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Korean Telco (NYSE:KT)
Q2 2020 Earnings Call
Aug 07, 2020, 2:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Seung-Hoon Chi

[Foreign language] Good afternoon, I am Seung-Hoon Chi, KT's IRO. This earnings release call is currently being webcasted via our website, and you can follow the slides as you listen in on the call. Let us now begin KT's Q2 2020 earnings presentation.  Before we begin, please note that today's presentation includes financial estimates and operating results under the IFRS standard, K-IFRS standard that is, and has 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 change.  Now I would like to invite our CFO, Yoon Kyung-Keun, for his welcoming remarks and presentation on Q2 2020 earnings.

Yoon Kyung-Keun -- Chief Financial Officer

[Foreign language] Good afternoon. I am Yoon Kyung-Keun, CFO of KT. In the midst of an unprecedented COVID pandemic, we now -- we have now come to the end of the first half of 2020. Despite formidable business environment, we saw robust subscriber growth from our core telecom business and achieved high revenue growth from the AI and DX businesses, including cloud, data center and blockchain.

And we were able to normalize K-Bank and also was able to strengthen our media business-related capabilities and was able to identify new growth opportunities in 5G and B2B platform, keeping pace with the fast-changing world brought on by the pandemic.  Now, on to the second-quarter 2020 business results. Q2 total revenue was down 3.6% year on year, coming in at KRW 5,876.5 billion. Notwithstanding steady performance from core telecom business, i.e., wireless, media and B2B, on subdued financial and real estate business impacted by COVID-19, service revenue was down 0.5% on year, and on lower handset sales following the stabilization of the market, handset revenue declined 22.2%.  On COVID-19, profit from group affiliates showed somewhat of a decline but supported by efficient spending and efforts focusing on profitability. Operating profit was up 18.6% year on year, coming in at KRW 341.8 billion.

Net profit was up 2.2% year on year, reporting KRW 207.6 billion, while EBITDA reported KRW 1,252.6 billion, up 5.1% year on year.  Next is on the operating expense. Q2 operating expense was down 4.7% on year to KRW 5,534.7 billion on sustained efforts on cost controls and efficient spending.  Next is on the financial position.  Debt-to-equity ratio as of Q2 end was 121.2%, down 1.9 percentage points year on year. Net debt ratio increased 6.1 percentage points on year to 32.8%.  Next is on capex. Out of this year's capex guidance of KRW 3.1 trillion, capex spend up to the second quarter amounted to KRW 967.3 billion.

COVID-19 does have some impact on the speed of 5G coverage build-out, but we will continue to expand 5G coverage in the remaining second half, focusing on our shadow zones and underground subways so that users can feel the difference.  Next, I will elaborate on the performance and outlook for respective business segment.  Wireless revenue was up 0.6% year on year to KRW 1,722.5 billion. Despite the decline in roaming revenue on COVID pandemic, with increases in high-quality 5G subscribers, wireless service revenue was up 0.2% year on year, reporting KRW 1,615.5 billion. Apart from membership-related accounting treatment changes, service revenue increased more than 2% year on year on the same basis, in line with the plan for wireless business growth.  On solid IoT business, Q2 MNO subscribers increased 295,000, recording highest rise since the first quarter of 2018, with total wireless subscribers coming in at 22,120,000 users. As of Q2, there are 2.24 million 5G subscribers, reporting 16% penetration against handset subscriber base.  We continue to see great responses for super plan plus rate plan that offers wide-ranging content benefits, including videos, music and VR.

Super plan plus caters to the needs of 5G subscribers who value media-related experiences and with more than 60% of new 5G subscribers choosing this product, positive feedback from customers continued.  We are also bringing changes to the product portfolio and distribution structure to better embrace the untapped environment through online direct rate schemes and launching of one-minute order and one-hour delivery services. With the 5G era upon us, we will continue to bolster our core competitiveness, bringing more choice and satisfaction to our customers and be an example of growth.  Next is on the fixed-line and the IPTV business. Fixed line telephony revenue was down 7% year on year to KRW 372.2 billion on subscriber declines, while broadband internet revenue declined 1.2% on year to KRW 496.7 billion on the back of stronger retention activities and customer care given to Giga internet subscribers whose contract expiration was coming due.  In June, since achieving 9 million broadband subscribers, we launched Giga Wi, a novelty WiFi service that offers both speed and coverage in the post COVID-19 world. As internet network at home becomes ever more important, starting with Giga Wi, we will expand on the customer base and further solidify our position as a No.

