KT - Q3 2021
November 9, 2021
Transcript
Operator (participant)
[Non-English content]
Speaker 6
Good morning and good evening. Thank you all for joining this Conference Call. Now we will begin the conference call for the 2021 Third Quarter Earnings Results of KT. We would like to have welcoming remarks from Mr. Seung-Hoon Chi, KT IRO, and then Mr. Young-Jin Kim, 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 and one on your phone during the Q&A.
Now we would like to turn the conference over to Mr. Seung-Hoon Chi, KT IRO.
Seung-Hoon Chi (IRO)
[Non-English content]
Speaker 6
Good afternoon. I am Seung-Hoon Chi, KT's IRO. This earnings release call is currently being webcasted live on our website, and you can follow the slides as you listen in on the call. Let us now begin KT's Q3 2021 earnings presentation.
Seung-Hoon Chi (IRO)
[Non-English content]
Speaker 6
Before we begin, please note that today's presentation includes financial estimates and operating results under the K-IFRS standard and have not yet been reviewed by an outside auditor. As we cannot ensure accuracy and completeness of financial and business data, except for historical performances, please be reminded that these figures are subject to possible changes.
Seung-Hoon Chi (IRO)
[Non-English content].
Speaker 6
I will now invite the CFO Kim Young Jin for his remarks and presentation on Q3 2021 earnings.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Good afternoon. This is Kim Young Jin, KT's CFO. Let's begin with key earnings highlights for Q3 2021. Consolidated revenue was KRW 6,217.4 billion, while service revenue reported KRW 5,402.4 billion, and operating profit reported KRW 382.4 billion.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Driven by growth from legacy telecom business, including 5G and internet, as well as platform businesses, which include B2B, media, content, and financial services, there was overall performance improvement for KT and its affiliates, which drove revenue up 3.6% year-over-year and operating profit up 30% year-over-year. On a separate basis, revenue was up 3.2% year-over-year, reporting KRW 4,664.7 billion, with operating profit up 24.3% year-over-year to KRW 259.1 billion.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
In particular, there was a salient service revenue growth as standalone service revenue increased KRW 114.1 billion, with Q3 cumulative revenue of KRW 312.7 billion. This is attributable to steady top line growth from KT's traditional telco business and expansion of its B2B and platform business.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
KT has classified its business domain into four segments: Digico and Telco in accordance with the characteristics of the business, and B2C and B2B based on the customer. KT's legacy business was in B2C telco business, which comprises of wireless, internet, fixed-line telephony, and they account for around 61% of the top-line revenue. Since KT's digital transformation announced back in 2020, we've been focused on the platform-based digital domain, especially B2C-based digital domain, exemplified by IPTV and the B2B-based digital, which represents cloud and IDC, have benefited from the contact-free habits becoming prevalent following the pandemic and from greater digital demand from the corporate market, to which KT responded swiftly. We've seen greater revenue uptrend versus 2019, the pre-digital era. In sync with digital KT transformation, we plan to expand this domain from 39% as of today to 50% by 2025.
Yet again, in Q3, we've seen meaningful results from the B2B digital domain. In Q3, B2B businesses orders booked amounted to around KRW 1 trillion, reporting a record high quarterly figure. On a Q3 2021 cumulative basis, order book amounted to KRW 2.5 trillion, significantly outpacing 2020's full year amount. Another core business of KT Digico is AI and DX, which was up 29.7% year-over-year. This was mainly driven by full-fledged initiation of the AI contact center business or AICC for short, an expanded user base for IDC and Cloud. For the IDC business, on top of steady revenue stream from current IDCs, we see revenue base expanding on the back of newly opened Yongsan IDC and KT's first branded South Guro IDC.
