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Edited Transcript of 030200.KS earnings conference call or presentation 3-May-19 6:00am GMT

Q1 2019 KT Corp Earnings Call

Kyeonggi-Do May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of KT Corp earnings conference call or presentation Friday, May 3, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kyung-Keun Yoon

KT Corporation - EVP of Financial Management Office

* Seung-Hoon Chi

KT Corporation - IR Officer

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Conference Call Participants

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* Hoi Jae Kim

Daishin Securities Co. Ltd., Research Division - Analyst

* Jong In Yang

Korea Investment & Securities Co., Ltd., Research Division - Analyst

* Joonsop Kim

KB Securities Co., Ltd., Research Division - Analyst

* Kim Hong-sik

* Seyon Park

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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[Interpreted] 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 2019 first quarter earnings results by KT. We'd 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.

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Seung-Hoon Chi, KT Corporation - IR Officer [2]

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[Interpreted] Good afternoon, I am Seung-Hoon Chi, KT's IRO. This earnings release call is currently being webcast via our website and you can follow the slides as you listen in on the call. Let us now begin KT's Q1 2019 earnings presentation.

Please note that KT's earnings are presented based on consolidated financial statement as under the IFRS standards. We will begin with our CFO, Yoon Kyung-Keun's, opening remarks followed by highlights on Q1 2019 results.

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Kyung-Keun Yoon, KT Corporation - EVP of Financial Management Office [3]

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[Interpreted] Good afternoon. I am KT's CFO, Yoon Kyung-Keun. Despite difficult market conditions in the first quarter driven by solid growth from core businesses of Wireless, Internet and Media businesses, KT was able to bring growth in revenue of 2.2% and operating profit of 1.3% year-over-year.

For the Wireless business in Q1, there was 169,000 MNO subscriber net additions with total reaching 21.330 million subscribers. Especially, there was an increase of 56,000 handset subscribers who are mostly prime customers taking out data on rate plans, driving 0.2% year-over-year growth in wireless service revenue.

KT began world's first 5G services last April and with its innovative 5G rate plans and services, in just a month since the launch, it's leading at the front of the market with more than 100,000 subscribers.

And super plan is a total unlimited data plan that removes any data-related burden for the customer and more than 85% of new subscribers are opting for this plan.

Also underpinned by our confidence on our 5G quality, we were the first to open our 5G coverage map in the domestic market. By being transparent in terms of number of base stations and equipment manufacturers used, we were able to alleviate any uncertainties people might have felt on coverage and we are doing our best to provide the best quality 5G services through service stabilization.

In B2B segments like manufacturing, media, health care and the public sector, we are making multiple cases of collaboration in 5G. KT is committed to developing 5G into a foundation for sustainable and long-term growth through our best quality 5G network and service differentiation.

In the Internet business, GiGA Internet subscribers surpassed 5 million mark, expanding to 58% of KT's total Internet subscriber base. We will continue to broaden customer base, mostly around 10 GiGA services and premium services.

For the IPTV business, since Korea's first commercialization back in 2008, in just 10 years, we achieved 8 million subscribers. We continue to post double-digit revenue growth every quarter, driven by growth in both subscriber base and platform services.

Going forward, keeping in step with changes in preference for content, we plan to strengthen customized content offerings, including movies that were not released in Korea and content for kids and seniors, creating a media environment where it's enough to have just the KT's Olleh TV.

Also in new business areas, we are endeavoring to lay the basis for long-term growth.

First, GiGA Genie, which is the AI platform, saw its subscribers reach above 1.5 million, growing to become Korea's #1 AI platform. Currently, GiGA Genie is further evolving, as can be seen from cable TV, which is a single device with screen and set-top box, AI personalization and other customized service development. And through application through other industries, we will continue to broaden its revenue source.

GiGA Drive is Korea's #1 platform for automobiles and we are expanding partnerships with domestic and foreign car manufacturers, strengthening corporation ahead of the upcoming era of self-driving vehicles.

With that, I now move on to Q1 2019 earnings results.

Q1 2019 consolidated basis revenue was KRW 5,834.4 billion, up 2.2% year-over-year. In particular, driven by slight increase in wireless service revenue and sustained growth from Internet and media, service revenue was up 1.9% year-over-year reporting KRW 4,955.5 billion.

On the back of higher service revenue and declines in business expenses, operating profit was up 1.3% year-over-year to KRW 402.1 billion. Net profit was up 15.9% year-over-year to KRW 259.8 billion and EBITDA was up 6.6% year-over-year, reporting KRW 1,309.5 billion.

Next is on operating expenses. Q1 2019 operating expense was up 2.2% year-over-year to KRW 5,432.3 billion. Marketing expense under the IFRS 15 basis reported an increase of 5.3% year-over-year.

