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Korean Telco (NYSE:KT)
Q3 2020 Earnings Call
Nov 06, 2020, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

[Foreign language] Good morning and good afternoon. First of all, thank you all for joining this conference call. And now, we will begin the conference of the 2020 third-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 language] Good afternoon. I am Chi Seung-Hoon, KT'S IRO. This earnings release call is being webcasted via our website, and you can follow the slides as you listen in on the call. Let us now begin KT'S Q3 2020 earnings presentation.

[Foreign language] Before we begin, please note that today's presentation includes financial estimates and operating results under the IFRS standard 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 changes. [Foreign language] Now, I will invite our CFO, Yoon Kyung-Keun, for his welcoming remarks and presentation on Q3 2020 earnings.

Kyung-Keun Yoon -- Chief Financial Officer

[Foreign language] Good afternoon. I am Yoon Kyung-Keun, KT'S CFO. Although mired with uncertainties, both at home and abroad, due to the prolonged COVID-19 pandemic, rising from the current crisis, KT was able to bring stable top-line growth and uncover hidden opportunities for growth. [Foreign language] In the post-COVID world, where on tech culture became the new normal, we sustained subscriber growth from the telecom business, while laying a foothold for new growth as a digital innovation partner to other industries, underpinned by KT B2B capabilities in IDC, cloud, AI, among others.

[Foreign language] Last May, when we communicated our midterm financial guidance as part of the shareholder return policy, we also communicated that our dividend payout ratio would be 50%. In addition, to further enhance corporate value, BOD decided on KRW 300 billion of share buybacks on November 5. We will continue to exert best efforts to bring sustainable growth to drive shareholder value enhancement. [Foreign language] Now, moving on to Q3 2020 financials.

Total Q3 revenue declined 3.4% year on year to KRW 6,001,200,000,000. [Foreign language] On the COVID-19 impact, handset revenue was muted, but there were revenue declines from financial, real estate, and other subsidiaries. However, supported by steady growth from wireless, media, and B2B business, service revenue increased 0.8% on year. [Foreign language] Despite efforts toward efficient spending, COVID-19 constrained subsidiary profit, and as a result, operating profit fell 6.4% year on year to KRW 292.4 billion.

[Foreign language] But owing to continuous efforts on operational innovation, which improved the nonoperating earnings, net income was up 7.9% year on year to KRW 230.1 billion. EBITDA was down 1.1% year on year, coming in at KRW 1,197,100,000,000. Next page is on operating expenses. [Foreign language] For operating expense, despite the wage increment being retroactively paid out this quarter, following the 2020 collective bargaining, thanks to cost control and efficiency measures, operating expense was down 3.3% year on year to KRW 5,708,800,000,000.

Next is on the financial position. [Foreign language] Debt-to-equity ratio as of Q3 end was 129%, up 8 percentage points year on year. Net debt ratio was up 2.9 percentage points year on year to 31%. Next is on capex.

[Foreign language] Capex spend up to the third quarter was in total KRW 1,784,100,000,000. In the remaining year, we plan to expand 5G coverage centering around shadow zones and underground subway to the extent that users can actually feel the difference. Next, I will elaborate on individual business segments in terms of their performance and future outlook. [Foreign language] Wireless service revenue was up 0.9% year on year to KRW 1,742,100,000,000.

With prolonged COVID-19 impact, roaming revenue fell by a large margin, but on a robust growth of 5G quality subscribers, wireless service revenue was up 0.6% year on year to report KRW 1,636,200,000,000. If you took out the roaming impact and accounting changes on the membership point, while the service revenue increase was 3% versus last year. [Foreign language] Total wireless subscribers in Q3 increased 200,000, reaching 22,323,000. As of Q3, there was 2,810,000 5G subscribers, accounting for 20% of the handset subscribers.

[Foreign language] Following the Super Plan choice plan, we introduced mid- to low-end tariff plan in October. And for 5G customers who value the media experience, we launched a Netflix bundle plan, giving more choice to our customers. [Foreign language] KT with its long track record of know-how as the first to introduce iPhone in the domestic market, drove 5G expansion through iPhone 12, which was launched back in October 30. And by solidifying core competitiveness, we will continue to drive growth going forward.

