KT Corp (KT) 2018 Q3 法說會逐字稿

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 fiscal year 2018 third quarter earnings results by KT. We will like to have welcoming remarks from Mr. Seung-Hoon Chi, KT IRO. And then, Mr. Kyung-Keun Yoon, CFO, will present earnings result and entertain your questions. This conference will start with a presentation, followed by a divisional Q&A session. (Operator Instructions).

Now we would like to turn the conference over Mr. Seung-Hoon Chi, KT IRO.

Good afternoon, this is KT IRO, Chi Seung-Hoon. Let me start the earnings conference call for the third quarter 2018. This earnings release call is being webcasted via our website and you can follow the slides as you listen on the call. Please note that KT's earnings are based on consolidated financial statements under IFRS standards.

We will begin with CFO Yoon Kyung-Keun's opening remarks, followed by highlights on third quarter 2018 results.

Good afternoon. I am Yoon Kyung-Keun, CFO at KT. Despite higher wireless discounts and rate cuts for the vulnerable in third quarter, KT generated stable revenue through qualitative growth by strengthening the quality of our subscriber base in our key businesses. First, for the wireless business. Third quarter MNO net additions reached 200,000, continuing the record of more than 200,000 net additions for every quarter consecutively in 2018. The DataON rate plan, which is optimized based on the customer's data usage patterns is chosen by approximately 70% of the subscribers currently switching wireless handsets.

The Y24 rate plan, which targets customers aged 24 and below, also provides the same benefits and was well received by younger generation customers. The Roaming ON rate plan, which offers the same coverage overseas as in Korea has been expanded to 16 countries, innovatively improving customer convenience.

For the Internet business, giga Internet subscribers continue to grow. Third quarter giga Internet net additions was 220,000, taking the total to 4.7 million subscribers. Giga Internet subscribers now represent more than half of our total Internet subscribers at 54%. The third quarter year-to-date Internet business revenue grew 3.7% Y-o-Y, showing steady growth trends.

Recently, KT launched commercial services for 10 giga Internet for the first time in Korea. We believe this offering, together with wireless 5G services in the future, will help us provide a broad range of high quality services that require large volume traffic.

For the IPTV business, for the third consecutive quarter in a row, net additions recorded 100,000 in total. And IPTV revenue increased 15.3% Y-o-Y, continuing double-digit growth. In particular, the Kidsland service package, which covers all domestic services for kids, has been popular with households with young children because of the wide variety of child-friendly content, leading to cumulative users reaching 3.6 million subscribers, and VOD use totaling 230 million views in 5 months.

KT continues to exert its efforts to identify future growth drivers based on an intelligent network. AI GiGA Genie is quickly evolving into an intelligent platform securing 1.2 million subscribers. We simulate convergence between services including AI platform-based kids' educational contents and services such as hotel and connected cars.

In addition from a functional perspective, we have strengthened voice UI for voice command TV, which enables customers to shop from start to final payments by just talking, displaying the real-life innovation that customers can directly experience.

In the smart energy business, we continue to expand energy efficiency related services based on the GiGA Energy Manager. Going forward, we will continue to develop new business models such as KT-MEG platform-based energy control and small generation aggregators. In the tangible media area, following on the launch of VRIGHT, an experiential VR service, in the first quarter, we launched an individual VR service that uses a head-mounted display. We continue to develop a wide variety of products to foster our tangible media as a flagship 5G service for the future.

To prepare for 5G, which is just around the corner, KT R&D center in September opened the 5G open lab. Currently, around 100 small- and medium-sized enterprises are co-developing new 5G based services that use the 5G network opened by KT. This enables KT to create a 5G ecosystem early on, which can be combined with a broad scope of KT platforms to spearhead the 5G business.

Going forward, KT will remain committed to generating stable revenue by fixed line and wireless network innovation, in addition to continued growth through ICT convergence.

With that, let me delve into the third quarter 2018 performance. First, I will briefly touch upon earnings based on the new standard K-IFRS 15, and then report on the previous standard for the benefit of our investors. Please note that figures under the old standards are for comparison purposes only and have not been audited or reviewed by an external auditor.