Also from the DBO business, which we newly launched, we are gaining new clients and building a new basis for further growth. KT recently announced that it will place a full momentum behind the AI business by employing AI-based active conversational technology that enables human-like speech. KT already employs AI technology in our own contact centers and provides AICC to major financial, restaurant, and logistics companies. We are also actively considering to adopt KT's AICC center to the public domain for central and local governments for the benefit of disaster safety management and care for the vulnerable. For small merchants run by a single person, hair salons and small mom-and-pop eateries, we introduced KT AI Secretary that would take reservations, orders, and respond to questions 24/7, all year round, doing what customer centers do.
As such, KT will be the frontrunner in domestic AICC market and launch many services that employ AI technology. We also embarked on AI service robot business with the release of serving robots. This service is currently used by restaurants and cafes, as well as hospitals and golf driving range as it sets the ground for popularizing use of robots. We will continue to enhance the operating platform and launch many different types of new robots so that we may become Korea's frontrunner and robotics service provider. KTDS, one of KT's affiliates, is a software developer and designer who builds IT data systems for clients, and they are broadening our digital business by winning projects on business platform and AI-based predictive systems from financial institutions and government agencies as well.
To strengthen our competitive edge and quickly respond to needs of global customers in the fast-growing global data market, we acquired a global data specialist company called Epsilon, based in Singapore. Epsilon is a company with global infrastructure, technical capabilities, and sales bases all across the world. Through this acquisition, KT will expand its global data business from Asia to North America and Europe, and we expect to win new business customers from both home and abroad. We also saw solid top-line growth, both in terms of size and quality, mainly around premium subscribers from KT's incumbent telecom business. 5G subscribers continued to display an uptrend, with wireless service revenue up 3.8% year-on-year, and wireless ARPU up 2.7% year-on-year, reporting KRW 32,476.
Driven by higher sales of giga-based products and offerings for single member households, broadband Internet business also saw a sustained subscriber expansion. Restructuring of the group business geared towards digital transformation is also ongoing, which drove a significant rise in both revenue and profit of group affiliates. K Bank, after its first turnaround in Q2, reported a net profit of KRW 16.8 billion in the third quarter, recording an annual cumulative profit. Following a successful capital increase last July, subscribers surpassed 6.6 million as of the end of Q3, with total deposits of KRW 12 trillion and lending of more than KRW 6 trillion, which drove a stable loan-to-deposit spread. Also, by offering online mid-price range products and launching products leveraging alliances with other group companies, K Bank is actively broadening its business.
K Bank will continue to expand its product coverage, upgrade its application, seek marketing partnerships, launch diverse loan products, dial up synergies with group affiliates so as to position itself as a differentiated financial platform. In media content, we've completed governance structure around Studio Genie and further enhanced business competitiveness. We completed the acquisition of Hyundai HCN, Hyundai Media, and took equity stake in Korea's number one subscription-based e-book startup, Millie's Library, and also spun off KT Seezn. Studio Genie completed rights offering and its capital base now amounts to KRW 227.8 billion and recently showcased Crime Puzzle, its first original content, as its content production came under full swing. On the back of Millie's Library acquisition, Genie Music will expand its business from music to audiobook and other audio content business with the objective of becoming Korea's best AI audio platform provider.
Audiobook content will be placed first on Genie, the AI music platform, and we plan to produce and add diverse array of audio content as we go forward. By offering Millie's Library via wide-ranging bundled services of KT, we expect growth of subscriber base of respective companies will also be supported. Now moving on to third quarter 2021 earnings results. Total revenue was up 3.6% year-over-year to KRW 6.2174 trillion. Operating profit was up 30% year-on-year, reporting KRW 382.4 billion. Net profit was up 46.9% year-over-year to KRW 337.7 billion. EBITDA was 6.5% year-on-year to KRW 1.2775 trillion. Next on the operating expense.