Next is on fixed-line and IPTV business. [Foreign language] Fixed-line telephony revenue was down 7% year on year to KRW 369.2 billion on reduced subscribers. Broadband Internet revenue was down 0.3% on year to KRW 498.7 billion on stronger retention activities, i.e., targeting of GiGA Internet subscribers with nearing expiry of contracts. [Foreign language] In the post-COVID age, in-home Internet environment has become ever more important.

And in June, we launched a new Wi-Fi concept service called GiGA Wi, growing market responses and expanding our subscriber base. By providing a complete set of internet services from fixed-line Internet to Wi-Fi inside people's homes, KT can further solidify its leadership in the broadband Internet market. [Foreign language] Driven by double-digit growth of subscriber net addition and revenue, IPTV revenue was up 11.9% year on year to KRW 459.3 billion, supported by Netflix partnership, exclusive showing of popular sports performance and through trendsetting content, OLED TV, which has the biggest content pool in Korea with 250 live channels and 210,000 VOD titles had a further boost in competitiveness, which drove increase in onboarding of high-quality subscribers. [Foreign language] KT will respond nimbly to fast-transforming media market so that it may continue to strengthen its position as a No.

1 pay-TV provider. Next is on the B2B business. [Foreign language] B2B revenue was up 0.8% on year to KRW 690.3 billion, especially the AI/DX business, which we used as a foothold for expanding digital transformation demand recorded a growth of 8.1% year on year. [Foreign language] As a leading company in DX, namely digital transformation, we plan to ramp up growth in the B2B market.

On October 28, we launched KT Enterprise, which has a B2B exclusive brand, and also opened Yongsan IDC on November 4, which is our 13th IDC, which all further built up our position as a No. 1 IDC and cloud service provider. [Foreign language] We are also actively introducing untapped solutions of KT to be utilized in many areas, including education, entertainment, call centers, and remote working. We also successfully won government projects on digital new deal initiatives.

And as such, we expect B2B business growth will come under full force. [Foreign language] Due to distinct DX platform, underpinned by the so-called ABC, which stands for AI, Big Data and cloud, and KT'S network infrastructure prowess, we will be a digital innovation partner to companies, helping them grow and accelerate digital transformation for Korea as a nation. Next is on performances of group subsidiaries. [Foreign language] Due to the extended impact from COVID-19, profit contribution from affiliates declined 25.4% year on year to KRW 85.6 billion.

BC Card revenue was down 0.6% on year to KRW 863.4 billion on lower acquiring volume following the pandemic outbreak. [Foreign language] K Bank, which resumed operations from July, saw its new product and services, like the online apartment mortgage loans, drive strong performance, leading to a sixfold increase in daily new customers, yet again confirming Wire Tech's potential. [Foreign language] As Korea's first Internet-only bank, we plan to expand the contactless financial services in not only B2C but also in B2B segment and under the objective of turning profit in 2022 and going IPO in 2023. We will seek synergies with KT, BC Card, and other shareholder companies and holding events that create the buzz.

We will go full force at acquiring new customers. [Foreign language] Skylife revenue was down 3.1% year on year to KRW 176.6 billion and declines in subscribers for satellite products. [Foreign language] Skylife has decided to acquire Hyundai HCN worth KRW 490 billion, and by completing the acquisition process, we will make this an opportunity to further enhance our media capabilities. [Foreign language] Revenues from content subsidiaries, which include KTH, Genie Music, Nasmedia, on strong performance from content and ad business was up 8.6% year on year, reporting KRW 194 billion.

[Foreign language] This has been KT Group's Q3 2020 earnings results. With only two months left, if we look back at 2020, all of us felt the changes brought on by the COVID-19 pandemic. And for us at KT, it was a year when we raced forward to show a new side of KT, different from the past. [Foreign language] We were steadfast at generating stable business performance and being equipped with a new growth engine of B2B business, and building out a robust governance structure and also notched up our efforts to enhance shareholder value from setting up the dividend policy to share buybacks.

[Foreign language] Last but not least, we expect 2020 financials will be an improvement from last year and we'll exert our best efforts to bring better performances for next year. We ask for your support and interest and wish only the best to investors and analysts. Thank you.

Seung-Hoon Chi -- Investor Relations Officer

[Foreign language] For more information, please refer to the IR document that we've circulated, and we will now entertain your questions.