First, under the new accounting standard, 2018 consolidated third quarter revenue was KRW 5,948.5 billion; operating profit, KRW 369.5 billion; and net profit, KRW 239.5 billion. From now on, for the purpose of comparison I will present the third quarter numbers versus the second -- third quarter of last year under the previous standard. Revenue was up 2.7% year-over-year, reporting KRW 5,986,000,000,000 on high quality subscriber growth from key businesses, including wireless, giga Internet, and IPTV.

Operating profit was down 15% Y-o-Y to KRW 320.8 billion due to an increase in operating expenses such as cost of services provided. Net profit weakened 0.8% year-on-year, reporting KRW 201 billion; and EBITDA was down 6.5% year-on-year at KRW 1,136.2 billion.

Next is on operating expenses. Third quarter 2018 operating expenses was KRW 6,665.2 billion(sic - see slide 6, "KRW 5,665.2 billion"), up 4% Y-o-Y. Labor cost increased 9.6% Y-o-Y due to the base effect of wage negotiations being conducted in the fourth quarter of last year, but reaching an early agreement in the second quarter of this year.

Cost of services provided increased to 12.5% versus last year due to an increase in contents costs such as IPTV, PPV revenue. Marketing expenses decreased 0.4% Y-o-Y, and selling expenses declined slightly as the market stabilizes.

On the next page, let me explain the financial position. The financial position will now be discussed based on the new accounting standards. As of the end third quarter, the debt to equity ratio is 124.1%, and net debt to equity ratio is 25.1%.

Next, let me discuss CapEx. CapEx, third quarter year-to-date totaled KRW 1,108.3 billion which represents roughly 48.2% against the yearly guidance of around KRW 2.3 trillion.

Now let me move on to each of the business lines. Total wireless revenue decreased 2.1% year-on-year to total KRW 1,778.6 billion. Wireless service revenue was down 2.5% year-on-year to KRW 1,657.4 billion on higher take up of selective rate discount plans and tariff cuts to the vulnerable. In addition, due to stronger sales volume of second devices and the impact of the customer benefit enhanced DataON rate plan, wireless subscribers recorded 20.92 million showing a net addition of 250,000 versus the second quarter.

Next is the wireline business. Underlying revenue declined 1.5% year-over-year to KRW 1,200,000,000,000 as the decline in both fixed line telephone [new] subscribers and usage volume continued. However, the broadband business grew 1.9% year-on-year driven by an increase in giga Internet subscribers even though interconnection rates declined.

Third quarter giga Internet net additions totaled approximately 220,000, making the total of 4.7 million subscribers, which stands for 54% of all Internet subscribers.

Next is on the media contents business. Total media contents revenue was up 9.2% year-on-year at KRW 625.3 billion. Media revenue grew 8% year-on-year as the IPTV business expanded its subscriber base with net additions of over 100,000 for 3 consecutive quarters. Contents revenue was up by 14.2% versus last year due to revenue growth of KTH's T-commerce.

Lastly, let me discuss the finance and other services. Finance revenue grew 1% year-on-year to KRW 882.3 billion due to an increase in acquiring volume at BC Card. Other service revenue grew 15.2% year-on-year to KRW 652 billion from stable revenue generated from the real estate and Internet data center business.

For other details, please refer to the presentation material. And now we will start the Q&A session.

(Operator Instructions) The first question will be provided by Jong In Yang from Korea Investment. The second question will be provided by Hoi Jae Kim from Daishin Securities.

There are 2 questions that I would like to ask you. First is about your IPTV services right now in your policy. We do understand that other service providers are interested in acquiring those. So I would like to know if KT also is very interested in this area.

And the second question that I would like to ask you is about your 5G services. What do you believe your 5G network strengths would be versus your competitors? And do you believe that having a 5G network deployed out early on would actually help your services in itself? And so if that is the situation, for the early services that you will be launching first, what type of services will you be offering?

So maybe to address your question about our pay broadcasting services or pay TV services: for -- as for the topic of a acquisition of an MSO, we have reviewed this issue in relation to maybe providing more growth initiatives for Skylife. However, we have not made any determination on this topic yet.

