KT Corp (KT) 2018 Q1 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 2018 first quarter earnings results by KT. We will like to have welcoming remarks from [Mr. Sung Hyun Ji], KT IRO, and then Mr. Kyung-keun Yoon, CFO, will present earnings results and answer 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. Sung Hyun Ji , KT IRO.

(foreign language) Good afternoon. I am [Ji Sung Hyun], KT's IRO. This earnings release call is being webcasted via our website and you can follow the slides as you listen in on our call. Let us now begin Q1 2018 earnings presentation. (foreign language) Please note that KT is releasing its earnings figure based on consolidated financial statement under the IFRS standards. We will begin with our CFO, Yoon Kyung-Keun's opening remarks followed by highlights on Q1 2018 results.

(foreign language) Good afternoon. I am Yoon Kyung-Keun, KT's CFO. Despite mobile tariff cuts, KT reported KRW 397.1 billion in operating profit driven by expanded subscriber base from its core businesses of wireless, GiGA Internet and IPTV and steady contributions from group affiliates. Under the previous accounting standards, the figure would be KRW 435.1 billion. (foreign language) For the wireless business, we implemented targeted Y generation marketing utilizing Y Data Box and family marketing through premium family bundling, which expanded high quality subscriber base. Q1 handset subscriber net addition reported 65,000 recording the peak since Q3 of 2014. (foreign language) For the Internet business in accordance with the strategy to make subscribers higher in quality, we focused new sales of 1 GiGA expanding the GiGA Internet subscriber to 49% of the base.

As a result, Internet business revenue reported a growth of 4.8% YoY under the previous KT standalone accounting basis. (foreign language) For the IPTV business also with children and education content more beefed up and Giga Genie collaboration promotion, which are marketing activities that stand out, we saw quarterly net addition report 100,000 underpinning the topline growth trajectory. (foreign language) As can be seen, KT has continued to solidify its core competitiveness and is in the process of enhancing performance from its platform businesses where our key focus has been placed over the past 4 years. (foreign language) First in media platform, we are pioneering into Korea's AI market by taking Giga Genie. Since its launch last January in just around 1 year, Giga Genie has solidified its #1 position supported by 710,000 subscribers.

Going forward, we plan to further broaden Giga Genie's business segment through stronger cooperation with key players in diversified areas, including kids, education, commerce and finance. (foreign language) Of recent we are testing VR and AR based immersive media market, which is receiving spotlight as the next generation media platform. Last March together with GS Retail, we launched VRIGHT, which is a VR theme park in the urban center. And in the second half of the year, we plan to launch personalized immersive media service enabling VR experience anytime anywhere. (foreign language) Also for the energy and security business, driven by broader customer base, Q1 revenue was up 147% and 28% YoY respectively. With GiGA Energy Manager launched in the second half of last year, we are pioneering into Korea's energy efficiency market and with the GiGA Eyes product, we are leading the intelligent video security market.

(foreign language) In the B2B business, essential capability lies in the ability to provide solutions and business models that satisfy the needs of our business clients. We plan to pool customer needs by integrating KT's core technologies of big data, AI, cloud, blockchain with our wireless and fixed-line network infrastructure, IDC, NB-IoT; which are KT's core assets; in order to create new businesses and in order for us to secure new sources of revenue. (foreign language) We will continue to endeavor to strengthen growth potential and profitability by devising reasonable growth strategies for both our existing and new businesses. With that, let me now walk you through our Q1 2018 earnings results. (foreign language) Before going into the financials, let me first explain about the document we shared. Starting this year we will report based on the new standard of K-IFRS 15, which changes the way we recognize revenue, expense, asset and liability.

We are however presenting Q1 2018 earnings based on the previous accounting standard for the benefit of easier comparison and understanding and will like to note that the figures have not yet been audited or reviewed by an outside auditor. (foreign language) Under the new K-IFRS 15 standard, first key principle is to change the revenue recognition method from distinct contract basis to performance obligation basis. Accordingly, we will allocate tariff discount and handset subsidies on a pro rata basis according to the transaction price of communication services and handset. Second key principle is to match revenue with expense. For the wireless business, acquisition expense used to acquire new subscribers would not be booked as expense upfront but will be capitalized and then amortized over the expected subscription period of the subscriber.