1 service provider.  IPTV revenue was up 0.5% on year, reaching KRW 407.6 billion and continued growth of high-quality subscribers. As the No. 1 pay TV operator, KT recently entered into an official partnership with Netflix, starting Netflix services over OLED TV since August 3. OLED TV offers 250 realtime channels and owns the biggest content suite, including 210,000 VOD titles.

And with the addition of Netflix services, we are able to offer plenty of wide-ranging contents to our customers.  Next is on the B2B business. B2B revenue was up 2.4% on year, coming in at KRW 701.1 billion. KT as the No. 1 domestic IDC provider is seeing a continuous uptrend in its IDC and cloud revenue driven by digital transformation demand.

And on blockchain revenue increase following the increase in issuance of local community currencies, AI and DX business revenue posted 16% year-on-year growth, highest of all the KT's main businesses. KT owns 13 IDCs around the nation, including one at Yongsan, which will be completed in the second half, and operate six CDCs, cloud data centers, and two edge clouds in Seoul and Busan. The [Inaudible], Korea's biggest cloud infrastructure, we are able to service 7,000 corporate and public customers and have more than 70% share in the public and financial cloud market.  KT is also engaged in wide range in cooperation with other industries so as to boost B2B platform growth.  AI one team, which is a collaboration between industry university and research institute was set up in May to enhance competitiveness in AI in companies from wide-ranging fields, i.e., heavy industry, finance and electronics are members to this initiative.  In June, we made KRW 50 billion equity investment into Hyundai Robotics, Korea's No. 1 robotics company.

We will start with intelligent robot and then enter the smart factory market in collaboration so as to speed up digital innovation of the manufacturing industry. KT will also move ahead in responding to digital new deal initiative so that we can support the process of recovery from the prolonged COVID-19 crisis. And on top of innovating other industries, we will actively explore growth opportunities as a B2B platform provider.  Next, is on the performances of group subsidiaries. With the COVID impact fully coming through in the second quarter, profit contribution from affiliates have declined 8.2% year on year, reporting KRW 89.1 billion.

BC card revenue was down 1.5% year on year to KRW 867.1 billion on lower acquiring volume following the pandemic outbreak. K-Bank completed around KRW 400 billion of rights offering in July and is reramping its operations, starting with Korea's first online apartment mortgage loans. Going forward, as Korea's first internet primary bank, we will expand the scope of contactless financial services from B2C to B2B and give momentum to generating synergies with KT, BC card and other affiliated companies.  Skylife revenue increased 2% year on year to KRW 177.7 billion, unsustained increase in high-end subscribers. As the media reported, Skylife has been selected as a preferred negotiation party to Hyundai HCN.

KT Group is committed to the negotiation process and will make this an opportunity to further enhance our capabilities in the media business.  Revenues from our content subsidiary was flat year on year at KRW 177.8 billion due to a decline in ad revenue despite strong e-commerce business performance. Estate revenue was down 7.9% year on year to KRW 104.4 billion due to the COVID impact on hotels and rental businesses.  So this has been Q2 2020 earnings for KT group. Looking back, past six months, there were some regrets following the changes brought on by COVID-19, but we were also able to show results of our efforts actually come to fruition.  KT's network and digital strength, spanning 5G, AI, big data, cloud make up our core infrastructure and platform in the post COVID world. Based on KT's capabilities and opportunities that are presented, we will not rest at being a telecom service provider but transform into a telecom-based platform provider so that we can find new opportunities for sustained growth, and we'll do our best to achieve tangible result.  Wishing all of you good health.

I look forward to your continued support and interest. Thank you.

Seung-Hoon Chi

[Foreign language] For more details, please refer to the documents that were previously circulated. From now on, we will be happy to take your questions.

Questions & Answers:


Operator

[Foreign language] [Operator instructions] [Foreign language]The first question will be provided by Hoi Jae Kim from Daishin Securities, and the next question will be provided by Joonsop Kim from KB Securities. Please go ahead with your question.

Hoi-Jae Kim -- Daishin Securities -- Analyst

[Foreign language] Thank you. My first question relates to Netflix arrangement. I understand that you won't be able to disclose specific terms and conditions but would like to understand what the business looks like. What type of partnership or alliance is it? Could you provide some more color? And also, we hear that there is also an element of network usage related payment.

If so, could you also elaborate on that aspect?  Second question regarding 5G infrastructure, we hear about co-investment from all of the three mobile players. Because KT owns the biggest infrastructure, we assume that it will be KT renting out certain of its network or facilities and other operators paying for the use of those. Is that the case? Could you also elaborate more on this?