Operating expense on the back of rise in business expense was up 2.2% year-over-year to KRW 5.835 trillion. Next is on the financial position. Debt to equity ratio as of Q3 2021 was 122.6%, down 10.2 percentage points year-over-year. Net debt ratio was up 1.9 percentage points year-over-year, reporting 33%. Next is on CapEx. CapEx spend in Q3 2021 was KRW 600.7 billion, and Q3 cumulative CapEx was a total of KRW 1.4648 trillion. Amount of orders placed for IT&E equipment was flat year-over-year, but due to COVID-19 pandemic, actual spending somewhat declined. Next, moving on to performances from respective businesses. Wireless revenue was up 3% year-over-year to KRW 1.7947 trillion.
On the back of 5G subscriber growth, wireless service revenue was up 3.8% year-over-year, reporting KRW 1.6978 trillion. As of Q3 end 2021, there was a total of 22,740,000 wireless subscribers. 5G subscribers were 5,610,000, which accounts for 39% of total handset subscribers. Next is on fixed line and IPTV business. Fixed line revenue was down 1.2% on year to KRW 368.4 billion, and sustained growth from enterprise subscriber, VoBB service revenue stream started to take off, significantly mitigating the revenue downfall. Broadband internet revenue saw a subscriber growth up 2.4% on-year to KRW 510.7 billion, driven by active sales of product for single member households and offering of stronger customer benefit.
On the back of enhanced offerings of kids content and launch of OLED TV tab, there was growth in subscribers driving IPTV revenue up 3.1% year-over-year to KRW 473.4 billion. Next is on the B2B business. B2B business was up 6% year-over-year to KRW 727.7 billion. Due to COVID-19 pandemic, infrastructure projects, including global ones, were delayed, and in the process of reorganizing low margin businesses, B2B IT solutions revenue declined. However, on growing data traffic and digital transformation demand inched up, bringing corporate fixed line revenue up 2.7% year-over-year.
For the AI and DX business, revenue posted a steep growth of 29.7% year-over-year, driven by higher AICC revenue following AI solution adoption by the financial sector in new projects in public and financial cloud, and growth in IDC, DBO, Design-Build-Operate business. Next is on group affiliate earnings. BC Card revenue on higher domestic acquiring volume was up 2.9% year-over-year to KRW 888.1 billion. Skylife revenue was up 1% year-over-year to KRW 178.4 billion, driven by MVNO business expansion and higher internet reselling. As one of core businesses of KT digital transformation, content subsidiary revenue was up 24.6% year-over-year to KRW 241.6 billion on the back of rise in platform-based revenue from major companies. That was a brief update on KT's Q3 2021 result.
Ever since it proclaimed transformation from a Telco to a Digico, we are crystallizing the changes as a Digico. In 2021, together with revenue and profit growth, we reorganized the group's business portfolio around B2B and platform, laying the basis for mid- to longer-term growth. We will continue to endeavor to bring success to Digico performance. Last but not least, with respect to the network failure that we experienced previous month, we once again would like to express our commitment that through process improvement, we will endeavor and exert our utmost efforts so that we can operate our network stably. Once again, we look forward to your interest and support. Thank you. For more details, please refer to our earnings presentation deck, which we previously circulated. We will now move on to Q&A.
To give as much chance as possible to as many people as possible, we'd like to ask you to limit your questions to no more than two questions per person. Now, Q&A session will begin. Please press star one, star and one, if you have any questions. Please press star two, that is star and two, if you want to cancel questions. In order to allow as many Q&A chances as possible within the restricted time, we would appreciate only two questions per each participant. The first question will be provided by Hoi Jae Kim from Daishin Securities. Please go ahead.
Hoi Jae Kim (Head of Equity Research)
[Non-English content]
Speaker 6
Hello. I'm Kim Hoi Jae from Daishin Securities. I would like to first ask you a question on your result. If you look at Q3 performance result, it was quite good. Usually when the fourth quarter comes, there are some individual cost impact and non-OP impact that kind of slowed the performance trend. The extent of that did alleviate last year. However, should we expect more significant or any, you know, one-off factors upcoming in Q4? And second, regarding Studio Genie, you've mentioned that you released an original content called Crime Puzzle. What is the lineup for next year as well as do you have any outlook on top line revenue?