(foreign language) Now, let me briefly share earnings based on the new standard and give further elaboration based on the previous accounting standard. (foreign language) Under the new accounting standard, Q1 2018 consolidated results starting with revenue was KRW 5,710,200,000,000, operating profit KRW 397.1 billion and net profit reported KRW 224.1 billion. (foreign language) From now on for the purpose of comparison, I will present Q1 numbers under the previous accounting standard. (foreign language) Revenue was up 4% year-over-year reporting KRW 5,837.900,000,000 on high quality subscriber growth from key businesses including wireless, GiGA Internet and IPTV and higher merchandise revenue. Operating profit was up 4.3% year-over-year to KRW 435.1 billion on marketing cost savings and steady profit contribution from group affiliates. Net profit was up 12.4% (sic) [12.6%] YoY reporting KRW 252.5 billion. EBITDA was flat YoY at KRW 1, 266,900,000,000.

(foreign language) On the next page is operating expense. (foreign language) Q1 2018 operating expense was KRW 5,402,700,000,000, up 4% YoY. KT standalone marketing expense under the previous standard was down 3.7% YoY on premium family bundling, database value-added services, GiGA Genie collaboration promotions and other effective marketing activities. Next is on the financial position. (foreign language) Financial position is based on the new accounting standard. Q1-end debt to equity ratio reported 117.5%, net debt ratio came in at 35.1%. As the company needs to state the impact of IFRS 15 as of January 1, 2018 in its financial statement, we booked around KRW 1 trillion of capital increase from retroactive treatment of accounting changes under 2018 beginning retained earnings line item. Next is on CapEx. (foreign language) Total CapEx spending in Q1 was a total of KRW 237.3 billion, which is around 10% of the annual guidance of KRW 2.3 trillion.

Next is on each of the lines of business. (foreign language) Wireless revenue was down 0.9% YoY to KRW 1,777,900,000,000. Wireless service revenue was down 0.4% YoY to KRW 1,660,200,000,000 on higher take-up of selective rate discount plans and tariff cuts to the socially vulnerable group. Total wireless subscriber reported 20,380,000 with 360,000 net additions and Q1 LTE subscriber share increased to 78% reporting 15, 870,000 subscribers. To note in particular is that handset subscribers have shown 5 consecutive quarters of net addition, which is a testament to a qualitative growth. Next is on the fixed line business. (foreign language) Fixed line revenue declined 3.3% YoY on continued erosion of PSTN subscribers and traffic. However, the Internet business saw a standalone revenue growth of 4.8% YoY driven by rising GiGA Internet subscribers continuing the uptrend for 11 consecutive quarters.

GiGA Internet's net addition reported around 300,000 subscribers accounting for 49% of the total subscriber base at 4.23 million subscribers. Next is on the media and content business. (foreign language) Media and content revenue was up 8.1% YoY reporting KRW 561.7 billion. KT has the biggest IPTV subscriber base in Korea and through distinct marketing activities, including Giga Genie collaboration promotions, in Q1 net addition reported 100,000 and standalone revenue was up 15.4% YoY. Underpinned by sustained topline growth, IPTV business is expected to improve its profitability this year as well. Next is on our financial and other services. (foreign language) Financial revenue was down 1.7% YoY to KRW 832.7 billion on decline in BC Card revenue impacted by lower acquiring volume in relation to China Union-Pay. Other service revenue was up 0.6% YoY reporting KRW 537 billion on the back of bullish Internet data center and security business.

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

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

(foreign language) I am Kim Hoi Jae from Daishin Securities. I would like to post 2 questions. I would like to understand the impact that IFRS 15 will have on your earnings this year in terms of direction as well as the extent of the impact? Second question, just now we -- the government has finalized the spectrum auction related plan and they will be auctioning out up to 100 megahertz in relation to the 3.5 gigahertz bandwidth. Would like to understand what KT's position with respect to this spectrum auction plan is? And also could you share with us what your 5G investment plan is going forward including the extent of your participation in this auction process?

