KT - Q2 2024
August 9, 2024
Transcript
Speaker 6
Good morning, and good evening. Thank you all for joining this conference call, and now we will begin the conference of the second quarter of fiscal year 2024 earnings results by KT. We would like to have welcoming remarks from KT IRO, and then CFO will present earnings results and entertain your questions. This conference will start with a presentation followed by a Q&A session. If you have a question, please press star one, that is star one on your phone during the Q&A. Now, we would like to turn the conference over to KT IRO.
Young-kyun Yoon (Senior VP and IR Officer)
[Foreign language]
Speaker 6
Good afternoon, I'm KT's IRO, Young-kyun Yoon. Let's begin KT's second quarter 2024 earnings presentation. Do note that the earnings release call is currently being webcast live on the company website, so you can listen in on the call and follow the presentation slides as we go along.
Young-kyun Yoon (Senior VP and IR Officer)
[Foreign language]
Speaker 6
Let me also remind you that today's presentation includes financial estimates and operating results under the K-IFRS standards that are yet to be reviewed by an outside auditor. We therefore cannot ensure accuracy nor completeness of financial and business data aside from the historical actuals. So please note that these figures may be subject to certain changes.
Young-kyun Yoon (Senior VP and IR Officer)
[Foreign language]
Speaker 6
With that, I invite the company's CFO, Min Jang, to run through the results of the second quarter 2024.
Min Jang (CFO)
[Foreign language]
Speaker 6
Good afternoon, I'm Min Jang, KT's CFO. During the first half of this year, KT focused its efforts around growth, guided by the AICT company vision, while driving structural profitability improvement.
Min Jang (CFO)
[Foreign language]
Speaker 6
To speed up the charge towards becoming an AICT company, in June, we executed strategic partnership with Microsoft to engage in an all-around cooperation across AI, cloud, and the IT domain.
Min Jang (CFO)
[Foreign language]
Speaker 6
Using KT's robust B2B customer base and technological capabilities of Microsoft, who's spearheading the AI market with its global top AI models, we will be able to respond to Korea's sharply rising AX demand.
Min Jang (CFO)
[Foreign language]
Speaker 6
Through this partnership, we plan to lead the Korean market by developing Sovereign Cloud and Sovereign AI that provides level of security, which enables and ensures data and AI sovereignty to domestic customers.
Min Jang (CFO)
[Foreign language]
Speaker 6
The two companies, thus, are planning to work together in joint R&D projects, service development tailored to Korea, build innovation center, and cultivate talent together. We will come back to you with more details in the upcoming quarters.
Min Jang (CFO)
[Foreign language]
Speaker 6
We are also placing momentum behind streamlining our low-margin businesses, a process which KT has embarked on since the second half of last year.
Min Jang (CFO)
[Foreign language]
Speaker 6
Under the objective of sustainable intrinsic growth, we are growing. We are going through business rationalization through the approach of selective focus and implementing a redesign of profit structure with service centricity.
Min Jang (CFO)
[Foreign language]
Speaker 6
...As part of our select and focus approach, we rationalized our solar energy, digital logistics, and healthcare businesses, while enhancing the business structure and streamlining AICC and robotics business from previously an infrastructure and on-premise basis to a service-oriented business. In the short term, the sales may go down, but we expect to see profit improvement in the longer run, and we will make sure to strike a balance between growth and profit. Coupled with structural improvements, we will be improving the ways of working, placing performance at the core, and running a profitability-centric business system. Through such efforts, we will power fundamental profit growth, that which is sustainable. With that said, I will move on to key financial highlights for the second quarter.
Min Jang (CFO)
[Foreign language]
Speaker 6
On the back of balanced growth from B2C and B2B, as well as growth momentum from core affiliates, including IDC Cloud and Real Estate, consolidated revenue reported KRW 6,546.4 billion, and separate basis revenue came in at KRW 4,548.3 billion. Consolidated revenue thus was flat year-over-year, while standalone revenue recorded an increase of 1.4%. Operating profits fell 14.3% year-over-year on consolidated basis and 12% on separate basis due to collective wage agreement reflected in the second quarter, which was earlier than usual.