Next is on the financial position. Debt-to-equity ratio as of first quarter end was 125.6%. Net debt ratio was at 27.3%.

With the adoption of the new IFRS 16 standard, lease expense, previously booked as expenses, have been recognized as right of use asset and lease liabilities, which had around 5 percentage point upward impact on debt-to-equity ratio.

Next is on CapEx. Capital expenditure up to Q1 was a total of KRW 552.1 billion. With 5G commercialization, investment was focused on the build-out of base station. This year, we are planning around KRW 3.3 trillion of investments in light of 5G coverage expansion and reinforcing of disaster safety preparedness.

Capital expenditure up to Q1 was 16.7% against the annual plan.

Moving on to each business line. Our Wireless revenue was down 0.5% year-over-year to KRW 1,732.5 billion. On the back of new subscriber growth and more people choosing high-end rate plans such as the Data ON Talk and Premium, wireless service revenue was up 0.2% year-over-year to KRW 1,626.6 billion. Total Wireless subscribers reached 21.330 million people with 210,000 net additions in the first quarter.

Next is fixed-line business. Fixed-line revenue was down 2.7% year-over-year to KRW 1,116.7 billion on PSTN revenue erosion. The broadband Internet revenue posted a growth of 1.3% year-over-year, coming in at KRW 479.5 billion and continued growth from the GiGA Internet.

In Q1, GiGA Internet subscribers reached above 5 million, growing its share to 58% of the total base.

Next is on media and content. Media and content revenue was up 15.7% year-over-year to KRW 641.2 billion. IPTV, in particular, reached above 8 million subscribers recently, growing 18.4% year-over-year in revenue on a stand-alone basis, underpinned by subscriber growth as well as vast services such as PPV and commerce. Content revenue was up 28.6% year-over-year on better subsidiary business performances from Genie Music's media content and KTH's T-commerce.

Next is on financial and other services. Financial revenue was up 0.8% year-over-year to KRW 839 billion on higher credit card payment volume, despite BC Card's domestic merchant fee cuts. Other service revenue was up 7.2% year-over-year, reporting KRW 575.8 billion on strong Internet data center business.

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Seung-Hoon Chi, KT Corporation - IR Officer [4]

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[Interpreted] For more details, please refer to the presentation materials that have been circulated. We will now entertain your questions.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) The first question will be provided by Jong In Yang by Korea Investment & Securities. And the next question will be provided by Hoi Jae Kim from Daishin Securities.

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Jong In Yang, Korea Investment & Securities Co., Ltd., Research Division - Analyst [2]

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[Interpreted] I would like to first congratulate you on a good business performance that you were able to achieve this quarter. I would like to pose 2 questions. First has to do with your 5G-related ARPU. You've mentioned that you were able to attract 100,000 subscribers for 5G services. I would like to understand when 5G will start to have meaningful impact on your ARPU number. Could you provide some color as to when your mobile-related ARPU is going to actually turn around and start to draw an upward trend?

Second question relates to depreciation. If you consider for the changes in accounting standards with regards to lease expenses for Q1, it seems like the figure is actually going down. This year, you have -- you earmarked around KRW 3.3 trillion of investments in -- CapEx investment. We'd like to understand what your take is on this year's annual depreciation figure.

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Kyung-Keun Yoon, KT Corporation - EVP of Financial Management Office [3]

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[Interpreted] Let me first respond to your question about 5G rates and the ARPU impact. Currently, if you look at the trend, more than 80% of the people are taking out rate plans above KRW 80,000. So the initial ARPU that we are seeing is quite high, but we will be able to understand the actual -- the trend to stay as we see the increase in number of subscribers.

Responding to your question about the Wireless revenue. We have seen the share of people taking out the selective discount plan actually rise to a significant level and also with the number of 5G subscribers were really taking off and being activated, we believe -- and we are taking a quite positive stance on the future prospect of revenue as well -- revenue turnaround and ARPU turnaround, most likely to happen in the second half of the year.

Responding to your question about depreciation. In the first quarter, due to the application of IFRS 16 standards on a consolidated basis, there was an year-over-year increase of depreciation cost of KRW 75.6 billion. However, there was also a downward impact on lease-related expenses, hence, the impact on operating profit was quite minimal.

Now if you were to carve out the impact of IFRS 16, in 2019, the depreciation figure, despite the fact that we have begun investment on 5G and there is new depreciations relating to the spectrums that we have. Because the LTE depreciation resulted in 2012 and 2013 has come to an end, we expect 2019 depreciation to rise only slightly on a year-over-year basis.

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Operator [4]

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[Interpreted] The next question will be presented by Hoi Jae Kim from Daishin Securities. And the following question will be presented by Hong-sik Kim from Hana Financial Investment.