Yoon Kyung-Keun -- Chief Financial Officer

[Foreign language] In today's world, where the overall media environment is fast changing, partnerships with OTTs has become a must because this is a way for us to provide more choice to the customers and also to enhance convenience and ease of use for the user base. Through these arrangements with Netflix, we are going to further enhance our content capabilities for OLED TV, and we also expect that we will be able to create a virtual cycle, where we expand our subscriber base which will help to further enhance the value of our media platform.  Currently, we're running a promotion for new subscribers to OLED TV and internet. And also, we are looking at various different segments where we will be able to generate synergies with Netflix, not only in IPTV business, but in other business areas, including wireless. Currently, we'll be providing it as a value-added services.

With regards to the rate-related schemes, it's something that we will be reviewing as we go forward.  Relating to the payment for the usage of the network, at this point in time, currently, there is a preparation ongoing to set up a -- the enforcement decree relating to the revision of the electricity and Telecommunication Business Act, which would stipulate the obligation on the side of the CPs in maintaining the network quality, the global CP status.  In line with the government's revision -- legislation revision process, we are going to fully comply with the government policy direction, and both parties through this partnership have agreed that we will comply with the relevant laws and regulations, and that we will make efforts toward a service stabilization. Please understand that due to the contract itself, we won't be able to disclose more specific terms and conditions.  Regarding your question about the joint or co-investment into the 5G network, aside from the 85 core city and the peripheral geographies, currently, the operators are in discussions about potentially making investment into a joint network. The details are yet to be ironed out. Once we have the details, we will come back and communicate that with the market.

The whole idea of a joint network, we expect, will help in terms of speeding up the broadening or expansion of the coverage and also will be favorable in terms of the quality and also will help to further enhance investment efficiencies.

Hoi-Jae Kim -- Daishin Securities -- Analyst

[Foreign language]

Yoon Kyung-Keun -- Chief Financial Officer

We will take the next question, please.

Operator

[Foreign language] The next question will be provided by Joonsop Kim from KB Securities, and the following question will be provided by Arnaud from [Inaudible] Hong Kong. Please go ahead with your question.

Joonsop Kim -- KB Securities -- Analyst

[Foreign language] So I would like to ask two questions. The first is on your 5G B2B business. Could you share with us what your business direction is for 5G B2B? What your outlook is, and what you consider key milestones are.  Second question is OTT. Your peer, your competitor, have recently -- really emphasized the K content, the distribution of K content.

I would like to understand what KT's perspective is when it comes to that topic. And also your own OTT service season, season services. Could you share with us some specific, I guess, plans or details regarding that?

Yoon Kyung-Keun -- Chief Financial Officer

[Foreign language] So KT, back in 2019, was the first to commercialize 5G in the world and at the same time, we launched private 5G. So, together with private LTE, we have been leading the B2B, the private network market. As of the second quarter, not only new customers, but previously, the private LTE users are also wanting to migrate to 5G, so we see that number continuously go up.  And so in line with providing or meeting the demand of the users, we are offering premium QoS service, which provides a steady network and also appropriate level of speed. Going forward, we plan to further upgrade 5G edge cloud, 5G smart office and other specialized services for the company.  Going forward, we will be increasing our use cases in 5G B2B in areas such as smart factory, smart healthcare and smart ship building, and we will further expand on a more customized platform that best fit different industry sectors.

At this point in time, we're conducting discussions with a total number of 30 customers who are interested in 5G-based solutions. Already, two of those companies have adopted our solution and have enjoyed improvement in productivity in smart factory.  And as I mentioned previously, KT is Korea's biggest IDC operator and also a cloud operator as well. In the post COVID world, we will see AI be applied to all of various different areas. And as we live in the untapped environment, we expect the entire innovation process based on cloud to further accelerate as we go into the future.  To this end, basically, our cloud core infrastructure is going to incorporate different technologies like AI, blockchain as well as big data.

So, we will be developing such solutions as we go forward and complete our AI/DX suite of solutions by the second half of this year. So, based on this platform, customers will be able to receive services, AI and big data services, supported by the cloud platform, which will provide nimbleness and fast speed.  Looking at the OTT market. This market, we think, is going to be taken by multiple number of players. So, the -- the market will be fragmented to a certain extent, and basically, with the season which we operate, we believe it has a mutually complementary relationship with Netflix.

So, basically, season can provide realtime broadcast channels and VODs, which Netflix cannot. That's why I say that both of these solutions and services are complementary to one another. And on this season, we will be making investment into original content, making use of K idols and developing different entertainment content, and we've seen MAU for season show an uptrend.  And there was also a recent press coverage on Season's content that it produced called Like the First Cup.  This program was successfully exported to HBO, and we will continuously equip ourselves with original content production capabilities so that we can really strengthen our OTT content base.  Season basically seeks open platform. It can, at any time, with any partners, can partner up, and we'll do those efforts, will develop and showcase wide-ranging services and content.

