cars, and solidified its #1 position through alliances with global car OEM companies.

(foreign language) In just 3 days, the PyeongChang Winter Olympic games will begin. As the official partner, KT will showcase its advanced technological power to the entire world with 5G trial service. Going forward, KT will utilize its 5G capability to prepare for further growth in new business areas such as next-generation media, connected cars and autonomous driving and smart city solutions by utilizing its networks.

(foreign language) In the AI market, with the successful launch and growth of GiGA Genie in 2017, we will maintain #1 position in terms of subscribers and strengthen the foundation for platform business through differentiation of key services and expansion of third-party partnerships.

(foreign language) Last year, our official guidance was consolidated revenue of over KRW 22 trillion and standalone CapEx of KRW 2.4 trillion. Thanks to the strong foundation for the core business, growth of the 5 platforms and revenue growth from the affiliates, we recorded a consolidated revenue of KRW 23.4 trillion in 2017, thus exceeding the guidance. For CapEx, we spent KRW 2.25 trillion on efforts to save and make our spending more efficient.

(foreign language) This year, we present our guidance of consolidated revenue of over KRW 23 trillion and standalone CapEx of KRW 2.3 trillion.

(foreign language) For FY 2017 dividend, the BoD agreed on the DPS of KRW 1,000 in light of the annual earnings outlook and capital plan. The DPS KRW 1,000 decision will be finalized at the general shareholders meeting scheduled to be held in March.

(foreign language) With that, let me move on to the 2017 earnings results.

(foreign language) The 2017 operating revenue was up 2.8% year-over-year to mark KRW 23,387,300,000,000. In particular, service revenue went above the KRW 20 trillion mark for 2 consecutive years, driven by the growth from the core business and revenue growth of the affiliates. Despite the decline in telephony revenue and expansion of wireless tariff discounts and increasing the costs related to 5G services with the winter olympics, the operating profit was down 4.5% year-over-year to stand at KRW 1,375,700,000,000. Net income came at -- came in at KRW 562.6 billion with EBITDA at KRW 4,740,200,000,000. Next is on operating expense.

(foreign language) 2017 operating expense was KRW 22,011,600,000,000 recording on year-over-year increase of 3.3%. Marketing expense declined 1.1% year-over-year on the back of effective marketing strategies such as premium family bundling and GiGA collaboration promotions. Next is on financial position.

(foreign language) The debt-to-equity ratio as of the end of the fourth quarter was 126.2%, down 12.9 percentage points year-over-year. Net debt ratio was 36.4%, down by 4.4 percentage points year-over-year. Next is on CapEx.

(foreign language) Total 2017 CapEx was KRW 2,249,800,000,000. We expect CapEx to be gradually stable downwards until 5G investments come under full swing. Next is by business line.

(foreign language) Wireless revenue was down 2.9% year-over-year to reach KRW 7,203,300,000,000. Wireless service revenue fell 0.9% year-over-year to mark KRW 6,601,400,000,000, due to the change in accounting treatment for handset protection plans.

Q4 LTE subscribers expanded to account for 77.2% of the total base, with 2017 wireless subscribers recording a net addition of 112,000, thereby exceeding the 20 million mark. Next is on the fixed business line.

(foreign language) Fixed line revenue declined 3.2% year-over-year on decline in PSTN subscribers in traffic. On the other hand, for the Internet business, driven by good GiGA Internet performance, the standalone revenue, excluding interconnection, increased 5.9% per annum, continuing on with the Internet revenue growth trend for 10 consecutive quarters. As a result, the GiGA Internet subscribers exceeded the 2017 target of 3.5 million to reach 3.93 million subscribers. Next is on media and content business.

(foreign language) Media and content revenue was up 16.3% year-over-year to come in at KRW 2,238,400,000,000. With the biggest IPTV subscriber base in Korea, KT carried out GiGA collaboration promotions and differentiated marketing campaigns based on GiGA Genie to achieve a net addition of 430,000 in 2017 as well as the standalone revenue growth of 16.6% year-over-year. Based on sustained top line growth and efficient cost execution, we will further enhance the profitability of our IPTV business this year. Next is on financial and Other Services.

(foreign language) Financial revenue was up 2.9% year-over-year recording KRW 3,528,300,000,000 on growth in credit card usage and good BC Card revenue performance following the sale of MasterCard shares. Other Service revenue was up 3.7% year-over-year to come in at KRW 2,252,000,000,000, thanks to contributions from real estate and other affiliates.

(foreign language) For more detail, please refer to the distributed documents. We will now entertain questions.