Min Jang (CFO)
[Foreign language]
Speaker 6
Now, excluding the collective bargaining impact, operating profit decreased 3.1% year-over-year on consolidated basis to KRW 558.4 billion, while separate basis operating profit increased 3.9% year-over-year, reporting KRW 423.3 billion. Last May, KT canceled 5.14 million treasury shares, which account for 2% of total outstanding shares, and decided on Q2 cash dividend payout of KRW 500 per share on July the 16th. Next, on the details of the earnings breakdown. Operating revenue was flat year-over-year at KRW 6,546.4 billion. Operating profit declined 14.3% year-over-year, reporting KRW 494 billion, on the back of collective wage bargaining impact captured in the second quarter accounts.
Min Jang (CFO)
[Foreign language]
Speaker 6
Net income was down 5.1% year-over-year to KRW 410.5 billion on lower operating profit, while EBITDA was down 3% year-over-year, reporting KRW 1,460.2 billion. Next page is on operating expense. Operating expense was up 1.4% year-over-year, reporting KRW 6,052.4 billion, on the back of increases in labor cost and business expense. Next is on the financial position of the company. Debt-to-equity ratio as of June end 2024 was 127.3%, while net debt-to-equity ratio dipped 11.1 percentage points year-over-year, reporting 33.5%. Next is CapEx.
Min Jang (CFO)
[Foreign language]
Speaker 6
Total CapEx up to second quarter on a cumulative basis for KT and its major affiliates amounted to KRW 1,335 billion. KT's separate basis Q2 cumulative CapEx was KRW 960.9 billion, while CapEx from key growth businesses of finance, IDC Cloud, real estate, reported KRW 374.1 billion. Next is on performance of each business segment. Wireless revenue was up 2.5% year-over-year, reporting KRW 1,765.1 billion. 5G subscribers surpassed 10 million count, achieving 75% penetration, and coupled with higher roaming revenue and MVNO business expansion, wireless revenue growth received a boost. With the release of variety of rate plans, KT is giving more choice back to users, which is helping to cement our subscriber base.
Min Jang (CFO)
[Foreign language]
Speaker 6
We are offering eight types of direct rate plan called YOGO, which we are using to grow the share of our online channel. While following the release of 10 mid-tier unlimited 5G plans in January, we launched TVING, Genie, and Millie's Choice Plan back in July, further expanding customers' choice for 5G tariff. Next, on the fixed line business. Internet revenue was up 1% on year, driven by growth in GiGA Internet subscribers, posting KRW 618.5 billion. Media business saw IPTV subscriber net addition trend continue, posting 0.9% growth versus last year. For content production and the entire chain of distribution, KT, at the group level, will actively utilize its AI technology and capabilities to spearhead the AX of the media industry.
As part of that effort, we are planning on introducing on-device AI set-top box in the second half of the year. Home fixed line revenue was down 7.8% year-over-year to KRW 175.6 billion. Next is on B2B services. B2B business revenue declined 1% year-over-year due to rationalization of low-margin businesses, including the solar energy business. Now, if we were to exclude the low-margin businesses which are currently under rationalization process, B2B service revenue has sustained an uptrend, generating results especially from the AI-related businesses. Despite the changes made to AI contact center from an on-premise to service-centric business structure, which was done to strengthen profitability, we are still seeing a double-digit growth continue.
In the second quarter, KT's own LLM model made its first attempt at global expansion, generating meaningful revenue from LLM project at the Jasmine Group of Thailand.
Min Jang (CFO)
[Foreign language]
Speaker 6
B2B service will continue on with its quality driven growth by improving the low profit business structure and through business and customer expansion, powered by our core capabilities, including AI.
