KT Corp (KT) 2018 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 will begin the conference of the 2018 second 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 a Q&A session. (Operator Instructions)

Now, we would 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. This earnings release call is being webcasted via our website, and you can follow the slides as you listen in on the call. Let us now begin Q2 2018 earnings presentation.

(foreign language) Please note that KT's earnings are based on consolidated financial statements under the K-IFRS standard. We will begin with CFO, Kyung-Keun Yoon's, opening remarks followed by highlights on Q2 2018 results.

(foreign language) Good afternoon. I am Kyung-Keun Yoon, KT's CFO. Despite higher discount rates for the tariff discount plan and tariff reductions for the low income bracket, KT continued its growth trend in Q2, driven by the launch of innovative rate schemes and differentiated services that led to expansion of subscriber base from our core businesses.

(foreign language) First of all, for the Wireless business, on the launch of new rate plans that offer significantly greater customer benefit, Q2 MNO subscriber net addition reported 220,000, further expanding the subscriber base. In particular, Data ON rate plan, which allows the customer to choose a scheme according to their data usage patterns, saw its subscribers surpass 500,000 in just 1 month since its launch last May. Roaming ON rate plan is one that offers the same domestic call rate to roaming users when visiting 12 different countries, and it was well received by the users. And since the launch, voice traffic increased more than 80% on average.

(foreign language) For the Internet business, GiGA Internet subscribers continued its growth. Q2 net addition for GiGA Internet users was 260,000, with cumulative figure reaching 4.5 million users. The growth rate is in line with the annual target of 1.2 million subscriber net additions, and GiGA Internet subscribers account for 52% of the total Internet subscriber base. Internet business revenue posted a growth of 3.7% year-over-year on a KT stand-alone and previous accounting standard basis.

(foreign language) The media platform secured a long-term growth momentum underpinned by 1 million GiGA Genie users and 7.6 million IPTV subscribers. GiGA Genie acquired 1 million subscribers in just 1.5 years since its launch last January and will be expanding its business scope, like the AI hotel, which opened recently, and will collaborate with various fields, including housing, education, automobiles, financial, et cetera. For the IPTV business, on unique marketing around expanding children and educational content offerings, high growth rates continued, with Q2 net addition reporting 100,000, with revenue up 17.2% year-over-year.

(foreign language) Also, in the field of connected cars, we are broadening the business through the GiGA Drive platform. Driven by active collaborations with both domestic and overseas manufacturers, we have acquired 650,000 subscribers as of end of Q2, up 34% year-over-year.

(foreign language) Also, energy and security platform is becoming more intelligent, with greatly sophisticated service offerings. GiGA Energy Manager helps with efficient use of electricity as it analyzes energy consumption patterns. GiGA Eyes is an intelligent CCTV that detects any abnormal activities via automatic image analysis. As such, we are further enhancing business competitiveness through upgrading our service platforms.

(foreign language) KT will continue to do its best to bolster both growth and profitability by devising adequate growth strategies for the existing and the new businesses. With that, I will now move on to Q2 2018 earnings results.

(foreign language) First, I will briefly touch upon earnings based on the new standard, the K-IFRS 15, and then report on the previous standard for the benefit of the investors. Please also note that the figures under the previous standard is for the purpose of easier comparison and are yet to be audited or reviewed by an outside auditor.

(foreign language) Under the new accounting standard, Q2 consolidated revenue was KRW 5,806,900,000,000; operating profit, KRW 399.1 billion; and net profit reported KRW 280.7 billion.

(foreign language) Now for better comparison with last year's performance, I will present Q2 operating results under the previous accounting standard.

(foreign language) Revenue was up 0.7% year-over-year, reporting KRW 5,882,400,000,000 on growth in high-quality subscribers from core businesses, including Wireless business, GiGA Internet and IPTV. Operating profit was down 15.7% year-over-year to KRW 376.9 billion on higher marketing spend arising from growth in fixed-line subscribers and a one-off labor cost increase on the back of collective bargaining agreement on wages. Net profit was down 0.4% year-over-year to KRW 256.9 billion, with EBITDA down 6.9% year-over-year, reporting KRW 1,199,000,000,000.