Joonsop Kim -- KB Securities -- Analyst

[Foreign language]

Yoon Kyung-Keun -- Chief Financial Officer

Next question, please.

Operator

[Foreign language] The next question will be provided by Arnaud from [Inaudible] Hong Kong. Please go ahead with your question.

Unknown speaker

Good afternoon. Thanks for offering the opportunity. I see the 5G subscribers are accelerating again. But the target of 3.5 million by the end of this year, is that still achievable? And then in line with that, we've seen ARPU actually continuing to drop or the whole idea was, I thought that with more and more customers moving toward 5G, we would actually see a pickup in ARPU.

Why is that not happening?  And finally, on capex. What can you say about the capex outlook now that you've underspent so much on network in the first half of this year? Is KRW 3.1 trillion still realistic, or is that going to be a different number? [Foreign language]

Yoon Kyung-Keun -- Chief Financial Officer

[Foreign language] Relating to your question on 5G subscribers, we think that we will be able to achieve the 3.5 million year-end subscriber target we set for ourselves. The reason why we think that is because there are going to be new handset launches. Galaxy Note and iPhone are scheduled to be launched, and we expect that it will be about 25% out of the total handset sales that will be accounted for by 5G.  Responding to your question on ARPU. Basically, as a subscriber actually migrates from LTE to 5G, there is about 30% upside impact to the ARPU.

And at this point, the high-end or high-priced portion is currently being maintained by -- high-end rate plan, that is, is being maintained at a relatively high level. As you've mentioned, our ARPU trend has been quite sluggish, and that's because due to the COVID crisis, we've seen declines in the roaming-related revenue, and there were increases in the IoT line. So, the ARPU, all in all, they had offsetting impact and the ARPU all in all was flat. In terms of the handset base, the ARPU is showing an uptrend.  Responding to your question on capex.

We are making investments into our growth businesses, including 5G, IDC and real estate. And also, we need to maintain the quality level of our fixed and wireless backbone network. It's due to these reasons we've said KRW 3.1 trillion as our CapEx guidance for the year. In the first half of the year, however, because of the COVID situation, the whole speed of making 5G investment was somewhat interrupted.

But as we go into the second half of the year, with more increases in 5G subscriber base, we expect the investment amount to be bigger than that of the first half, but we will make sure we spend within the guidance level.

Operator

[Foreign language]

Yoon Kyung-Keun -- Chief Financial Officer

Yes. We will wait one moment for the question.

Operator

[Foreign language] The next question will be provided by Seyon Park from Morgan Stanley, and the following question will be provided by Hong-sik Kim from Hana Investment Securities. Please go ahead with your question

Seyon Park -- Morgan Stanley -- Analyst

[Foreign language] If you look at the first quarter, the overall marketing environment was quite favorable. But in the second half of the year, there are multiple handsets that are slated to be launched, including Samsung Fold, probably is going to launch a 5G version. What do you expect your competitive landscape would look like in the second half of the year?  And second question is KT seems to have lower level of margin in the second half of the year versus the first. Could you provide some more color with regards to this issue?

Yoon Kyung-Keun -- Chief Financial Officer

[Foreign language] In the first half of the year, because of the COVID pandemic, the overall economic activities had slowed. And also thanks to efficient marketing conducted by all of the three telcos, overall level of competition in the market had been somewhat subdued. But in the second half of the year, we expect the handset flagship lineup to expand. So, compared to the first quarter -- first half, excuse me, we expect the wireless market to expand.  For us, we will focus on introducing competitive tariff plans and also launch cloud streaming games.

And under the partnership with Netflix, we plan to provide more differentiated and unique services and also expand the network coverage and really focus on our core and fundamental competitiveness elements rather than engaging in reckless competition, so we do not think there is going to be a repeat of a fierce competition, marketing competition, that we've seen in the second half of previous year.  Responding to your question on the second half margin. The first half of the year, thanks to a steady service revenue growth and efficient spending, on a KT stand-alone basis, we reported an operating profit of KRW 552.3 billion. In the second half of the year, we expect the top line situation to be much favorable and also on the wireless side, in the first half of the year, the 5G qualitative growth, we were able to continue. And as we enter the second half of the year, we believe we will be able to expand on that growth.  For IPTV, in the second half, when the negotiation with the home shopping providers on the commission level is all ironed out, we think that we will be able to bring about double-digit growth for IPTV.

