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KT Corp (NYSE:KT)
Q1 2020 Earnings Call
May 13, 2020, 2:00 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 Fiscal Year 2020 First 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 divisional 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 2020 Q1 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 today's earnings results include pre-audited financial earnings and business results estimates prepared using the K-IFRS standards. Thus, we cannot guarantee the accuracy and completeness of all financial and business performance data other than the fixed past data and note that they may change in the future.

[Foreign Speech]

We will begin with CFO, Kyung-Keun Yoon's opening remarks, followed by 2020 Q1 earnings presentation.

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

[Foreign Speech]

Good afternoon. I am KT's CFO Kyung-Keun Yoon. Despite the difficult business environment, including COVID-19 in the first quarter, it has been a meaningful time, holding [Phonetic] a new Board with new CEO taking office and stable transition of the management amid support for investors and analysts.

[Foreign Speech]

In today's ICT market, which includes telecommunications, 5G is becoming the mainstream. All industries are accelerating the pace of digital transformation, and we are experiencing great changes in our daily life since the outbreak of COVID-19, which includes the greater adoption of the untapped culture.

[Foreign Speech]

With the new management structure in place from the beginning of this year and in tandem with such social changes, KT has created the AI/DX organization and strengthened its B2B organization. The field organization has also transitioned to the regional HQ system in order to quickly respond to various customer needs.

[Foreign Speech]

Reflecting these changes, KT has decided to change how we present our revenue categories from this year. While the revenue structure in the past was driven by key B2C core businesses, including wireless, fixed line and media, starting from 2020, we have two main categories: B2C and B2B.

[Foreign Speech]

The new B2B revenue has three business areas; traditional corporate lease line, corporate IT solution, which includes SI business and AI/DX, which includes IDC and cloud business.

[Foreign Speech]

The product revenue has also been simplified by excluding the SI business to represent only the handset revenue. Moreover, we have separated the earnings performance of KT and its affiliated group companies to more clearly present the performances of individual group companies.

[Foreign Speech]

We expect to further raise your understanding of the KT group with the realignment of the revenue categories.

[Foreign Speech]

Let me now present our first quarter earnings performance. Q1 total revenue was KRW5.8317 trillion, a similar level on year, and while handset revenue fell 6.9% Y-o-Y due to the decline in the handset sales volume from the COVID-19, service revenue grew 1% Y-o-Y with stable performances from core businesses, including wireless, Internet and media, as well as the growth of the B2B and AI/DX businesses.

[Foreign Speech]

Operating profit was KRW383.1 billion, down 4.7% on year with a small decline in the profits from group companies due to the impact of COVID-19. Net income was KRW226.6 billion, down 12.8% Y-o-Y, and EBITDA was KRW1.2958 trillion, down 1% Y-o-Y.

[Foreign Speech]

On the next page, I will talk about our operating expense.

[Foreign Speech]

In 2020 Q1, operating expense was KRW5.4486 trillion, up 0.3% on year through continued cost controlling efforts.

On the next page, I will explain KT's financial highlights.

[Foreign Speech]

As of the end of 2020 Q1, debt to equity ratio was 116.5%, down 9.1 percentage points on year and net debt ratio was 37.6%, up 10.2 percentage points on year.

Next, I will talk about our capex.

[Foreign Speech]

At the beginning of this year, we presented our annual capex guidance to be around KRW3.1 trillion. Capex in the first quarter was KRW406.9 billion, which is 13.1% of the annual plan.

[Foreign Speech]

As we are in the second year of launching the 5G service, KT plans to focus on expanding the coverage to the outdoor shadow and indoor areas to improve its user service quality.

Now on each business.

[Foreign Speech]

Wireless revenue was up 1.9% on year to KRW1.7357 trillion. Of this, wireless service revenue was up 2.2% on year to KRW1.6324 trillion, backed by the increasing number of prime subscribers since the launch of 5G and in spite of the great decline in roaming revenues as a result of the COVID -- coronavirus outbreak.

[Foreign Speech]

In Q1, total number of wireless subscribers reached 21.980 million, with a net addition of 181,000 MNO subscribers. Since starting the world's first 5G service in April 2019, as we enter the second year, we have 1.780 million 5G subscribers.

