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KT Corp (NYSE:KT)
Q4 2019 Earnings Call
Feb 6, 2020, 1:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

[Foreign Speech] 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 2019 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 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.

Seung-Hoon Chi -- Investor Relations Officer

[Foreign Speech]

Good afternoon. I'm Seung-Hoon Chi, KT's IRO. Let us now begin KT's 2019 annual earnings presentation. This earnings release call is being webcasted via our website and you can refer to the presentation slides as you listen in on the call.

[Foreign Speech]

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

Kyung-Keun Yoon -- Executive Vice President and Chief Financial Officer

[Foreign Speech]

Good afternoon. I'm KT's CFO, Kyung-Keun Yoon. I will first present key earnings performance by business division and close with the business direction for 2020.

[Foreign Speech]

Wireless revenue achieved quantitative and qualitative growth with the launch of the 5G commercial service. 5G subscribers that the initial target of 10% of the total mobile telecom subscribers with 1.42 million subscribers. Wireless service revenue and ARPU, which had been on a downward cycle, due to the impact of greater tariff discount have also been growing every quarter with the increase in the 5G subscriber base. Wireless ARPU in Q4 has turned around on an annual basis up 2.1% on year.

[Foreign Speech]

Currently 5G coverage has been expanded to 85 cities, provinces and to home level nationwide. In 2020, we aim to focus on improving the quality directly experienced by our subscribers by expanding the in-building coverage, centered around public places and large buildings.

[Foreign Speech]

Moreover, we plan to offer new telecommunications experience, leveraging the 5G high capacity and ultra-low latency by launching the 5G HD service within this year.

[Foreign Speech]

With the launch of high quality content including the 5G game streaming and immersive media, Super VR and 5G virtual and immersive music, as well as strengthening the new customer communication services including Real 360 and other, we aim to drive experiential service differentiation.

[Foreign Speech]

And in the area of 5G B2B by leveraging the enhanced security and network performance, we plan to expand the B2B experience to other industrial sectors and making a tangible inroads in that business, including our 5G collaboration robot and smart factory.

[Foreign Speech]

In the Internet business, GiGA Internet steady growth continued. GiGA Internet, which had become the standard for ultra high-speed Internet just five years since its launch, recorded 5.47 million subscribers, with a net addition of 580,000 subs in 2019 and grew to represent 61% of the total 8.96 million Internet subscribers.

[Foreign Speech]

With the greater lineup of high quality services that require high volume traffic and increasing number of connected devices in the home, GiGA Internet together with 5G are expected to lead the premium telecommunications market in the future.

[Foreign Speech]

IPTV business also continued its double-digit growth. IPTV subscribers reached a total of 8.35 million subscribers, with a net addition of 500,000 subs in 2019. With the greater number of net subscribers, coupled with the platform income from VOD and advertisements, IPTV revenue grew 15.4% Y-o-Y to KRW1.6 trillion on a non-consolidated basis.

[Foreign Speech]

KT has recently launched the new OTT Season, which enables users to receive AI based content recommendations and experience high definition video and high resolution audio. Season is receiving positive responses from customers by surpassing 100,000 subscribers in just two weeks. In the future, we plan to raise the competitiveness of the entire media business by strengthening the AI based one-on-one pillar services and differentiated content.

[Foreign Speech]

Korea's number one AI platform, GiGA Genie surpassed 2.14 million subscribers as of the end of 2019. The AI set-top box GiGA Genie is leading the growth of the IPTV media business and is expanding into spacial services such as AI hotel, AI apartment and in-car infotainment. The convergence of AI without only future growth businesses, but also with existing businesses will increase the efficiency of the entire KT's business. And we plan to actively faster the development of the AI platform through alliances with a wide-ranging providers.

[Foreign Speech]

From now on, I will present the 2019's business performance.

[Foreign Speech]

In 2019 revenue was KRW24,342 billion, up 3.8% on year on a consolidated basis. Service revenue was KRW20,246.3 billion, up 1.3% on year, thanks to the improved wireless service revenue backed by 5G success.

[Foreign Speech]

Operating profit was KRW1,151 billion, down 8.8% on year, due to the increases in 5G marketing expenses during the initial launching period. Net income was KPW669.3 billion, down 12.2% Y-o-Y and EBITDA was KPW4,776.7 billion, up 5.1% Y-o-Y. On the next page, I will talk about our operating expense.