(foreign language) Now, in terms of the operating expense, 2018 Q2 operating expense was KRW 5,505,400,000,000 on higher labor and marketing costs, rising 2% year-over-year. Labor cost was up 13.5% year-over-year with the one-off impact from collective bargaining process, which came to an agreement earlier than previous years, and that impact was fully booked in Q2. Marketing expense was up 1.6% year-over-year on bolstering of subscriber retention and growth in sales of fixed line. Next is on the financial position.

(foreign language) Financial position is on a new accounting basis. Q2 end debt-to-equity ratio was 109.5%. Net debt ratio was at 30.4%. Next is on CapEx.

(foreign language) Total CapEx spend up to Q2 was a total of KRW 644.7 billion. There was an increase in B2B-related investments driven by leased line and increase in number of orders, one for the IDC, among others. And the implementation rate is around 28% of KRW 2.3 trillion of annual guidance. Next is on the key highlights from each of the businesses.

(foreign language) Wireless revenue was up 0.3% year-over-year to KRW 1,786,200,000,000. Wireless service revenue was down 0.7% year-over-year to KRW 1,667,200,000,000 on higher takeup of selected discount plans and tariff cuts for the socially vulnerable class. However, on sales growth of second devices and the launch of Data ON rate plan, which offers greater customer benefit, Wireless subscribers reported a net add of 280,000 Q-on-Q, coming in at 20,660,000 total subscribers, with revenue up 0.3% Q-on-Q. Next is the fixed-line business.

(foreign language) Fixed-line revenue was down 2.4% year-over-year on continued erosion of PSTN subscribers and traffic. Broadband Internet, despite cut in interconnect fees, posted a growth of 1.6% year-over-year on GiGA Internet subscriber growth. Service revenue was up 3.7%, excluding the interconnect fees, sustaining a 3-year consecutive growth trend. Q2 GiGA Internet subscribers posted a net addition of approximately 260,000, which account for 52% of the total base at 4.5 million subscribers. Next is media and content business.

(foreign language) Media and content revenue was up 7.6% year-over-year, reporting KRW 604.2 billion. On a stand-alone basis, IPTV revenue posted a growth of 17.2% year-over-year, continuing a double-digit growth, driven by growing higher-quality subscribers. In the remaining year, we plan to continue IPTV profitability improvement underpinned by subscriber and revenue expansion. Next is on financial and other services.

(foreign language) Financial revenue was down 5.2% year-over-year to KRW 866.7 billion on lower BC Card revenue from lower China's UnionPay acquiring volume and the base effect from MasterCard equity gains from Q2 of last year. Other service revenue was up 1.9% year-over-year to KRW 596.8 billion on good performances from both the Internet data center and the 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 Yang, Jong In from Korea Investment & Securities, and the following question will be presented by Hoi Jae Kim, from Daishin Securities.

(foreign language) Yes, I would like to pose 2 questions. My first question has to do with your ARPU trend. I see that, as of the second quarter, your ARPU has, on a Q-on-Q basis, declined by 0.8%, and the amount of this fee at the extent has actually become much smaller. And also on a new accounting basis, it actually inched up by about 0.2%. So can we expect going forward some meaningful turnaround in the ARPU trend? Second question has to do with the introduction of your new data plan and its impact. Can you share with us the subscriber migration for -- after the launch of this data plan, how the subscribers are migrating across different rate plans? And also, what is the impact of this new plan on your ARPU figure?