[Foreign Speech]

KT has been leading the market with innovative tariff plans. And in the first quarter, we have expanded our 5G age group, with the launch of the 5G Y Teen [Phonetic] tariff plan for the teens and the Y Super Plan for the 20 [Phonetic]. In particular, within one month of the launch of the Super Plan Plus, the new tariff plan with a variety of content benefits for video, music, VR and etc., have been positively received with more than half of new 5G subscribers opting for this plan.

[Foreign Speech]

Also the 5G streaming game service currently in open beta, has surpassed 40,000 subscribers. After the service upgrade, daily average game playing time has increased by around 40% and the number of weekly visitors has increased close to two-fold. The service is scheduled to be officially released as a monthly fixed rate subscription offering in the first half.

[Foreign Speech]

KT will cement its leadership by strengthening its fundamental 5G competitiveness and differentiated 5G service offering and secure the growth momentum.

[Foreign Speech]

Next, fixed line and IPTV businesses.

[Foreign Speech]

Fixed line revenue was down 7% Y-o-Y to KRW372.5 billion with a decline in subscribers. In broadband Internet, KT reinforced its Number 1 position, fueled by the increase in the number of GiGA Internet subscribers. Broadband Internet revenue rose [Phonetic] 0.5% on year to KRW502.5 billion, with the continued growth in GiGA Internet.

[Foreign Speech]

With the increase in Wi-Fi connection in the future, we will broaden our customer base by evolving our services to cater to the changing trends in the Internet usage.

[Foreign Speech]

IPTV revenue is maintaining its robust double-digit growth. With the continued increase of high-quality subscribers, revenue grew 11.9% on year to KRW417.7 billion.

[Foreign Speech]

With the greater adoption of the untapped trend, KT's media service is creating changes as a integral part of our customers' daily lives.

[Foreign Speech]

KT has strengthened its market leadership by quickly responding to customer needs with the kids-lab [Phonetic] service, specializing in the kids segment, home-schooling affiliated content and AI-based English education service for the opening of the online schools and the industry's first membership program for kids.

[Foreign Speech]

Moreover, the Super VR, which attracted much interest with the launch of the Korea's first 4K wireless VR service in 2019, showcased the 8K VR streaming for the first time in the world. With the COVID-19 affecting outdoor activities, March's monthly usage volume increased by 60% and per subscriber average usage time increased by 20% as well.

[Foreign Speech]

Seezn, the new OTT service launched last November, is showing its potential by surpassing 2.24 million MAU within just four months. Seezn is the only OTT service in Korea that has all the domestic broadcasters' content, such as terrestrial [Phonetic], cable TV and general programming channels and we will further strengthen its competitiveness in the future.

[Foreign Speech]

Next is the B2B business.

[Foreign Speech]

B2B revenue was KRW674.8 billion, up 8.22% on year.

[Foreign Speech]

The B2B business' value as a new growth driver has been confirmed with the growing demand from companies for digital transformation.

[Foreign Speech]

KT in particular has a competitive edge as Korea's leading IDC operator with 12 Internet data centers. Consequently, the growth was led by the increase in AI/DX revenue by 28.5% on year with the greater sales of the cloud service to public and financial sectors.

[Foreign Speech]

Furthermore, Korea's Number 1 AI GiGA Genie attracted more than 2.3 million subscribers and showing tangible progress by leading the AI station market, including AI apartments and hotels.

[Foreign Speech]

Within the B2B market, a new opportunity to leverage the AI technology is opening with the acceleration of the digital transformation from COVID-19 and the greater need from companies to build a business environment to increase productivity. KT plans to lead the B2B market by assisting the innovation of other industries with the channel infrastructure and know-how in the B2B market that it has built over a long period of time and combining its leading edge network and AI/DX capability.

[Foreign Speech]

Next, earnings performances of key group companies.

[Foreign Speech]

BC Card revenue was KRW799.4 billion, down 7.7% Y-o-Y due to the reduction in domestic merchant fees and the decline in the credit card usage amount from the coronavirus impact. Skylife revenue was KRW167.9 billion, down 1.6% Y-o-Y due to the decline in satellite TV subscribers.

[Foreign Speech]

Contents subsidiaries revenue was KRW177.9 billion, up 12% on year, fulfilling its role as the growth engine for KT group companies with the increase in GENIE Music subscribers and the growth in KTH T-commerce business.

