KT Corp (KT) 2018 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 2018 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 result and entertain your questions. Mr. Kyung-Keun Yoon, CFO, will present earnings result and entertain your questions as well. (Operator Instructions) Now we would like to turn the conference over to Mr. Seung-Hoon Chi, KT IRO.

(foreign language) Good afternoon, I'm Chi Seung-Hoon, KT's IRO. This earnings release call is currently being webcasted via our website, and you can follow the slides as you listen in on the call. Let us now begin KT's 2018 full year earnings presentation. (foreign language) Please note that KT's earnings are based on consolidated financial statements under the IFRS standards. We will now begin with our CFO, Yoon Kyung-Keun's opening remarks, followed by highlights on 2018 full year results, including Q4 figures.

(foreign language) Good afternoon, I'm Yoon Kyung-Keun, KT's CFO. Under difficult market backdrops characterized by mobile tariff cuts and fiercer competition in the fixed-line market, KT was able to expand high-quality subscribers and implemented efficient marketing and investment, thereby generating stable earnings. (foreign language) In wireless business, we launched new rate plans, such as Data ON and Roaming ON preemptively, which invited positive responses from many subscribers. We also introduced rate plans, specifically geared towards teens and 20s, called [Y 24 ON and Y Teen ON] and by offering useful membership benefits and data box service allowing friends and families to share data. We conducted targeted marketing for the younger generation, which led to quality growth around handset subscribers. As a result, 2018 MNO subscriber net adds was up 17% year-over-year, reporting 920,000, of which handset subscriber net addition was 140,000.

(foreign language) In the Internet business, we saw growth sustain around GiGA Internet. In 2018, for GiGA Internet, there was 950,000 net additions, leading to a base of 4,890,000 subscribers, which accounts for more than a half at 56% of the total Internet subscriber base.

At the end of last year, for the first time in Korea, we also launched 10 GiGA Internet, broadening the market into data-heavy users and Soho subscribers. We expect 10G Internet, together with 5G services, will offer customers distinctive services as they lead the premium market.

(foreign language) For the IPTV business, with 380,000 subscriber net adds over last year, we acquired a total of 7,850,000 subscribers, driven by subscriber growth and continuous growth from platform revenues, such as paid VOD and commerce. Stand-alone IPTV revenue was up more than 15% year-over-year, reporting KRW 1.4 trillion. This year, we are committed to solidifying our position as a #1 media platform by offering customized services and differentiated kids contents and movies, et cetera.

(foreign language) We are also seeing meaningful results from KT's future growth businesses, which is its platform business. For AI, artificial intelligence, as of end of 2018, GiGA Genie reached over 1,390,000 subscribers, becoming a #1 AI platform in the home market. We have launched various services including shopping, education and karaoke, and usage rate is steadily increasing. We were also able to see the opportunities in the B2B market for AI business, such as AI hotel and AI apartment. We plan to develop set-top boxes and other devices, as we broaden the B2B domain and strengthen partnerships with various providers, so that we can develop into an actively foster converged AI platform.

(foreign language) For the smart energy business, with the launch of GiGA Energy Manager, we expanded our customer base. And with KT-MEG-based energy efficiency projects and through winning of energy projects from 22 local governments, we brought balanced growth across the whole chain of smart energy consumption, production and trading.

In security business, through collaborations with affiliates and by actively utilizing the existing distribution channel of our current telecom business, we brought in the subscriber base with GiGA Eyes, the intelligent image security product, and are further expanding the business domain towards information security, video security and disaster safety. Going forward, we will continue to focus on securing a leading position in the respective markets of smart energy and security businesses.

(foreign language) In the field of connected cars based on the GiGA Drive Platform, we actively cooperated with domestic and overseas manufacturers, gaining 770,000 subscribers. Going forward, we will attract more subscribers via collaborations with multiple global companies in segment 5G-based in-vehicle infotainment and autonomous platform technologies, so as to prepare for the coming of the age of self-driving cars.

(foreign language) Above all, this year will mark the beginning of 5G services. KT was the first in the world to showcase 5G services at the PyeongChang Winter Olympics on February 2018. With the start of 5G frequency transmission last December, commercialization will come under full swing from March, starting with metropolitan areas and major cities around the country.

(foreign language) KT has created largest and most optimal 5G frequency bandwidth, together with our unmatched fixed-line infrastructure, we will utilize Edge Cloud Center located nationwide to provide Korea's best quality 5G services.

(foreign language) First, in the B2C market on top of individual 5G rate plan launches, we are preparing for a multifaceted immersive media services. In the B2B market, after the launch of 5G Open Lab last September, we are developing different business models and services in collaboration with multiple number of companies and will incorporate them as services to smart factory among others.