(foreign language) Let me respond to your question on ARPU. As you would know, because of the increase in the tariffs discount percentage and also the introduction of a tariff reduction for the vulnerable class, that had an impact -- a downward impact, that is, on our top line. And also, the NB-IoT and second device trend has continuously impacted on broadening of our new subscriber base. Under this backdrop, KT has continuously introduced new rate plans as well as value-added services that befit the new data usage trend of the consumers. We have been highly focused on bringing about a qualitative growth rather than a simple increase in the number of subscribers. Through such marketing efforts, we were able to defend the declines in ARPU.

(foreign language) Now having said this, we believe that the ARPU decline trend will continue on the back of continuous change of the subscriber mix. Therefore, we believe that it is most appropriate to analyze the performance of our Wireless business by looking at our revenue trend rather than the ARPU trajectory.

(foreign language) Just to talk about our revenue aspect. On a first half cumulative basis, our Wireless service revenue did dip by -- or decline by 0.8%. Overall top line trend is much better than what we had originally expected. However, starting the second half of the year, there is going to be a new policy that will be implemented to apply a lower tariff to the elderly who receive the social security pensions, and that will actually work as a pressure on our Wireless top line. However, we will try to minimize the impact by providing a rate plan that best befits the data usage trend of our consumers and also the VAS, the value-added services.

(foreign language) Now let me respond to the question about our new data plan. The Data ON rate plan, which we've recently introduced, intuitively simplifies the existing scheme of our rate plans. And it actually was launched in order to provide the most optimal services that best befit the data usage pattern of our consumers. By launching the Data ON rate plan following the Data Select rate plan which we launched back in 2015, KT has once again led the innovation in the rate plan schemes and has provided a bigger benefit to our subscriber base. And we believe that we have laid a firm foundation where we could fully leverage the assets and the capabilities that KT owns as a telecommunications provider.

(foreign language) And since its introduction, more than 70% of the new subscribers have taken this -- or selected this data plan. And in just 1 month since its launch, it acquired 500,000 subscribers, and we are seeing the preference for this plan being quite favorable. Since it's only been recently launched, it's difficult or premature for us to provide you with some meaningful data, but we believe that from a long-term perspective, with the greater use of multimedia content and greater usage of the data, we believe that this new rate scheme will be of benefit to both the consumer and the service provider.

(foreign language) The next question will be provided by Hoi Jae Kim from Daishin Securities.

(foreign language) Yes, I would like to pose 2 questions. First, including this year, as well as several years to come, can you provide us with your mid- to long-term dividend policy? And the second question has to do with 5G. All of the 3 telcos have recently announced that they will commercialize 5G come March of next year. What will be the extent of this commercialization, meaning in which areas will we be able to use 5G services? And also, what is the timing for the completion of the 3.5 gigahertz nationwide network? And for 28 gigahertz, where will be the regions that we will be able to use 5G?

(foreign language) Responding to your question on dividend, basically, we stick to our existing dividend policy in terms of the size of shareholder return as well as payout ratio and that we will continuously be focusing on improving our profitability and also efficient use of our capital. Having -- there are some regulatory impacts and -- but we plan to maintain our profitability to a similar level as last year. Having said this, we are at a point where we need to consider an extensive investment into 5G, an investment for growth for the future. So we will consider not only profitability, but also cash flow as well as financial standing and the overall future investment plan in making the decision. In terms of the dividend payout policy going forward, including this year, we will be considering many different aspects very closely and come to a decision. And once the decision is made, we will communicate with the market.

(foreign language) In terms of our 5G approach, yes, basically our objective is to bring about commercialization by the first half of next year. However, all the specifics regarding the equipment vendors, the pricing, the volume has not yet been finalized or confirmed. So it would be difficult for us, at this point, to provide you with the specifics in terms of the size of the investment for this year as well as next year. Our basic stance is that we will continue to wield and maintain our technological leadership in 5G. And also, we'll strike the right balance in terms of profitability as well resource allocation and a reasonable investment plan. That would be our key direction.

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

(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 Q2 2018 Earnings Conference Call. Thank you.