[Foreign Speech]

KT Estate's revenue was KRW106.7 billion, down 8.4% on year, due to under-performances of the hotel and leasing businesses from COVID-19 impact.

[Foreign Speech]

This brings us to the end of KT Group's first quarter earnings results. Presently, the world is waging a fight with an invisible enemy called the COVID-19. While there is some impact to the business plan and field operations than what we had initially planned at the beginning of the year, we are exerting efforts to minimize the negative impacts with the growth of our core businesses and efficient cost execution.

[Foreign Speech]

Now is the time for us to prepare for the post-COVID-19 era. Along with a greater prevalence of the untapped culture, we see demand for digital transformation in our daily -- in our cherished [Phonetic] daily activities that we have been taking for granted. Crisis and challenge await, but rather, this is an opportunity for KT. Backed by KT's leading network quality and digital capabilities, we will quickly respond to customer needs and assist the changes in people's daily life and the innovation of other industries.

[Foreign Speech]

In line with the management direction of our new CEO, KT will turn this adversity into an opportunity by focusing on customer-centric innovations and profitability enhancements. I ask for great interest and support from you, investors and analysts. Thank you.

[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 provided by Hoi Jae Kim from Daishin Securities. And the next question will be provided by Hong-sik Kim from Hana Financial Investment. Please go ahead with your question.

Hoi Jae Kim -- Daishin Securities -- Analyst

[Foreign Speech]

Good afternoon. I have two questions. My first question is related to your dividend policy taking into consideration the one-off issue. I believe that the dividend payout ratio is at around 40%. So can you provide additional color to what the dividend would look like in the future?

And my second question is related to your performance in wireless service. You have already -- have successfully done the turnaround for the wireless service revenue, and your wireless ARPU is higher compared to other two companies, and that is why I am interested in what sort of guidance you can share with the market related to the KT's performance in wireless service. If you can give us some information related to the outlook for our 5G subscriber base number or what ARPU or revenue would look like? That would be very helpful. Thank you.

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

[Foreign Speech]

To address your first question on the dividend policy for next year, currently, the management and the Board of Directors have a consensus that we need to actually come up with a dividend policy that is more predictable for the market. And based on this consensus, the BoD and the management are currently discussing the mid-term dividend policy outlook. And once we have closed discussion, and this is confirmed, we will communicate with the market as soon as possible.

[Foreign Speech]

And to address your second question related to the wireless service revenue and ARPU, first of all, thank you very much for those kind words. But, to be frank, we believe that we need to do better. And in respect to some positive points related to the wireless service, compared to the past, we see a continued improvement in the areas of net additions of handset subscribers.

[Foreign Speech]

And furthermore, since the launch of KT's 5G services, we are currently maintaining a much higher market share in 5G compared to the market share we have for the LTE handsets, and such efforts have fundamentally helped us to make the turnaround as early as possible. However, we do believe that we need to further improve the growth potential of our wireless business. And at present, we continue to maintain a very high ARPU for the new 5G subscribers. But as I have mentioned previously related to the new tariff plans that we have announced and are selling to the market, we are using these upselling opportunities to continue to do better.

[Foreign Speech]

And furthermore, with the impact of COVID-19, we have seen a drop in the roaming revenue and also a slowdown in the growth of net additions, but we continue to see growth momentum in the 5G services. And in the second half, we also had a greater line-up of handsets available and we will also anticipate that the growth rate of 5G subscribers will also pick-up pace in the second half as well. Of course, on a full-year basis, our growth rate may be slightly below what we had anticipated. But in terms of revenue and ARPU, we believe that we will continue to grow in these two areas.

[Foreign Speech]

And moreover, we had actually forecasted that by the end of 2020, in terms of the growth rate on a handset basis that we can see a growth of around 25% to 30%, but we believe that the upper -- higher level, the 30%, may not be achievable.

[Foreign Speech]

And so I would say that you should assume the growth rate to be around 25%.

Hoi Jae Kim -- Daishin Securities -- Analyst

[Foreign Speech]

Operator

[Foreign Speech]

The next question will be provided by Hong-sik Kim from Hana Financial Investment. Please go ahead with your question.