(foreign language) In the face of a paradigm shift to be led by 5G, we would bring together all the capabilities of KT and its subsidiaries, so that we may leap towards becoming a #1 player in 5G platform.

(foreign language) As our guidance last year, we presented KRW 23 trillion in consolidated revenue and CapEx of KRW 2.3 trillion stand-alone basis. Driven by steady performance from core businesses, growth of platform business and contributions from subsidiaries, 2018 consolidated revenue was above target at KRW 23.4 trillion. And thanks to efficiency efforts, CapEx spend was KRW 1.98 trillion.

(foreign language) This year's consolidated revenue guidance is above KRW 24 trillion. On the investment plan, we will communicate once the uncertainties around 5G investments are removed. We ask for your kind understanding.

(foreign language) 2018 dividend was approved by the BOD at KRW 1,101 per share, up 10% year-over-year, and it would become final at the shareholders meeting to be held in March.

(foreign language) With that, I now move on to 2018 earnings results.

(foreign language) First, I will briefly touch upon earnings based on the new K-IFRS 15, and then report on the basis of previous standard for better understanding. Please note that figures under the previous bases are for comparison purposes and are yet to audited or reviewed by an outside auditor.

(foreign language) Under the new accounting basis, 2018 full year earnings are as follows: revenue was KRW 23,460,100,000,000; operating profit, KRW 1,261,500,000,000; and net profit reported KRW 762.3 billion.

(foreign language) Now for better comparison purposes with previous year's performances, I will present on the full year operating results under the previous accounting standard.

(foreign language) Revenue was up 1.6% year-over-year to KRW 23,751,700,000,000 on high-quality subscriber growth from core businesses of wireless, GiGA Internet and IPTV.

Operating profit was down 11.4% year-over-year to KRW 1,218,400,000,000 on more subscribers taking out wireless tariff discount plans, closing of the WiBro business and payment relief related to the Ahyeon branch fire incident. Net profit was up 27.3% year-over-year to KRW 715.1 billion. EBITDA was down 5.1% year-over-year, reporting KRW 4,500,100,000,000. Next is on the operating expense.

(foreign language) 2018 full year operating expense was KRW 22,533,300,000,000, up 2.4% year-over-year. Marketing expense was down 1.6% year-over-year on lessened competition on the back of stabilized market and efficient marketing activity. Next is on the financial position.

(foreign language) Financial position is under the new accounting basis. 2018 Q4 end debt-to-equity ratio was 118.5%, net debt ratio was 26.8%. Next is on CapEx.

(foreign language) Total capital expenditure over 2018 was KRW 1,976,500,000,000. Next is the financial results by each business.

(foreign language) Wireless revenue was down 2.3% year-over-year to KRW 7,040,900,000,000. Wireless service revenue was down 2% year-over-year to KRW 6,610,300,000,000 on the back of higher takeup of selected discount plans and the close of the WiBro business. Next is on the fixed-line business.

(foreign language) Fixed line revenue driven by continuous PSTN traffic erosion was down 2.1% year-over-year, reporting KRW 4,799,000,000,000. For the broadband Internet business, excluding the interconnect fees, service revenue posted a growth of 2.9%, continuing a steadfast upward trend for fourth consecutive year. Next is the media and content business.

(foreign language) Media and content revenue was up 9.4% year-over-year, reporting KRW 2,449,200,000,000. Stand-alone IPTV revenue, driven by high-quality subscriber growth and platform revenue growth, was up 15.8% year-over-year. Next is financial and other services.

(foreign language) Financial revenue was down 2.4% year-over-year to KRW 3,444,900,000,000 due to the impact of BC Card's gains from sales of MasterCard shares, which was reflected last year.

Other services revenue was up 6.7% year-over-year to KRW 2, 403,600,000,000 on good real estate and Internet data center business.

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

(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 Jay Yoo from Merrill Lynch securities.

(foreign language) I would like to post 2 questions. On first, you've mentioned that you have decided to pay out KRW 1,101 per share as dividend but excluding the one-offs, what would be the payout ratio? Would you please share with us that figure? And also, going forward after 2019, what will be your stance in terms of your dividend policy? Second question, there is talks that there would be resumption of discussion on the combined market share related regulations. Would like to understand what KT's position is with respect to this combined market share regulation is, and also what your overall media strategy is?

(foreign language) Responding to your question about dividend, if we were to curb out the one-offs on a stand-alone basis, the payout ratio for 2018 stands at around 43%. We've made the decision to pay out KRW 1,100 per share in light of our capital utilization plans as well as our earnings. In terms of our dividend policy going forward after 2019, we will make an appropriate decision in light of our 5G investment as well as financial planning and profitability.