And next maybe to address your question about what our strengths are versus our competitors. First through the PyeongChang Olympics, we, for the first time in the world, have been able to provide commercial level services in the 28 gigahertz frequency. So as a -- in terms of the network and as a result of that, we have the experience and have been able to accumulate it in providing end-to-end services.

As a result of that, when you do provide services, there could be various challenges that you face. We have been able to overcome those; and also have the experience of -- have reached optimization. So when we go for full commercial services, we do believe that this will be a strength that we will have to differentiate ourselves versus our competition.

In addition, if we look at the issue from an infrastructure perspective, if we look at our fixed line infrastructure nationwide, we already have it at a giga level. So in the future on the wireless side when we introduce 5G services, we do believe that this strong fixed line infrastructure will enable us to decrease our CapEx requirements. And as a result of that we do believe that, versus our competition, we would be able to make more efficient CapEx investments.

In addition, in order to improve the CapEx efficiency and also the user experience, we will make sure that our 5G technology development and our network related investments would be closely linked to our existing network. And that would be our position.

And next to talk about our 5G services, at the time our 5G commercial -- commercialization, we will be commit -- we will make sure that versus the existing network that we have that we can provide a differentiated service and value to our customers. So therefore, one of the core contents that we do believe will take place in the 5G era would be to have a immersive media market that is stimulated and to be competitive into this area.

So as a result of that, with joint efforts with GS Retail, we have launched our VRIGHT services, which is an offline VR experience service. And in the fourth quarter, we also have introduced individual services, which are called GiGA Live TV, which use an independent VR HMD. And as a result of that, we do believe that we will continue to expand our services for immersive media.

In addition, in the B2B area we also do believe that there will be business opportunities that can be expanded in the areas of connected car, smart city, and factories and also other types of non-telecommunications related platforms. So as a result, at the time of our commercialization, we will be prepared; and we will be developing various services for these players that are engaged in a wide variety of industries.

And also from a network and service perspective, in line with the 5G commercialization that is slated for the first half of next year, we do have full preparations taking place. And based upon these efforts, we will try to solidify our position as a leading 5G service provider.

The next question will be provided by Hoi Jae Kim from Daishin Securities, and the following question will be presented by Jae-min Ahn from NH Securities.

There are 2 questions that I would like to ask you. Related to your real estate business, it seems to be that your revenue on this side is growing continuously. So as a result of that, for the initial target that you had shared with us for this business which would be KRW 700 billion or at the mid KRW 700 billion in revenue by the year 2020, would that still be valid, or are there any changes in that revenue target? To be able to achieve that level, that would have to mean that for each year your revenue would increase by around KRW 100 billion. So do you believe that that is something that you would be able to do?

The second question is something that I would like to ask about in terms of your dividend policy. So if you look at your overall financial position versus 2017, it does believe to be more healthy. So as a result of that, how would that influence your dividend payout policy?

Maybe I can discuss our real estate business strategy. If you look at the basic business strategy that we have for our real estate business, it is to either lease the real estate or develop it according to the characteristics of that asset type to ensure that we have the best product and can actually maximize the value of the asset. For example, for the real estate leasing business, right now, we do want to expand various corporate related leasing that we provide.

In addition to that, we also want to secure stable new revenue sources such as the hotel business, and also engage upon remodeling of our existing assets so that we can utilize the existing real estate assets that we have to the best of their capabilities. Through this, at the end of the day, we would gradually like to expand our revenue base.

So if we talk about the overall real estate development or [PyeongChang] business, according to the site characteristics and also the trends within the real estate market, we would like to identify and develop the best products for that time to be able to maximize the asset value that we have.

And in addition to that, if we currently look at the overall number of projects that are currently under development or the ones through which we have a development plan already fixed, that would include around 20 sites in total in terms of the real estate locations. So as a result of that we do believe that the current stance of having the mid KRW 700 billion of revenues by the year 2020 in terms of our target is still valid.

However, because these are very large size sites, we do believe that according to how the progress of the sites do take place, that in terms of the timing of that target, there could be some difference.