(foreign language) With regards to the impact of IFRS 15 adoption, the allocation of handset subsidy and tariff discount to handset and service revenue and also the sales commission is going to be amortized over the subscription period and customer subsidy and dealer subsidies have now become a deduction item against the revenue. Now we have adopted a modified retroactive approach whereby we have represented the cumulative impact of IFRS 15 as under the retained earnings as of the January 1 of 2018. And also we -- if you were to make a comparison with the financial statement as of the end of 2017, on a standalone basis there was an impact of -- on the asset side of KRW 1,305,000,000,000 increase and also in terms of the capital, there was an upward impact of KRW 967.6 billion. (foreign language) Now if you were to make the comparison of Q1 earnings comparing that to the existing accounting standards basically with the expansion of the subscriber base who have taken out the selective rate plan which brings about a higher deduction from the handset sales, there is an impact on the operating profit line item to a downward side of KRW 34.6 billion. Going forward, we believe that the impact that IFRS 15 will have on our operating profit based on the assumption that the percentage of the selective rate plan subscribers don't change too much from where we are at this point, we believe that compared to the Q1 impact that the impact will start to decline as we go forward. (foreign language) Also from a more long-term horizon under the assumption that there's not going to be any significant change in terms of our business structure or the marketing backdrop, we believe that any P&L related impact from such accounting changes is going to be neutral. (foreign language) Relating to the government's spectrum auction plan, considering the fact that in terms of the network buildout at the company significant and sizable investment, we believe that the beginning auction price that the government has announced is at a level that is quite onerous from the operator's perspective. However, the fact that the cap limit has been set at 100-megahertz for the 3.5 gigahertz band, believe that it really lays a foundation for players to be able to compete on an equal footing when we are beginning this 5G related journey. We believe that is therefore a positive aspect. (foreign language) At this point, it will be difficult for us to share with you the specifics relating to our auction related strategies or the spectrum allocation price. Basically we will exert our utmost effort so that we will be allocated the necessary spectrum bandwidth at a reasonable price, which will help us maintain and lead our leadership in 5G. (foreign language) Once again it will be quite difficult for me to lay out the specific details relating to the 5G investment strategy, the network structure and the configuration and the CapEx. Basically, our key direction is to maintain our leadership in 5G and also make reasonable investment and make reasonable allocation of the resources so that we may strike a good balance as against profitability and bottom line. (foreign language) Hence, we will make determinations in terms of the size of the investment and the speed of that investment fully considering for different regulatory backdrop including our business environment, the technological trend and 5G-based business model or the level of maturity of that business model.

(foreign language) We will take the next question.

(foreign language) The next question will be provided by Yang Jong-In from Korea Investment Security.

(foreign language) I am Yang Jong-In from KIS. I would like to post 2 questions. If you were to look at Q1 profit on an year-over-year basis based on the previous accounting standard, you've seen a rise so can we expect you to outperform 2018 on a per annum basis compared to 2017? And also based on the previous accounting standard, when your profit level goes up, basically your dividend also goes up. Can we expect and hope for a higher level of dividend payout? My second question has to do with the update of the sunset of the market share restriction that is placed on the players. If this restriction becomes more mitigated, how will that change KT's pay TV-related policies going forward? For instance, would you be considering potential M&A of a cable TV or so?

(foreign language) On the first question, we were able to attain qualitative growth in our wireless Internet business and IPTV as well as bring about cost efficiencies. So, there was a one-off gain that had worked positively. But even if you were to carve out the one-off profit impact, our operating profit still reported KRW 390 billion really proving that we do have a sound revenue generating and profit generating capability. But on a per annum basis, there is regulation that is pressuring our bottom line, but we will focus on very effectively allocating our resources through selection and through focus and do our best to make sure that we secure a momentum for long-term growth. (foreign language) Although we won't be able to specify a certain per annum target figure, once again we give you our commitment that we'll do our best to achieve profitability that is commensurate to that of last year. (foreign language) On dividend, basically our basic dividend policy remains the same. With improvement in profitability and for efficient utilization of the capital, our basic stance is that we will go about expanding our payout ratio. There is the regulatory impact for this year, but we will do our best to make sure that we maintain the profit level that is similar to that of last year. I understand that the market does have a concern because there are need for making investment into the new spectrum in order to prepare against 5G and that may actually have an impact on our ability to distribute and pay out dividend. We are clearly aware of that concern. (foreign language) Now under such a fast-changing business environment, it is one of the company's key mission to further enhance shareholder value and to earn the trust of the market. That's one of the key missions of our BOD and the executive team. Basically the specific amount of how much will be paid out will be something that will be finalized at the deliberation of our BOD, but we will do our best to maintain at least the level of last year. (foreign language) Responding to your question about the pay TV market share restrictions. Now the whole -- this restriction actually embodies quite a bit of issues having harm to the consumers and also in light of the characteristics of the platform players that is not really -- that does not hinge on the dominance of the public [views] and also it actually restricts competition across different pay TV players as well as eliminates any motivation for innovation. Therefore, it is our view that such sunset of the restriction is necessary as slated for the June of 2018. KT as a leading player in the pay TV segment regardless of the regulatory backdrop or the competitive landscape, we will focus on maintaining our market #1 position underpinned by qualitative growth which is supported by our broad subscriber base. (foreign language) Now we launched Giga Genie back in 2017 and the subscribing figure has surpassed 700,000. This year we are targeting to go over 1 million subscriber base. And based on the biggest number of subscribers in terms of the AI subscriber base, we plan to further evolve our IPTV to intelligent media platform. (foreign language) Currently I believe that the regulation, which is quite discriminatory against operators and the platform providers, is not desirable. It is not desirable to allow certain business operators the opportunity to enter into an M&A transaction. We believe that having a fair and equal environment for competition is therefore most important. (foreign language) And please understand that with the regulatory regime not yet finalized, it will not be appropriate for us to give you more details with respect to the M&A attempt.