(foreign language) (Operator Instructions)

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

(foreign language) I have 2 questions. So first question is related to 5G. The 5G full commercialization is likely to happen within -- in about 1 year, and there are talks about the possibility of sharing some of the key essential infrastructure and facilities that are owned by KT with other operators. So I'd like to know if there have been any concrete discussions on this possibility? And also, at the last conference, you mentioned that because you are going to roll out the 5G network in connection with the 4G and utilizing hotspots, the coverage will be expanded on a gradual basis. And you also mentioned that the amount of investment needed for 5G will not likely to be larger than those needed for 4G expansion. So I'd like to ask you to comment on this. My second question is regarding pay TV. As you know, the restrictions on the market share of the pay TV will gradually be lifted in June this year. So what is your forecast on the development of the media industry in Korea? And what is KT strategy?

(foreign language) Let me first respond to your first question regarding 5G investment. Well, currently, the Ministry of Science and ICT is developing a plan to facilitate the early expansion of the 5G rollout in Korea as well as the possibility of sharing some of the infrastructure and facilities. And as for the KT, our position is that we understand the policy direction of the government, because we also believe that there should be efficient investment. Also, the expansion of the 5G network as early as possible, because this is going to be important for Korea to become the ICT leader and also be successful in the fourth industrial revolution. However, we also have to be mindful that investments regarding 5G have to be made in an efficient manner, while promoting healthy competition in the industry. And also, we have to be mindful of the ways to promote benefits provided by 5G. And there needs to be a further sophistication of the infrastructure needed for 5G services and the upgrade of the fixed-line Internet lines. Therefore, there needs to be balance between the wireless and fixed-line development for 5G.

(foreign language) When it comes to KT's position, we will be actively collaborating with the government and other stakeholders in order to ensure early adoption and installation of the 5G infrastructure in Korea. And it is our position that all the stakeholders need to collaborate to come up with the best possible ways to build the 5G network in Korea so that there will be the maximum benefits or positive benefits of the 5G development.

(foreign language) Regarding the second part of your first question with respect to the investment for 5G, I believe that our position is not very different from what we shared with the market at the last conference. So far, standardizations regarding 5G and the spectrums have not been decided yet. So at this point in time, it's not -- it's a little bit early or premature to discuss specific strategies and the specific network, structure and the size of the CapEx needed for 5G development.

(foreign language) So we are maintaining the current position that we will maintain technological leadership regarding 5G, and also try to strike a balance between wise investment and the resource planning so that we will maintain profitability and leadership at the same time. Therefore,, we will take into consideration various factors such as regulations, business environment, technological trends as well as the maturity of business models related to 5G. And by considering all these different factors, we will decide on our CapEx size as well as the speed of CapEx execution.

(foreign language) And you asked a question about the combined restriction. And the current restriction is causing much problem in the market, because there have been some damages to the consumers, and the platform operators are not related to the media power. And also, there are other problems such as the restriction of competition among [BSOs] and the discouragement of drivers for innovation. So we believe that this restriction needs to be repealed as scheduled in July -- in June this year.

(foreign language) Your second question was regarding the media industry in Korea. Currently, there are many different challenges presented in the Korean media industry, because there is unfair or unbalanced competition among the pay TV operators and there is an increasing marketing cost for IPTV, and there are rapid regulatory changes in the media industry. Regardless of these challenges, KT, as the market leader, will continue to operate our customer base and offer differentiated and high-quality services regardless of competition, landscape and the regulatory changes.

(foreign language) The next question will be presented by Jong In Yang from Korea Investment & Securities, and the following question will be presented by Hong-sik, Kim from Hana Financial Investment.

(foreign language) I have 2 questions. The first question is related to the IFRS 15. Currently, I'd like to ask you to provide us with a number or the percentage of new subscribers taking out the 25% discount -- tariff discount scheme? And what is the cumulative percentage of subscribers utilizing the 25% discount scheme? And also with respect to this, as you can see the number of subscribers ticking up this discount plan is increasing, and what is going to be the impact of the introduction of IFRS 15 on your P&L? The second question is regarding 5G. And I'd like to ask you to provide us with some color on the time line or the schedule of the commercialization of 5G services from the perspective of KT. And what do you think are your strengths in 5G market? And what kinds of services are you planning to focus on in providing the 5G services?

(foreign language) Let me first respond to your first question regarding the discount scheme and IFRS 15. So on a quarter-on-quarter basis compared to the previous quarter, the number of subscribers taking out the discount scheme has increased by -- to 1 million. So when you take a look at the total new subscribers, the percentage has increased on a Q-on-Q basis by 15 percentage points to 59%. And when you look at the cumulative number by the end of fourth quarter, the percentage is 32.1%.

(foreign language) Starting from the first quarter of this year, we are going to apply the IFRS 15 accounting standards to disclose our financial statement. Currently, we're discussing the details regarding the introduction and the application of IFRS 15 with relevant stakeholders. As far as we understand, there will be the fair-value distribution of subsidies and discount -- tariff discount schemes, and there will be some impact of the introduction of IFRS on certain items, such as the cost of contracts acquired and the cost of execution. However, we're currently analyzing the impact, and we believe that we'll be able to provide you with some specific numbers when we represent the first quarter earnings results.