[Foreign Speech]

In 2019, operating expense was KRW23,191 billion, up 4.5 4% on year. The competition is from the recent market stabilization, marketing expenses increased by 18.4% Y-o-Y, due to the deferred marketing expenses spent during the initial 5G service rollout. Starting from Q4 2019, our accounting rule has changed to deduct the redeemed subscriber membership points from the revenue instead of recognizing the amount as a marketing expense. Consequently, Q4 marketing expenses decreased by 3.8% Q-o-Q. On the next page, I will explain KT's financial highlights.

[Foreign Speech]

As of the end of Q4 2019, debt to equity ratio was 124.3%, net debt ratio was 32.9%. Next I will talk about our capex.

[Foreign Speech]

Total capex spent in 2019 was KRW3,256.8 billion. Now on each business.

[Foreign Speech]

Wireless revenue was up 0.2% Y-o-Y to KRW6,970.7 billion. Of this, wireless service revenue was, up 0.7% Y-o-Y to KRW6,566.3 billion backed the increasing 5G subscribers.

[Foreign Speech]

Next fixed line business.

[Foreign Speech]

Fixed line revenue was down 1% on year to KRW4,697.1 billion with continued decline in the fixed line usage.

[Foreign Speech]

Broadband Internet in particular saw continued subscriber growth from GiGA Internet with its revenue at KRW2,15.7 billion, up 0.9% on year and next is media and content business.

[Foreign Speech]

Media and content revenue was up 13.5% on year to KRW2,740 billion. Media revenue was up 11.2% on year to KRW2,159.7 billion from the growing IPTV subscriber base. Content revenue was up 23.1% on year, thanks to the growth of Genie Music subscribers and the growth of the KTH T-commerce business.

[Foreign Speech]

Next is financial and other services.

[Foreign Speech]

Financial revenue was down 1% on year to KRW3,411.8 billion on reduction in merchant fees for BC card. Other service revenue was KPW2,426.7 billion a similar level on year.

[Foreign Speech]

Lastly, I will share KT's business guidance for 2020. KT's 2019 consolidated revenue was KRW24.3 trillion and capex was KRW3.26 trillion. The 2020 guidance for the revenue is KRW25 trillion on a consolidated basis and capex is KRW3.1 trillion on a non-consolidated basis through prudent investments and service differentiation, we will focus on improving our fundamentals.

[Foreign Speech]

KT's BOD has chosen Hyun-mo Koo as the final candidate for the next CEO of KT. In accordance with the Articles of Incorporation, the next CEO candidate was chosen after a three-level verification, by the governance committee, CEO Candidate Review Committee and Board of Directors and the appointment as the new CEO is to be confirmed at the General Meeting of shareholders in March.

[Foreign Speech]

Going forward, KT will strengthen the competitiveness of core businesses through its 5G leadership and customer-centric services and plans to accelerate business innovation by applying new technologies, including AI. Also we will avoid some competition based on cost and tariff for the existing telecom business and endeavor to improve both growth and profitability. At the KT Group level, we will secure new growth momentum and strengthen the Group's competitiveness by adjusting our business portfolio.

[Foreign Speech]

For further details, please refer to the earnings presentation material we have provided. And now we will start the Q&A session.

Questions and Answers:

Operator

[Foreign Speech] Now Q&A session will begin. [Operator Instructions] [Foreign Speech] The first question will be presented by Hoi Jae Kim from Daishin Securities. And the following question will be presented by Joonsop Kim from KB Securities. Mr. Hoi Jae Kim. Please go ahead, sir.

Hoi Jae Kim -- Daishin Securities -- Analyst

[Foreign Speech]

I have two questions. My first question is related to the profit outlook for 5G services on a stand-alone basis. I know, that you also have to consider the growth of the subscriber base for 5G, as well as the required capex and the marketing expenses. But around when do you think that your 5G services will turn a profit?

My second question is related to the newly -- new candidate for the CEO and of course the appointment will be finalized at the upcoming meeting of -- general meeting of shareholders. But if you can share to the extent that's possible, can you talk about the KT's future business direction that would be led by your new CEO?

Kyung-Keun Yoon -- Executive Vice President and Chief Financial Officer

[Foreign Speech]

In respect to your first question about the profit outlook for 5G business, for the 5G business, of course, internally we are entertaining various possibilities, but all of our projections will also be dependent on the market situation, the handset situation, as well as the B2B market situation as well. And so, currently there are still many uncertainties that are related to the outlook for 5G business.

[Foreign Speech]

And to the extent what I can share with you today that is that in terms of our focus, we are going to focus on trying to become more profitable and will drive -- continue to drive our profitability. We will stay away from competing based on marketing expenses, related to cost, as well as tariffs and we will compete based on service differentiation going forward. We also want to make some meaningful progress in the B2B business as well, ultimately to make sure that 5G serves as a positive profit source for the company.