(foreign language) Any other questions, please?

(foreign language) Currently there are no participants with questions. We will wait for a second until there is another question. (foreign language) The next question will be presented by Neale Anderson from HSBC and the following question will be presented by Yang Xiaohao from JPMorgan.

Could I ask about the B2B section you mentioned in the highlights, please, 2 questions? How do you feel about the revenue growth outlook this year and next in the IoT business? And also could I ask about the margin? What's the margin currently and where do you expect that to trend to? Thank you very much. (foreign language)

(foreign language) Now let me respond to that question about our IoT strategy. KT's IoT strategy focuses on 3 domains of home, biz and connected cars. Basically, we are not focusing on [parallel] circuit type of an approach. We are more focused on solution platform and our link and connection to big data. So, we plan to further expand our business segment also to generate new value. (foreign language) As a platform provider, KT is going to focus on expanding its network and also the connectivity of the platform early on. Underpinned by such efforts, we are going to develop special solutions for different vertical segments and also connective big data so that we can develop different convergence projects thereby providing and offering added value to each of the segment market and further enhance profitability. (foreign language) In Q1, subscribers for IoT was actually up 30% year-over-year. (foreign language) And as we expand on the lines that we provide, that's going to actually contribute to a higher level of platform revenue and will naturally feed into bottom line expansion.

(foreign language) We will take the next question, please.

(foreign language) The next question will be presented by Yang Xiaohao from JPMorgan.

(foreign language) I would like to present 2 questions. First question has to do with your ARPU trend. In Q4 the ARPU did decline and also in Q1 because of the tariff cuts it also declined. Up until when do you think that this trend will continue? And also the extent of this erosion or decline, would you think that this will slow as we go forward because on a QonQ basis, the reduction -- the extent of the decline was quite significant or do you think that this current trend will continue as we go forward? And with the introduction of 5G services potentially next year, will -- do you think that your ARPU will start to rebound? My second question is with respect to your profit, you have previously stated that you will maintain your profit at a level that's similar to last year considering the fact that there was a tariff cut, which will mean that there will be a bigger impact on decline of profit. Now do you plan to make up for this from higher level of profit from your fixed line business or are you planning to continue cost cutting as you have done so far? Are you insinuating that you do have more room to cut costs going forward?

(foreign language) Now on ARPU, our Q1 ARPU figure is KRW 32,993. With the higher level of discount given to the users and also lower tariff given to the vulnerable -- socially vulnerable class, there was an impact -- downward impact on our top line and also with more subscribers for NB-IoT and second device, there was a Q-on-Q decline. If you were to look at our future trend, because of the regulation we expect that the wireless service revenue on an year-over-year basis will decline by mid-1%. So, that stance remains unchanged. However, we would like to try to lessen the burden by making our subscriber base much higher in terms of quality and also through expansion of subscriber base for second device. (foreign language) Now after 2019 the regulatory impact may still linger, but we think that up to 2018 most of the regulatory impact will be reflected in the numbers. Basically, regardless of such regulatory backdrop, we are going to continuously upgrade and make our handset subscriber base much more high quality underpinned by data and we will continue to see subscriber expansion from new segments. (foreign language) 5G based on its hyper-speed and ultra-connectivity as well as ultra-low latency underpinned by its network capabilities, we believe that in our wireless business it will be able to provide us with a new opportunity to generate profit and revenue. (foreign language) Responding to our future projection for our earnings. Basically, with lowering of the telecommunication cost as well as regulatory changes, it does work as a burden for the company. But irrespective of that underpinned by data, we will attain qualitative growth and also from new segments, we will also bring about quantitative growth as well and we still believe that there is room for potential growth from broadband and IPTV business segments as well. (foreign language) Also from a mid-to-long term development plan, we are implementing our property and real estate related businesses so we expect in 2018 our top line will start to increase. And also in our growth businesses including energy, security and platform; we are hoping that it will be able to bring about meaningful contributions in terms of top line as well as bottom line. And also our priority is to look at gradual investment fully taking into consideration the market maturity level when it comes to 5G. So from 2019, we do not expect that it will entail a significantly large sum of expense.

(foreign language) Now in light of the changing market environment, we will continuously make our marketing spend much more efficient and we'll continue to innovate our cost structure so that we may endeavor our utmost to attain a bottom line that is commensurate to the level of last year.

(foreign language) Any further questions? (foreign language) With no further questions, we will now end the Q&A session. Thank you for your questions and interest and for joining us despite your very busy schedules. This brings us to the end of Q1 2018 earnings conference call. Thank you.