And maybe I can address your second question about our dividend policy. The basic policy that we have in terms of continuously expanding our dividend payout ratio to be more shareholder friendly in terms of our overall capacity and in light of the overall improving profitability and also the efficient use of our capital, remains the same. It is consistent. So though there were some impact according to the regulations for this year, we do believe that for the full year performance that we will be able to maintain a profitability level that at the minimum would be in line with what we achieved last year.

However, in light of the fact that there will be more full-fledged investments taking place into growth areas including 5G, not only the profitability but also other financial situations such as cash flow will be taken into consideration to overall -- and also our CapEx plans for the future to come up and to have a holistic view about the situation.

With regards to our dividend for this year and beyond, as mentioned before, there are various factors that will be reviewed in detail to come up with a conclusion. And our plan is to try to maintain a stance in which we would be able to maintain at least what we did in the previous year. In terms of the actual amounts or numbers, we do believe that we will be able to communicate them to you when we do have a final decision after the BOD meeting in the beginning of next year.

The next question will be provided by Jae-min Ahn from NH Securities.

There are 2 questions that I would like to ask you. Recently, you have announced that you will be providing 10 giga Internet services. In terms of the plans going forward and also your expectations for revenues, and maybe as specific as the rate plans that you will be offering, if you could provide some details about that, that would be appreciated.

And the second question that I would like to ask you is about your K-Bank. Recently, some of the regulations surrounding this operation have been eased. So do you have any future plans to expand your ownership or maybe introduce a external partner? If there are any developments on that front, please discuss them also.

Now maybe to discuss about our 10 giga Internet services. In October of 2014, we had commercialized giga Internet services. And as a result of that, we were able to lead a paradigm shift within the broadband market on a giga base. In November 1 of this year, we actually have started 10 giga Internet commercial services.

With the launch of these services, in addition to that for the 5G services that we will be introducing next year, we do believe that KT will be able to lead the fourth industrial revolution. In addition to that, we will be able to stably provide fixed line based services that require large volume traffic such as UHD broadcasting, augmented reality and virtual reality related services.

And with regards to our approach, we will be starting with around 57% of our coverage areas in which FTTH/R is available. So we will start there. And because this is an area in which we do not require network investments, as a result of that we do believe that the incremental CapEx will not be significant. For further coverage expansion, we will make that decision based upon the market demand and also the feasibility of the business.

In addition, if we talk about the various rate plans, we will break them down by 2.5 giga, 5 giga and 10 giga; that would be our overall offerings. And when you compare that to the 1 giga existing products that we have, we do believe that the rates will be, at a maximum, twice the current levels. So we do believe that this will be one of the drivers in boosting our broadband revenue and also, our ARPU growth.

So based upon a BOD meeting at K-Bank that took place on October 10th, the bank, all in all, has been -- has decided to engage upon a rights offering of around KRW 120 billion. For the existing shareholders of which KT would be one, we are planning to participate in this offering. However, in terms of the actual size, we have not made our determination yet.

In addition, on September 20th for the full session of the National Assembly, the Internet Bank Act has been approved. And as a result of that, it will go into force from January of 2019. As a result, we do have the possibility of expanding our ownership to 34%. In terms of the actual approval to be the largest shareholder of this institution, we do believe that that application will only be possible after the Act goes into force. So taking that timeframe into consideration, we will be prepared to make such an application.

As initially was the overall spirit of us launching the Internet bank, we do believe that in order for us to lead the innovation that is taking place within the financial markets with new services, we do have a plan to expand our ownership ratio up into the limit that is -- the new limit that would be possible.

However, in terms of the actual timing for that or in terms of how we will do that going forward in terms of execution, this is something that we do need to discuss with the other shareholders of the institution. So as of now, we do not have any plans that we can share with you.

So since there does not seem to be any more questions, we will now like to wrap up our Q&A session. Once again, thank you for your interest and your questions for the company. We would like to thank everyone who has participated on this call, amidst your very busy schedule. And with this, we will wrap up the third quarter 2018 earnings conference call for KT. Thank you very much.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.