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Hoi Jae Kim, Daishin Securities Co. Ltd., Research Division - Analyst [5]

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[Interpreted] With the launch of the 5G services, you also launched the unlimited data plan, and I think that this was based on your understanding you have the infrastructure and capacity in place to fully cover for explosive data traffic growth. So could provide some elaboration, especially in terms of numbers as to the data capacity, data processing capacity that KT currently has?

Second question, you disclosed that you would be making CapEx expenditure of KRW 3.3 trillion. Based on that, I would like to understand what your payout direction going forward is going to be. Would you be keeping to your upward trend going forward as well?

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Kyung-Keun Yoon, KT Corporation - EVP of Financial Management Office [6]

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[Interpreted] Responding to your question about our unlimited rate plan and the potential explosive traffic, KT has designed its rate plan in light of the network characteristics as well as the characteristics that 5G services actually have. The 5G services, basically, the way that the KT understands the 5G is that it is a network that specialized for high-capacity data transmission. Therefore, we would utilize our know-how -- operational know-how in managing the existing traffic. And we believe that we will be able to, without any interruptions, be able to provide the services, mostly around the heavy users. I do understand that there are some concerns relating to a sudden explosive growth of data, but we are fully prepared to respond to any such movement and also any types of data traffic. And also, we have the basis and the provisions that are in place to actually apply a normal rate to any commercial or abnormal usage patterns and we have the provisional basis to actually prohibit or stop such traffic.

Responding to your question on dividend. In 2018, we had decided to pay out KRW 1,100 per share in order to satisfy the expectations that the shareholders had. After 2018, we will also continue to determine the size of our dividend payout in light of the company's profitability as well as the capital utilization plan. In 2019, we do understand that due to the 5G investment from a short-term perspective, there could be certain pressures put on profitability and cash flow. However, for the BoD as well as our management team, it's a critical mission for us to maintain the track record when it comes to shareholder return and also enhancing our trust and shareholder value vis-à-vis the market. The actual amount of shareholder return, the size of the dividend, will eventually be decided by the BoD.

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Operator [7]

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[Interpreted] The next question will be presented by Hong-sik Kim from Hana Financial Investment. And the following question will be presented by [Jimin Ahn] from NH Investment & Securities.

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Kim Hong-sik, [8]

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[Interpreted] I would like to ask 2 questions relating to 5G: one on future forecast; and two, with respect to cost. In the initial phase of 5G launch, the net addition trend was quite favorable. We recently, however, saw some slowdown in the speed of net addition. You've initially projected about 10% penetration as of end of the year. Is this number still valid? I asked this question because your competitors have gone back and forth with respect to this target figure. What is KT's year-end target in terms of penetration?

Second question, as players became quite aggressive in pushing for 5G launch, there is also a heightened concern over marketing cost as well as CapEx expenditure. Your marketing expense over the years have been on a downward trend. This year, you will be reporting your numbers based on IFRS 15. What is your projection for the future marketing expense trend? Also, there seems to be quite a bit of issue with regards to CapEx, especially given the fact that you have launched the unlimited rate plan. If you were to compare, as of today, the amount of CapEx that you're projecting for 5G versus the previous LTE CapEx that have been implemented, what would be the range of percent increase as against the LTE CapEx investment?

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Kyung-Keun Yoon, KT Corporation - EVP of Financial Management Office [9]

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[Interpreted] Our year-end penetration target for 5G, 5G penetration is 10% as against the smartphone subscribers. At this point, 5G market is defined as a premium market based on a strategic handset as well as characterized by high-end rate plans. Depending on the coverage expansion and more addition of handsets to the 5G handset lineup, I believe that the speed of 5G subscriber acquisition will change.

Now on the marketing expense question. In 2019, with the increase in 5G subscribers and as we responded to competition in the fixed-line market, we expect that in 2019, there will be somewhat of an increase in marketing expense. However, this number is going to be fluid depending on the market competitive backdrop. So please understand, it will be difficult for us to say the specific figure. KT is committed to moving away from unnecessary subsidy support and we will basically focus on broadening our subscriber base, leveraging our network capabilities and also do differentiated marketing activities.

Now on CapEx, as I have previously mentioned, in 2019, we're expecting CapEx spend about KRW 3.3 trillion, and this CapEx will comprise of our efforts to increase 5G-related quality and also increasing the ratings of our telecommunications sites, and also CapEx will be used for network redundancies and disaster preparedness.

In terms of 5G CapEx, please understand that we do not carve out that figure separately. When you think about 5G, the investment into 5G is actually inevitable for us to gain competitiveness. We do understand that it could be a constraint to our bottom line, but at this point, we believe it is more important for us to secure the basis for long-term growth.

With respect to other existing businesses, we are going to review those businesses from the 0 base and we have planned to actually reduce the size through efficient investment.