Min Jang (CFO)
[Foreign language]
Speaker 6
Now moving on to KT's subsidiary performance.
Min Jang (CFO)
[Foreign language]
Speaker 6
Revenue for BC Card was down 6.8% on year to KRW 977.7 billion on lower acquiring volume following the economic downturn. While its operating profit increased significantly year-over-year on the back of stabilizing cost trend, including write off costs.
Min Jang (CFO)
[Foreign language]
Speaker 6
Due to declining number of pay TV subscribers and home shopping advertising market slump, Skylife revenue dipped 2.5% year-over-year to KRW 254.6 billion. Operating profit fell year-over-year on the back of increase in amortization cost from contents of Skylife TV.
Min Jang (CFO)
[Foreign language]
Speaker 6
Content subsidiaries saw a 14.8% year-over-year revenue decline on the back of reduction in number of original drama production.
Min Jang (CFO)
[Foreign language]
Speaker 6
Despite sluggishness in the industry, Nasmedia secured a firm leading position in digital advertising market by being selected as Google's official MCM partner, and Crash, which is Studio Genie's drama, topped viewership ranking for Mondays and Tuesday drama time slot. As such, we are seeing meaningful results from each of these business areas.
Min Jang (CFO)
[Foreign language]
Speaker 6
For KT Cloud, we saw increase in IDC revenue, mostly from global customers and on timely monetization of DBO, design, build, operate projects. Revenue increased 17.1% year-over-year, with operating profit reporting sizable expansion.
Min Jang (CFO)
[Foreign language]
Speaker 6
Driven by balanced growth in rental revenues across office, hotels, et cetera, KT Estate saw 7.1% year-on-year increase in its revenue. In particular, hotel segment drove KT Estate's growth on higher revenue per room, which was driven by increases in demand from global tourists.
Min Jang (CFO)
[Foreign language]
Speaker 6
That was the highlights of KT's second quarter 2024 earnings performance.
Min Jang (CFO)
[Foreign language]
Speaker 6
KT will expand cooperation with global IT tech companies so that we may make the leap as the AICT company. Through continued streamlining of our businesses, we will drive shareholder value enhancement.
Min Jang (CFO)
[Foreign language]
Speaker 6
Dear investors and analysts, we once again ask for your continued interest and support. Thank you.
Min Jang (CFO)
[Foreign language]
Speaker 6
For more information, please refer to the presentation deck that we have previously circulated. We will now take your questions, and in order to allow as many people as possible and give them opportunity to ask questions, we would like to ask that you limit your questions to two per person.
Operator (participant)
[Foreign language]
Now Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, that is star and two on your phone.
[Foreign language]
The first question will be provided by Hye-jae Kim from Daishin Securities. Please go ahead with your question.
Hye-jae Kim (Analyst)
[Foreign language]
Speaker 6
Thank you. I'm Hye-jae Kim from Daishin Securities. I would like to ask you two questions. First, a little bit more color on your alliance with Microsoft. You did say that you would come back to us next quarter with more information, but can you provide some color on the business model? Is it a revenue share model or will it take in a different form? So if you can talk about the business model, that would be quite helpful. And if we can look forward to monetization, what will be the timing of that monetization?
Second, it seems that your large investment cycle has been concluded, and I think that there may be an opportunity going forward then for a spectrum allocation, and in which case, that spectrum that is to be allocated is not going to be the adjacent spectrum to the spectrum that you currently own. So do you think that in that case, carrier aggregation, CA, would be made possible? Is that another option that you can think about? And also, if you're going to make additional investment into the spectrum, do you think that the size will be such that it will actually pressure your current bottom line improvement trend?
Min Jang (CFO)
[Foreign language]
Speaker 6
Yes, I will respond to your second question first. The government has introduced a draft plan for the Digital Spectrum Plan in the early year, but I understand that the final version is yet to be confirmed.