Hong-sik Kim -- Hana Financial Investment -- Analyst

[Foreign Speech]

Thank you. And I have two questions related to the profit outlook for the company. Related to the first question, I want to actually know a little bit more about what the outlook of the KT stand-alone profit will be on a full-year basis. I know that originally, we had anticipated KT to actually post a higher depreciation costs, but that wasn't the case in Q1, that as much as we anticipated. As a result, we're seeing a very better-than-expected performance when it comes to posting our operating profit, and you have enjoyed a Y-o-Y growth. But can you give us additional information related to what the stand-alone KT's full-year operating profits would look like and also, if possible, give a little bit more information to us related to what the depreciation will be for this year.

My second question is related to the overall turnaround that KT will be recording. And of course, in Q1, it did not happen. But of course, if you look at what's going to happen in Q2, Q3, you'll be starting off with a low base effect. So can you actually give us in terms of how we should be looking at the KT's bottom-line performance in 2020?

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

[Foreign Speech]

You asked two questions. But since they all deal with profit, I'll just give you the answer for both. And if you look at what's happening for this year, KT's primary focus is to improve its bottom-line. For our labor costs and depreciation, we will control it at a 1% to 2% level, and we also have to deal with the deferral effect of the last year's selling expenses, but we believe that we'll be able to overcome this. And thus, we will continue to do a very tight cost control in terms of reducing the marketing expenses as well. And so -- in so doing, in terms of stand-alone basis, we will exert great efforts so that we will be maintaining the performance in profits to last year's level.

Hong-sik Kim -- Hana Financial Investment -- Analyst

[Foreign Speech]

Operator

[Foreign Speech]

Unidentified Participant

[Foreign Speech]

Operator

[Foreign Speech]

The next question will be provided by Seung Lee [Phonetic] from Citigroup. Please go ahead with your question.

Seung Lee -- Citigroup -- Analyst

[Foreign Speech]

Thank you for this opportunity. This is the first earnings call we are having after the appointment of the new CEO, Mr. Hyeon-Mo Ku and thus I'm interested to know in terms of KT's strategic direction, with the new CEO, have there been any new changes? Are there any specific areas that KT is now focusing on?

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

[Foreign Speech]

When you talk about the key focus of our new CEO, and to do this by business, in terms of the wireless, the focus is to really realize our market stability in 5G and to make sure that we are very prudent in terms of how we present our products and marketing, so through product and marketing differentiation, to be able to drive our revenue and ARPU.

If we move on to fixed line, we want to leverage the leadership that we have in GiGA Internet and to continue to drive the growth of IPTV and also to expand our GiGA Genie AI platform.

Let me move on to the B2B AI/DX area. This is where we believe that it's going to serve as a new growth driver for KT. And for the Group management, in terms of our business size, our capabilities, growth and synergy, taking all these into consideration, we will continue to be working on improving our portfolio.

[Foreign Speech]

And in the near future, as soon as feasible, our new CEO will communicate with the market related to the overall corporate vision, strategy and shareholder return policy.

Seung Lee -- Citigroup -- Analyst

[Foreign Speech]

Operator

[Foreign Speech]

The next question will be provided by Taewon Kim from UBS Securities. Please go ahead with your question.

Taewon Kim -- UBS Securities -- Analyst

[Foreign Speech]

Thank you for the opportunity. And I have a question related to the dividend policy. I have heard that the company is considering also doing a quarterly dividend payout. And my fundamental question is why the company is considering quarterly dividend payment? Is it possibly because of the dividend windfall that you can get and ultimately to be able to stabilize KT's austere prices, but for the market investors, what's most important is really the total annual dividend payout amount. And so just wondering if you can actually share the management view on whether it's a quarterly dividend payment, whether we can anticipate a full-year dividend payment amount to increase.

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

[Foreign Speech]

I think that there was a misunderstanding of what I commented earlier. When I mentioned our dividend policy going forward, I said mid term, not quarterly dividend payment. And so, just to repeat what I said, that once the company is able to finalize its mid-term dividend policy outlook, we will reach out to the market as soon as possible and communicate what we have decided.

Taewon Kim -- UBS Securities -- Analyst

[Foreign Speech]

Operator

[Foreign Speech]

Kyung-Keun Yoon -- Executive Vice President and Chief Financial 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 2020 first quarter earnings conference call.

Duration: 51 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

Hong-sik Kim -- Hana Financial Investment -- Analyst

Unidentified Participant

Seung Lee -- Citigroup -- Analyst

Taewon Kim -- UBS Securities -- Analyst

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