Now if you look at 5G, in light of its spectrum-related characteristics and the configuration of the network, there is a possibility that the CapEx requirement could be higher compared to the previous generation of technology. But at this point, there are uncertainties. Hence, it would be quite difficult for us to make apples-to-apples comparison with LTE CapEx at this point in time. KT is going to make full use of its fixed-line infrastructure and undertake its capital expenditure in a rational and reasonable manner.

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Operator [10]

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[Interpreted] The next question will be provided by [Jimin Ahn] from NH Investment & Securities. And the following question will be presented by Joonsop Kim from KB Securities.

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Unidentified Analyst, [11]

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[Interpreted] I would like to ask some follow-up question on CapEx. If we look at the CapEx amount for Q1, I would think that there's going to be higher level of CapEx spend in Q2 and Q3. Can you update on your current level of coverage and what your number of base station target is as of the end of the year? Second, with regards to depreciation, should we expect quarterly upward trend for depreciation?

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Kyung-Keun Yoon, KT Corporation - EVP of Financial Management Office [12]

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[Interpreted] Responding to your question on KT's coverage, basically, we launched the services based on 37,500 sites in areas such as Seoul Metropolitan and greater city areas and highways and KTX as well as major universities. And by the second half of the year, we will be covering most of the areas under 85 cities and we are exerting our 5G-related efforts in order for us to continue to maintain a network advantage or network superiority as compared to our peers. And also for transparency purposes, we have opened our 5G coverage map. We were the first to do so, and you can access this coverage map for more information.

So on depreciation, just to add on top of my previous answer, on a consolidated basis, it will be around 1 percentage increase year-over-year.

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Operator [13]

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[Interpreted] The next question will be provided by Joonsop Kim from KB Securities. And the following question will be presented by Seyon Park from Morgan Stanley.

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Joonsop Kim, KB Securities Co., Ltd., Research Division - Analyst [14]

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[Interpreted] My first question relates to your -- or what your view is with respect to the recent trend. If we look at, for instance, Netflix and also the integrated Oksusu service that your peers are providing, it seems like these OTT services have risen as an alternative or a replacement of pay TV broadcasting. What is your KT's take on this trend?

My second question is what is your view with respect to your competitor moving to acquire a cable TV? I would think that the National Assembly discussions on the broadcasting-related aspect will be the key with respect to the approval of such acquisition. Does KT have different scenarios in place depending on the outcome of this acquisition process?

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Kyung-Keun Yoon, KT Corporation - EVP of Financial Management Office [15]

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[Interpreted] Now when it comes to the global OTT players like YouTube and Netflix and their market penetration, yes, we believe that this is quite threatening. However, we are going to very closely monitor the certain changes that we see in the media market.

Now however, if you look at the preferences of the domestic consumers on the type of content that they prefer as well as the reasonable price that IPTV services are offering, we believe that OTT as well as pay TV broadcasting service will grow in tandem with one another. Now KT will continue to secure growth potential by offering differentiated services and also offering customized products.

In terms of the reshuffling or the revamping of the pay TV market structure, including the potential for acquiring cable TV player, KT is looking at various different strategies to further bolster its competitiveness from a long-term perspective.

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Operator [16]

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[Interpreted] The next question will be presented by Seyon Park from Morgan Stanley.

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Seyon Park, Morgan Stanley, Research Division - Equity Analyst [17]

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[Interpreted] I would like to ask additional questions on CapEx. The 2019 guidance that you shared with us, is this on a stand-alone basis or on a consolidated basis? And moving on to 2020 guidance, you've mentioned the need to make investments for redundancies of the existing network and also potential upgrades. Now is the figure a slight increase on a year-over-year basis because for next year, you've actually taken out the upgrade-related investments required other than on the 5G networks? Or is there a possibility that we will continue to see more than KRW 3 trillion of investment requirement for next -- CapEx investment requirement, that is, for next year and 2 years from now? I do understand that the whole circumstances are quite fluid, but could you provide some more color on this?

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Kyung-Keun Yoon, KT Corporation - EVP of Financial Management Office [18]

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[Interpreted] First, the simple answer is it's on a stand-alone basis, the 2019 figure.

Yes, it's quite difficult for us to give you a specific guidance for 2 or 3 years to come. We will have to look at the market situation as well as the competitive backdrop and also look at the level of 5G activations under which we will be making decisions on investment.

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Operator [19]

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[Interpreted] Currently, there are no participants with questions. (Operator Instructions)

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Seung-Hoon Chi, KT Corporation - IR Officer [20]

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[Interpreted] With no further questions, we would like to now close the Q&A session. Thank you very much for your questions as well as your interest. I thank you, once again, for joining us today. This brings us to the end of KT's Q1 2019 Earnings Call. Thank you.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]