Min Jang (CFO)
[Foreign language]
Speaker 6
So because of that, because we do not know as to the specific spectrum that is up for allocation or the pricing that is attached to it, none of that has yet been confirmed. So it's very difficult at this point to project the impact it may have on the financials.
Min Jang (CFO)
[Foreign language]
Speaker 6
But if the spectrum is allocated, from a technical perspective, in terms of carrier aggregation, we do not see that there will be any issue or any hurdles in going through with CA if needed.
Min Jang (CFO)
[Foreign language]
Speaker 6
And also, even if that additional spectrum is assigned, if you look at our current 5G spectrum, we still do have ample buffer. So in the near future, we do not believe that there's going to be any additional burden in terms of CapEx or in terms of our finances.
Min Jang (CFO)
[Foreign language]
Speaker 6
So once the government finalizes their plan, we will come back to you and share with you more information about its potential impact on the company.
Min Jang (CFO)
[Foreign language]
Speaker 6
Now, moving on to your first question about our partnership or alliance with Microsoft, the business model and the timing of monetization. Now, first, talking about the business model, just simply put, Microsoft, as you know, is a global tech company that owns a top AI model. KT is a number one domestic player in the B2B area, and these two companies coming together, we believe, can create meaningful opportunities in the Korean market. So that is the background of this partnership.
Min Jang (CFO)
[Foreign language]
Speaker 6
Also in terms of the business model per se, basically, we, the both companies, we would like to work together and our plan is to work together in the areas of AI, cloud, and smaller LLMs and small multimodal language models, so SLM and SMM. So we will be working together in those segments and launching, certain, you know, some products into products and services into the market. And the second aspect is, it's more about not specifically about the business per se, but more about cultivating the required talent in the areas of AI and cloud. So it will be an opportunity for KT to learn from Microsoft regarding these technical capabilities and vice, and Microsoft will have an opportunity to gain further insight and understanding about the Korean market.
Min Jang (CFO)
[Foreign language]
Speaker 6
Just to elaborate on the service that we are currently planning to provide is, and I mentioned during my presentation, terminologies like Sovereign AI and Sovereign Cloud. What that means is, we will be developing a service that could give our customers, like the government organizations, the public entities and financial institutions, ample amount of conviction that they are the ones that have the authority over data, as well as the ownership and control over the data, that is used under the whole AI and cloud domain. These are the customers will be the one that will independently and autonomously have rights to and authority over the data and the ownership.
Operator (participant)
The following question will be presented by Jae-min Ahn from NH Investment & Securities. Please go ahead with your question.
Jae-min Ahn (Senior Analyst)
[Foreign language]
Speaker 6
Thank you for taking my question. I'm Jae-min Ahn from NH Investment & Securities. I also would like to ask two questions. First one is, I see that, your B2B services revenue has dipped. You did talk about streamlining low-margin businesses. Can you elaborate a little more on this topic? Second is, with regards to the government-initiated Value-up Program, is KT also planning to participate in that initiative? What plans do you have? And also, some schedules or timeline-related information would be appreciated.
Min Jang (CFO)
[Foreign language]
Speaker 6
Yes, thank you for that first question. I will provide you with the answers to that question. You asked about the reason why we see lowering of B2B services revenue and our rationalization efforts around low-margin businesses, and what impact it is having.
Min Jang (CFO)
[Foreign language]
Speaker 6
So regarding the streamlining and structural enhancement effort that we are putting in around our B2B business is actually, there are actually two aspects. The first one is to phase out certain businesses that is not giving good profit. So making that selection as to which low, low margin or low-margin businesses we will be phasing out. So that is one aspect. Second is to realign our structure, focusing on the profit generation capabilities.
Min Jang (CFO)
[Foreign language]
Speaker 6
...So under that first approach, some of the examples that I can cite is, for instance, we sold our blockchain and also Lolab, which was our digital logistics, initiative. So we sold off those businesses, and also we withdrew from the healthcare business in Vietnam.