[Foreign Speech]

And moving to your second question about the business direction for the new CEO. As you have correctly noted, the appointment has not been finalized, his appointment will be confirmed at the upcoming general meeting of shareholders. And thus it is not really possible to actually talk about the detailed business strategy that would be laid out by the new CEO. But going back to what I said earlier during the earnings presentation, the company for 2020, what we aim to do is to really focus our business to be more customer-centric and to focus on driving growth, as well as profitability.

[Foreign Speech]

In the existing wireless and media business, the focus is to really base our competition through service differentiation and in so to grow these businesses. And we have also our focus -- we're also focusing on the B2B AI and new business areas. And ultimately the primary focus is to raise the customer value and to provide services that the customers' desire. And in so doing, we'll continue to become a market leader and identify new growth engines.

[Foreign Speech]

And at the KT Group level, it is very much important that we realign our portfolio, so that the businesses are actually synergistic and enhance the internal value of the company, but for further details and further direction, we will actually set aside a separate time after the new CEO has taken office.

Hoi Jae Kim -- Daishin Securities -- Analyst

[Foreign Speech]

Operator

[Foreign Speech] The next question will be presented by Joonsop Kim from KB Securities. And the following question will be presented by Neil Anderson from HSBC. Mr. Joonsop Kim, please go ahead, sir.

Joonsop Kim -- KB Securities -- Analyst

[Foreign Speech]

I have two questions. Thank you for this opportunity. My first question is related to the video OTT service season that you have recently launched, which you have mentioned that the subscribers growing very quickly, to the extent you can share, can you actually talk about the future market or landscape -- competitive landscape, as well as key milestone? And lastly, some key things that we should be looking at going forward?

Second question is related to the outlook for the real estate business of KT. Specifically, I'm also interested in knowing the progress that you're making for the Jayang-dong business development?

Kyung-Keun Yoon -- Executive Vice President and Chief Financial Officer

[Foreign Speech]

Season was launched as of end of November last year and in just two weeks we were able to attract 100,000 paid subscribers. And we also see the actual usage rate growing in a very meaningful way and so we have to say that the initial response is quite favorable.

[Foreign Speech]

And season, in terms of the content are we -- KT season has a much richer lineup of content, compared to what is currently being offered by our competitor OTT providers. We are leveraging our AI technology to be able to do very custom personalized one-to-one recommendation, wherein our contents are high-definition. And if you look at our audio, music streaming service, we also provide high resolution audio and that is why our OTT service is quite distinct from the past OTM service that has been provided in the past, and that is why we believe that we're getting positive feedback from our customers.

[Foreign Speech]

Whether we're talking about the media business at home or abroad, we see a great emergence of many different OTT providers or say ongoing M&A, as well as the customer wanting more personalized media platform. And so currently the media market is going to create changes.

[Foreign Speech]

KT's media strategies basic direction is really to serve the needs of our customers or they want more personalized media platform and they also want more intelligent services. And so from this respect, our season is much -- is quite well positioned to cater to the personalization needs of the customers and Season is also pursuing open platform. This means that we are proactively considering cooperation with OTT providers at home and abroad.

[Foreign Speech]

Going forward, we will continue to make efforts so that we continue this market leadership in the media sector. We are open to various possibilities in continuously pursuing this media business.

[Foreign Speech]

In respect to your second question about the real estate development in Jayang-dong, for this project as of 2019, we have already completed in current investment. We have already set up the PSP and are waiting for more direction from the government, because there has been a change to the government policy direction of what -- related to the real estate development. And that is why the way we will be actually pursuing this development project -- overall timing and the schedule is still not 100% confirmed.

[Foreign Speech]

For KT, this is nevertheless, we are continuously maintaining the overall basic direction for this business. So the framework has not actually changed, but for more details we will set up a separate communication channel to deliver more information to at a later time. I would also like to say that since our 2018, KT has been pursuing hotel leasing business and we are seeing meaningful revenue growth from this area and that is why we will seek to a more meaningful growth from the leasing revenue as a result of our hotel development business going forward.

[Foreign Speech]

Next question please.

Operator

[Foreign Speech] The next question will be presented by Neil Anderson from HSBC. Mr. Neil Anderson, please go ahead, sir.

Neil Anderson -- HSBC -- Analyst

Thank you, good afternoon. I have two questions please, both on 5G. The first relates to the millimeter wave spectrum that KT has. I was wondering when you plan to start deploying millimeter to weight technology. And when you expect handsets to become available that will support that?