Subscriber base for both fixed and wireless, the net addition trend is continuing and the MS indicator is also showing an uptrend. For the B2B business, we think we will be able to continue and achieve double-digit growth. And for hotel and ad business, basically, these were quite -- was significantly impacted by the COVID pandemic, but they are starting to show signs of recovery.  So our basic business management stance is that we will try to manage second half of the year just as we did in the first half of the year. But having said that, we still have the collective bargaining agreement left to be made.

And also, because of the increases in investments, there are some seasonality factors as well. And also, in light of the fact that the revenue and profit from BC card and KT estate have declined, so on a consolidated operating profit basis, we will do our best to make sure that we attain the level of last year.  In order to live up to our mid to long-term guidance until 2022, which we shared with the market during the corporate day end of May, we will endeavor to bring about growth every year and also to improve our profit.

Seyon Park -- Morgan Stanley -- Analyst

[Foreign language]

Yoon Kyung-Keun -- Chief Financial Officer

We'll move on to the next question.

Operator

[Foreign language] The next question will be provided by Hong-sik Kim from Hana Investment, and the following question will be provided by [Inaudible] from Capital Group.

Hong-sik Kim -- Hana Investment Securities -- Analyst

[Foreign language] I would like to just ask one quick question. During the corporate day, the CEO had expressed his position, which was quite not -- which was a bit negative on the -- on why one has to actually acquire a cable TV. But you've mentioned about the preferred negotiation partner being selected vis-a-vis Skylife and HCN. Would like to understand, going forward, are your subsidiaries and affiliates, will they be more independent? Meaning, will they be far off from any control from the mother company and make independent decisions? Would like to understand that relationship between the mother company and the subsidiary.

Yoon Kyung-Keun -- Chief Financial Officer

[Foreign language] Now, KT has been closely monitoring the market surrounding the pay TV business. And at the group level, we've been thinking quite hard as to how we could further strengthen our capabilities when it comes to the media platform. Skylife also had, over the years, have been considering different growth strategies. And in order to bring about stand-alone growth, they decided that they needed to build scale and decided that they would acquire HCN.  KT has been endeavoring to further enhance our subsidiaries' stand-alone value, and we are always thinking hard about how we could bring about the overall synergy.

And that's why BC card decided to acquire certain equity stake at K-Bank.  During the corp day, corporate day, CEO also talk to the effect about the restructuring of our group companies. So, I think that should be -- you could -- I think that that should be the angle when you view this topic.

Hong-sik Kim -- Hana Investment Securities -- Analyst

[Foreign language]

Yoon Kyung-Keun -- Chief Financial Officer

Next question, please.

Operator

[Foreign language] The next question will be provided by [Inaudible] from Capital Group. Please go ahead with your question.

Unknown speaker

Thank you for your time. I have two questions. One is on the marketing expense in the second quarter. It looks like relatively high in second quarter, about 600 million that's been spent.

Can you talk a little bit on what's going on there, and what is the trend in second half of this year?  And my second question is, given the recent weakness of these non-telco business, how is this going to change your restructuring plan? Do you plan to move any of the restructuring schedule ahead of the original schedule, or can you talk a little bit about it? Thank you. [Foreign language]

Yoon Kyung-Keun -- Chief Financial Officer

[Foreign language] Responding to your question about marketing expense, on an actual spending basis, in the second quarter, there was actually a decline in marketing spend. It's just that starting previous year, because of the application of IFRS accounting standards, there were marketing spending that was deferred. Basically, it is being amortized over the period. That's why Q2 figure for this year looks elevated.

But we expect this year's marketing spend to be flat on a year-on-year basis.  I think we mentioned this previously as well, but the company, in light of our strategic value, we will be quite bold in restructuring our affiliates and subsidiaries that does not -- that do not add to our growth or that do not create synergies. At this point in time, within the company, we are engaged in in-depth discussions, but we do not have nothing concrete at this point to share with the market. But once we make a decision and a judgment, we expect that the actual implementation and the speed is going to be quite fast. [Foreign language]

Seung-Hoon Chi

[Foreign language] Well, thank you very much. This ends the Q&A session. Thank you very much for your questions and your interest. This brings us to the end of KT's Q2 2020 earnings conference call.

Thank you.

Duration: 67 minutes

Call participants:

Seung-Hoon Chi

Yoon Kyung-Keun -- Chief Financial Officer

Hoi-Jae Kim -- Daishin Securities -- Analyst

Joonsop Kim -- KB Securities -- Analyst

Unknown speaker

Seyon Park -- Morgan Stanley -- Analyst

Hong-sik Kim -- Hana Investment Securities -- Analyst

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