(foreign language) Responding to your question about the potential readoption of the combined market share regulation being readopted, I believe that at this point in time, it's quite difficult for us to make an accurate prediction going forward. However, the combined market share regulation does not really (inaudible) the current trend that we witnessed in the media market, and there are some problems with respect to undermining of the diversity and fair competition when it comes to broadcasting market. Therefore, in light of those factors, we do look forward to a reasonable conclusion as we go forward. For us, at KT, we are going to focus our efforts on further strengthening our platform competitiveness across the suite of products that we hold within our company, meaning KT's IPTV, Olleh TV mobile, GiGA Genie and Skylife, among others.

(foreign language) Moving to our media strategy as a whole, we already are equipped with a very high-quality content library as seen from IPTV, Olleh TV mobile and our satellite TV. We're also providing monthly fixed rate packages in the form of prime movie pack and kids package. And also, we are providing various different types of services that really helps our customers and subscribers to make use of the content by providing them with personalized and customized services. And also, we are making investments into developing original contents on specific area, such as the kids content as well as idol-specific entertainment content. We are also producing and offering through Sky TV -- Skylife TV certain original content that we are investing and developing. So we are (inaudible) our effort to provide a very diversified lineup of content.

(foreign language) To prepare for the 5G age that's coming upon our way, we're going to continuously expand our investments into a more immersive media content and services. At PyeongChang, we introduced sync view and multiview, and we also recently launched GiGA Live TV. Through such efforts, we will continuously develop on highly immersive content. And also, these contents that we will develop will be offered through the media platform that KT owns within the group. And through such efforts, we are going to really focus on acquiring subscribers and especially acquire high-quality subscribers.

The next question will be presented by Jay Yoo from Merrill Lynch Securities.

(foreign language) I would like to post 2 questions. This will be same for your competitors as well, but with the greater investment into 5G, your depreciation is bound to rise, and this will be a cost burden for the company. You shared with us your revenue guidance of around KRW 24 trillion. I'd like to understand what your OP guidance is? And for your wireless business, could you provide us with your projections for service revenue and ARPU trend?

(foreign language) Responding to your question on our profit, in 2019, as I have mentioned before on a consolidated basis, we are looking to achieve KRW 24 trillion in revenue. In terms of the wireless service revenue, we are expecting that it will start to turn around as we enter the second half of the year. And for the broadband business and media content business, we are projecting that the growth trend that we've seen in 2018 will continue. Also, we are now seeing some visible outcomes and results from our future platform business, and we will exert our efforts to make sure that, that growth further expands in 2019 in terms of the growth trends going forward.

(foreign language) All in all, in 2019, we believe that our priority task that lay in front of us is to make sure that we secure competitiveness and leadership in 5G, so that we build a firm basis for mid- to long-term revenue creation. At this point, it is difficult for us to share with you specific investment amount, but considering the fact that we are investing into a network evolution, which requires a front-loading of investment, there is bound to be an increase in terms of investment as well as related cost. Having said this, in terms of the size of the profit is going to be determined based on 5G-related investment as well as the speed at which the subscriber base migrates. So it's going to be quite difficult for us to predict with high level of accuracy. We're going to try to do our best to identify business opportunities from B2C and B2B domains, which is underpinned by 5G services. And through the most rational investment and efficient marketing, we are going to try to maintain our 5 leadership -- 5G leadership and at the same time maintain our profitability -- adequate level of profitability.

(foreign language) Responding to your question about wireless revenue going forward and ARPU trends going forward, with a greater discount rate as well as higher take-up of people taking out the tariff discount plan, we do expect the revenue decline will continue. In 2019, however, we are going to provide stronger benefits to high ARPU, high-quality subscribers, thereby maintaining a growth that's underpinned by quality. And after the launch of the 5G services, if we are able to accelerate the subscriber migration, we expect that our wireless service revenue will turn around as we enter the second half of the year. For ARPU, because of the decline in wireless service revenue as well as more subscribers taking out the second device as well as the IoT services, the trend of decline is expected to continue. However, the speed at which subscribers select the selective discount rate is slowing and also, as we focus on bringing up the quality of the subscribers and our sales activities and with the proportion of 5G subscribers increasing, we would do our utmost to make sure that we minimize that ARPU decline.

(foreign language) Do we have any questions in the queue?

(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 your interest and for joining us despite your very busy schedule. This brings us to the end of full year 2018 earnings release call. Thank you very much.