Second is relating to the enterprise side. And I was wondering if you've seen any early interest or sort of -- which types of corporate or enterprise appear to be most interested in 5G after these few months of launch. Thank you. [Foreign Speech]

Kyung-Keun Yoon -- Executive Vice President and Chief Financial Officer

[Foreign Speech]

To answer your first question related to the 28 gigahertz service, we actually don't have a fixed capex confirmed yet, as well as when we will be rolling out the service.

[Foreign Speech]

And so currently, what we are doing is we're working with vendors and we are conducting field testing for the time being.

[Foreign Speech]

And so, in respect to the availability of the handsets, chipsets and the devices, all these timings are still not fixed. And what we'll do is, once we have a confirmed schedule or the availability, we'll come back to the market and communicate the details to you.

[Foreign Speech]

And moving to your second question related to the 5G base B2B business, we have already -- we have been working with various partners to identify applicable use cases for 5G B2B. And as of the fourth quarter 2019, we have already identified 150 use cases.

[Foreign Speech]

Since launching the dedicated 5G B2B service as of April 2019, on a year-end basis end of December, we have already secured 53 customers.

[Foreign Speech]

And to shares some company names, we have the Hyundai Heavy Industries. And what we are doing with this company is for Hyundai to be able to be the world's first 5G shipyard. Another customer can share is Samsung Electronics and with Samsung Electronics, we are currently trying to develop world's first dedicated corporate 5G build service.

[Foreign Speech]

Operator

[Foreign Speech] The next question will be presented by Alastair Jones from New Street Research. Please go ahead with your question.

Alastair Jones -- New Street Research -- Analyst

Hi, there. Thank you for taking the question. Two quick questions if you don't mind, just firstly on the take-up of 5G, just seen that the net adds obviously in the last few months of the year of 2019 did slow down quite considerably. I was just wondering, if that was expected and what really was driving that? And if you've got any guidance at the end of this year, are you still expecting a significant chunk of your handsets to be on 5G by the end of 2020 or the slowdown changed your view on that?

The second thing you mentioned in your presentation was just a change in accounting rules relating to points that are redeemed. I was just wondering if you can give any clarity as to how much this impact has in quarter on a seamless just only affected your mobile service revenue, is that correct? Thank you very much. [Foreign Speech]

Kyung-Keun Yoon -- Executive Vice President and Chief Financial Officer

[Foreign Speech]

Let me address your first question related to the 5G subscriber growth. In Q4 2019, you asked whether or not the company had already anticipate and expected this slowdown in the net addition growth? Yes, we did expect a slowdown that was because in Q4 there was market stabilization, as well as the release of the new iPhone and so the pace was actually expected.

[Foreign Speech]

And also in terms of the 5G subscriber number outlook for 2020, you -- we have to factor in the market competition situation, as well as the handset lineup availability and the release are scheduled for the handsets as well. And thus our outlook for 2020 in terms of the 5G subscribers and just to talk about on a handset basis, we believe that it will grow to around 25% to 30%.

[Foreign Speech]

And to answer your second question related to the accounting rule change for the membership point redemption, from this quarter what we had previously recognized as a cost is now being deducted from these service revenue. Once the membership points are redeemed, it doesn't impact our operating profit, it will just be deducted from the service revenue.

[Foreign Speech]

And so what happened in the fourth quarter of 2019 was one off, because we had to actually retroactively deduct the full-year amount from the service revenue. Going forward, what we will do is to add to a monthly deduction and that amount will not be huge.

Seung-Hoon Chi -- Investor Relations Officer

[Foreign Speech]

Operator

[Foreign Speech]

Seung-Hoon Chi -- Investor Relations Officer

[Foreign Speech]

Operator

[Foreign Speech] Currently, there are no participants with questions. We will wait for a second until there is another question.

Seung-Hoon Chi -- Investor Relations Officer

[Foreign Speech]

If there are no more questions, we will close the Q&A session. Thank you once again for your questions and interest. Thank you participants for your time, despite your busy schedule. And we will close the 2019 Annual Earnings Conference Call.

Duration: 50 minutes

Call participants:

Seung-Hoon Chi -- Investor Relations Officer

Kyung-Keun Yoon -- Executive Vice President and Chief Financial Officer

Hoi Jae Kim -- Daishin Securities -- Analyst

Joonsop Kim -- KB Securities -- Analyst

Neil Anderson -- HSBC -- Analyst

Alastair Jones -- New Street Research -- Analyst

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