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Yes. Thank you for those questions. You asked two questions. First, regarding our Q4 outlook, any seasonality factor or non-OP impacting factors and what our forecast is for Q4.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Now, first factor to mention is that with regards to the network failure that we experienced and the relevant compensation expense that we've set aside, that figure had not been reflected in Q3 numbers. That impact is going to come through in Q4 figure.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
KT traditionally has seen seasonality factors that emerge in Q4. For instance, those would be fees and commissions paid in terms of repair cost, service cost, and IT and outsourcing related expenses that would feed through usually in Q4.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Regarding our projection on one-off upcoming in Q4. Back in 2020, there was impairment that was booked regarding the 28 GHz spectrum. There was quite a significant one-off non-operating expense factor. This year we do not foresee any such massive or significant one-off factor that will come into play. Having said that, usually at the end of the year, there is an accounting-based valuation done on invested equities and assets. There is always a possibility that there may be some slight expense.
Young-Jin Kim (CFO)
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Speaker 6
The second question you asked related to Studio Genie's upcoming lineup for next year and revenue outlook.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
KT, in order to have a very stable backdrop to be able to produce content comfortably, we've recently conducted a rights offering or capital increase in the amount of KRW 175 billion.
Young-Jin Kim (CFO)
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Speaker 6
This year, we started off with Crime Puzzle, and we plan to produce about six different titles. Of those, two titles will be released in the second half of the year. Midnight Thriller is scheduled to be released through OTV and Seezn after end of November.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Next year we are planning to produce about 15 different original content titles, and by 2023, we want to make sure we have capability and system in place that could enable us to produce about 20 different titles every year. Based on those capabilities, we want to make sure that we secure an IP library of, which comprises of about 1000 and about 100 drama IPs by 2025.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
The content that we produce from Studio Genie would of course be distributed through KT Group's platforms such as OTV, Seezn, SkyTV, and Media Genie. We also plan to distribute such content through other platforms as well as program providers, depending on the characteristics of the content.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
You did ask us about our top line outlook for next year, but for the time being, rather than focusing on financial performance for Studio Genie, we are at this point emphasizing laying the appropriate environment for content production as well as driving synergy across the group affiliate.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Next question, please.
Operator (participant)
[Non-English content].
Speaker 6
The following question will be presented by Joonsop Kim from KB Securities. Please go ahead with your question.
Joonsop Kim (Senior Researcher)
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Speaker 6
Hello. I am Joonsop Kim from KB Securities. My first question relates to IDC, which is I would like to understand what the company's take is on the IDC market. We see a lot of players entering into the market. Compared to those other players, what is KT's position and what is your strategy? Second question relates to your OTT service, Seezn. There will be Disney+, which will be soon launched in Korea. Will there be any financial impact on Seezn? With regards to strategy for Seezn, what is your strategic direction?