Min Jang (CFO)
[Foreign language]
Speaker 6
So, in terms of the specifics, what indicators, we have, put in and what the targets are, or, and what actions should follow, all these details once again, are currently under discussion. KT, however, we've been very actively talking and finding ways to make improvement to this, undervalued corporate, valuation. And so once we are able to come up with the more specifics, we will make sure that we can, live up to the expectations that the market has. And once we have that information available, we will come back to you and communicate and also make disclosures.
Operator (participant)
The following question will be presented by Joon-sop Kim from KB Securities. Please go ahead with your question.
Joon-sop Kim (Research Analyst)
[Foreign language]
Speaker 6
Thank you for taking my question. I'm Kim Joon-sop from KB Securities. I would like to ask two questions. First one, on the impact from the labor cost following the collective wage agreement and your second half outlook. Regarding the labor cost for the second quarter, it seems that labor cost had quite a bit of an impact on your cost line item, and as you've also mentioned during the opening, as well as the press news bites that we have seen, would like to gain some understanding as to the extent of the impact that you felt from the labor cost or the collective agreement on wages. Second question is your take on the second half outlook. In the second quarter, you achieved more than 10 million, or you surpassed the 10 million count for 5G subscribers.
You've streamlined your low margin businesses, so there are multiple issues that are existing at the same time. Just wondering whether there is any big issue that could impact your second half performances, earnings performances, and to the extent possible, it would be helpful if you could shed some light on what your understanding or take is in terms of your business outlook in the second half?
Min Jang (CFO)
[Foreign language]
Speaker 6
Yes, responding to your question about the impact from on the labor cost on the wage agreement, the amount that was reflected for the first half of the year is KRW 64.4 billion, based upon our calculation. So that is part of the annual calculation, which is about KRW 118 billion. That will be for the entire year, and KRW 64.4 billion is part of that. And we reached an agreement in terms of the collective wage bargaining as of July. And according to the advice that we got from the independent auditor, basically, if that number has to be reflected in the first half number, if all the facts are confirmed before the timing of the disclosure. So we follow the advice of the independent auditor in reflecting this figure in our semi-annual financial statement.
Min Jang (CFO)
[Foreign language]
Speaker 6
So last year, if you compare with last year, basically this expense was captured in Q3 number. This year, it was captured in the second quarter number. But if you look at the extent of the impact on an annual basis, it's about KRW 40 billion less compared to the previous year. So aside from KRW 64.4 billion, which we had, booked, basically the KRW 118 billion of wage increase effect is going to be spread across, the accounts for the second half of the year. So it is not going to undermine or have a, you know, or, or be, or be pressuring down on a specific quarter's profit.
Min Jang (CFO)
[Foreign language]
Speaker 6
Now, on your question about our second half earnings outlook in terms of the labor costs, as I have just explained, in the second half of the year, this is not going to work as a big burden for the company. Also, as we are continuing on, continuing on with the streamlining of our non-core low margin businesses, that would actually help with the company's profitability.
Min Jang (CFO)
[Foreign language]
Speaker 6
Also, in terms of the depreciation cost and selling-related cost, we are controlling these cost items very well. On the back of inflation that we are seeing, there is increases in the electricity cost as well as other business-related expenses. All of that is already reflected in the company's business plan. We will do our best to make sure that we overachieve on the earnings in the second half of the year compared to the previous year.
Min Jang (CFO)
[Foreign language]
Speaker 6
Lastly, if I may also talk about our group affiliates. The content market, if as you know, the market is very sluggish, and there was a change in the criteria upon which we calculate our depreciation cost, and that had pushed down on the profit a bit. But we believe, we will do our best in the second half of the year, so that on a consolidated basis, in terms of the top line revenue and operating profits, all of our group affiliates in the finance, AI, IDC, cloud, can actually perform robustly.
Min Jang (CFO)
[Foreign language]
Speaker 6
Well, thank you very much for all of your interest and the questions. Since we have no questions in the queue, we would like to now close the Q&A session. Once again, thank you very much!