(foreign language) Let me now respond to your question regarding a time line of 5G enrollment. At 3G PPV, non-standalone standardization standard was finalized in December of 2017, and the specifications regarding a standalone will be finalized in June this year. And I believe that the spectrums will be allocated through auction in June, and recently the government has announced the plan to revise its execution-related policies regarding 5G spectrum allocation.

(foreign language) Recently, we invited 6 global players to offer the request for proposal regarding 5G in order to select the collaborative partner for 5G commercialization. And this was an opportunity for us to present our overall direction of 5G development and some of the specific technological requirements.

(foreign language) We're still maintaining and trying to follow the 2019 commercialization plan as we stand today, but there may be some room for change depending on the spectrum allocation, standardization and system device development.

(foreign language) KT has already built GiGA infrastructure for the fixed-line Internet network, and going forward in adopting and rolling out the wireless 5G, I believe that we will be able to reduce the CapEx for fixed-line infrastructure. So compared to other competitors, we believe that our CapEx investment will be more efficient.

(foreign language) Also, we are going to utilize the existing networks and develop 5G technologies and make network-related investments in order to maximize the efficiency of our CapEx execution and improve the user experiences. Also, during the PyeongChang Winter Olympic games, we're going to showcase the world's first 5G services, and I believe that such experiences and know-how in offering 5G services and collaborations with various businesses will be a very essential and valuable asset for KT.

(foreign language) When it comes to the specific business models that we will adopt at KT regarding 5G, I believe that such business models would be developed according to the standardization and the final planning for network construction based on spectrum allocation as well as the progress made by handset manufacturers. However, at this point in time, what I can say is that we believe that business models, the feasible business models are likely to occur more in the B2B market first. And I believe that we will have future opportunities in such areas as next-generation media, connected cars, smart city and factory.

(foreign language) The next question will be presented by Hong-sik, Kim from Hana Financial Investment.

(foreign language) I have a question regarding the ways to increase corporate value. As you can see, for the past 10 years, the market cap of KT has been stagnant. And with the new CFO in place, I'd like to know whether KT has any specific plans to increase the corporate value and the shareholder value for the benefit of the shareholders? And also, the second term of the CEO Hwang has begun, and it seems that there are not enough commitments made to increasing the profitability of the businesses as well as improving the cost structure. And considering the large size of the assets that KT has, there is a very small size of operating profit generated from KT businesses. So I'd like to know if you have any strategies to address these concerns?

(foreign language) Your -- you asked 2 questions, but I believe I can address these 2 questions with one answer. Basically, it is about increasing corporate value, and I'd like to approach this topic from 3 perspectives.

(foreign language) First of all, we will continue to pursue stability in our business performance and continued growth. There are many challenges that are faced by KT in the current business environment. However, we will continue to focus on maximizing customer value and offer differentiated services so that we can improve the competitiveness in our core business. At the same time, secondly, we will continue to renovate and innovate our business practices and improve our business management infrastructure internally. And it's not just about improving the cost structure and improving our business processes, but rather it is about transforming the entire KT business processes and structures so that we can be optimally suitable for the new network environment and the new business environment.

(foreign language) The second approach is maximizing the growth momentum. During the PyeongChang Winter Olympic games, KT will present the world's first 5G services, and based on this strong technological leadership, we will exercise leadership in the 5G market. And we will offer customer services that are valuable and useful for our customers. Currently, there are strengthening of regulations in the telecom industry, so we need to look for other areas that are proven to have good profitability and good growth momentum. In other words, we will expand to future and convergence-related businesses and focus more on the platform businesses. In particular, we will expand our presence in the B2B market such as cloud and IDC.

(foreign language) The third approach is maximizing the value of the assets that we have in our possession. Currently, according to the mid- to long-term plan, we have been developing the real estate that we have in our books. And starting from 2017, revenue has been generated from these real estate properties. And we are planning to expand the size of the revenue from real estate to around KRW 700 billion by 2020. Such real estate development will not only contribute to top line growth, but also increase the value of the real estates in our possession. As of the end of 2017, the market value of the real estate properties we have is about KRW 8.3 trillion. And through various portfolio-based developments, I believe that such real estate properties will continue to improve in their value, and by 2020, the value is going to be around KRW 9.5 trillion.

(foreign language) As the new CFO, I would like to offer my experience in managing the capitals that we have, and we will like to implement a strategic allocation of capital, so that we will cater to the CapEx investment and shareholder return and the active utilization of the capital and assets we have, so that we can maximize profitability in the KT business.

(foreign language) With no further questions, we'd like to end the Q&A session. Thank you very much for your questions and your interest. And also, I like to thank everyone who has been participating at today's conference. And this is the end of the 2017 yearly earnings conference call. Thank you.