Young-Jin Kim (CFO)
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Speaker 6
Thank you for those questions. First question relates to KT's IDC positioning and strategy.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
As you've correctly pointed out, if you look at the IDC providers, including global providers, we see the number of players actually increase. I think that is a good testament to the fact that this market outlook is quite bright.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Now, companies are really speeding up their digital transformation. To accompanying that, we have a significant increase in the demand for data center, and there's this explosive growth there. KT as a number one market player, I think we have around 40% market share. We are responding to that demand. In order for us to solidify our market leadership, we will continue to make investments into additional IDCs.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Now, in terms of new IDCs, one has to seek out the appropriate location and site, which is quite time consuming. Providing new IDCs, supplying that into the market, it cannot happen overnight. It cannot happen over a short period of time. Hence, we also developed a branded IDC business model where we provide KT's network and command and control capabilities to other companies' IDCs. We, for the first time, successfully opened the South Guro IDC, which is KT's first branded IDC, and we plan to continue to expand on such business model.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
In the face of such explosive demand growth, we are seeing new opening and new opportunities and various different types of business models, such as, you know, designing, building and operating IDCs. We call this type of model DBO for short, Design-Build-Operate. By adopting this business model, we will continue to strengthen our market dominance.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Second question related to Disney+ launch in Korea and what impact that will have on the outlook of Seezn's financials.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
KT also will launch Disney+ affinity package, alliance package, and in November 12th. We are, at this point, in the process of developing the pricing package as well as promotion for the customers.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Now, KT is well aware that the Korean consumers, you know, level of, I guess, level of demand or requirement when it comes to a global standard content, that they do have high requirement. We are, at this point, developing a very reasonable and best offerings to better fit the needs of the Korean consumers. We believe that it is meaningful and that we are able to provide more options and more choice to the Korean viewers and Korean content. We will be able to provide more selection, and we think that it's meaningful that we can provide such abundant services through this extensive content library of Disney+.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
KT Seezn business also, we have continuously beefed up our content offerings, and we have been able to drive growth with the 5G bundled lineup. Also, we've shifted and changed the governance structure and have placed Seezn under the governance of Studio Genie.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Now, OTT subscribers, depending on the type of content that they want to view, they actually subscribe to multiple OTT services. We think that the launch of Disney+ is not going to have any direct impact on Seezn, per se. Seezn, supported by the overall Studio Genie umbrella, will continue to strengthen its channel as well as competitiveness in terms of its content offerings, so that we may continue to drive growth from this business.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Next question, please.
Operator (participant)
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Speaker 6
The following question will be presented by Hong-sik Kim from Hana Financial Investment. Please go ahead.
Hong-sik Kim (Equity Research Analyst)
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Speaker 6
Thank you. I would like to ask you two questions. First, if you look at your earnings results up to Q3, on the mother company basis, operating profit on a cumulative basis was up by 29%. Considering that there are some expense factors that's upcoming in Q4, investors are a bit concerned. Under the current trend, do you think that you will be able to continue with the upward trend of dividend payout? Q3 CapEx to date has been quite slow. From a bondholder's perspective, this may be something that's positive, but us as an equity investor and equity analyst, it's not something that we could actually welcome wholeheartedly because we feel that in order to drive top line growth, there needs to be investment.
Could you provide some color as to what your outlook for, you know, CapEx planning is like going forward?
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Thank you for those questions. First question related to, in light of the operating profit uptrend, can the market expect a higher dividend payout? That was your question.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
As I said previously, in Q4, there's going to be the network failure related compensation figure that will be reflected and paid out in Q4, as well as some of the seasonality factors. There are no non-OP operating profit items that will have any significant impact this year. The growth in operating profit, we believe, will be connected to increases in dividend.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Responding to your question on the slowness of the CapEx spend, due to the impact of COVID, as well as the shortage of semiconductor supply, it is true that CapEx spend somewhat was pushed back. If you were to look at the size of the CapEx comparing last year's Q3 and this year in terms of the size of the orders placed, it is actually quite flat year-on-year.
Young-Jin Kim (CFO)
[Non-English content]
Speaker 6
Because of those reasons, we think that CapEx spend is going to be focused mostly in Q4. On a per annum basis, we would most likely see a flat CapEx spend on a year-over-year basis. As you have correctly mentioned, CapEx is important in order for us to operate our Telco business in a stable manner and also to bring an improvement in quality as well as, CapEx is important for us to make investment focused on our digital business expansion. We expect CapEx to be spent in accordance with plan.
Young-Jin Kim (CFO)
[Non-English content]
Operator (participant)
[Non-English content] Currently, there are no participants with questions. We'll wait for a second until there is another question.
Young-Jin Kim (CFO)
[Non-English content]
Operator (participant)
Thank you. With no further questions, we would now like to close the Q&A session. Once again, thank you for joining us and giving us your interest as well as questions. This brings us to the end of earnings call for Q3 2021. Thank you.