Questions & Answers:


Operator

[Foreign language] Now, Q&A session will begin. [Operator instructions] [Foreign language] The first question will be provided by Hoi Jae Kim from Daishin Securities. Mr. Hoi Jae Kim, please go ahead with your question.

Hoi Jae Kim -- Daishin Securities -- Analyst

[Foreign language] I would like to pose two questions. You have announced plan to buy back your shares. I would like to understand what the progress of that share buyback is. Is it for cancellation? Or would you be using that for M&A purposes going forward? And is it OK for us to consider share buyback as separate to your dividend payout? Second question is, on a stand-alone basis, we see that your cumulative net profit has gone up by 29% year on year.

And also that figure had actually outperformed 2019 net profit figure. I would like to know if there are any changes that actually took place on your operating side. And also since Q4, usually, typically, the expense level is not that high. So can we expect higher level of net income at the end of the year? And has there been any certain changes that took place on your nonoperating business side?

Kyung-Keun Yoon -- Chief Financial Officer

[Foreign language] Let me first respond to your question about share buyback. The assessment of the management is that the current share price compared to the intrinsic value of KT is significantly undervalued. As we have communicated in May, even at a very conservative forecast, we think that we will be able to achieve KRW 1 trillion of stand-alone operating profit come year 2022. We are confident of further improving our fundamentals, and we expect our equity prices, share prices to actually show an uptrend going forward.

[Foreign language] And so we decided that the meaningful size of capital allocation is necessary, and that is why we've decided a KRW 300 billion of share buyback. In light of a very fast-changing operational backdrop, we felt that we needed to have an option with regards to capital allocation. And in terms of the potential for canceling the shares that are bought back, in light of the future business earnings, as well as changes in the business backdrop, we feel that that is one of possible options. [Foreign language] Responding to your next question on dividend.

We have made an announcement in the previous corporate day event that we will be paying out 50% of our stand-alone basis adjusted net profit for the coming three years. This dividend policy still is valid. And in terms of the actual amount of the dividend, we will communicate with the market once our BOD is convened for Q4. [Foreign language] Our decision to do a share buyback was, once again, based on the assessment of the management that, compared to the intrinsic value of the company, that current share prices are significantly undervalued.

That was the basis for the decision to do a share buyback, and it is separate from our decision on dividend. [Foreign language] In terms of your question on our net profit and any changes that we can identify on the non-operating side, basically, in terms of the employee welfare fund, which used to be under the non-OP item had been changed to an operating expense. As a result, the size of that impact is about KRW 60 billion to KRW 70 billion per annum basis. And also, we've seen a quite steady trend for both disposition losses for both the tangible and intangible assets, and those aspects contributed to the net profit on the non-op side.

[Foreign language] Concerning Q4, we do expect some seasonality, but compared to previous years, we expect more improvements as we go forward.

Seung-Hoon Chi -- Investor Relations Officer

[Foreign language] We will take the next question, please.

Operator

[Foreign language] The next question will be presented by Jae-min Ahn from NH Investment & Securities. Mr. Jae-min Ahn, please go ahead with your question.

Jae-min Ahn -- NH Investment & Securities -- Analyst

[Foreign language] I'm from NH Securities. I am Ahn Jae-min. We'd like to ask you two questions. First is on your B2B business.

I see that your B2B revenue on a year-on-year growth aspect seems to be a bit weaker. Can you explain as to the reason why? You've shared with the market your vision and announced KT Enterprise as a brand, and it seems like you're going to be quite aggressive in providing services based on your new IDC center at Yongsan. If possible, can you give us what your growth projection is for your B2B AI and DX business after next year? If that's difficult, at least, can you provide some color on the strategy going forward? And if there are any updates with your collaboration with Microsoft and cloud, could you also share that with us as well?

Kyung-Keun Yoon -- Chief Financial Officer

[Foreign language] The reason why you've seen a bit of a weaker performance is because some of the large-scale projects that were originally scheduled, the speed has gotten a bit slow. And you are right, we are going to push and give a very strong growth momentum behind B2B business. But while we're doing that, we are still going to be very mindful of growth potential, as well as profitability. And if we see need for any rationalization, we will, of course, definitely take that route.

But the mainstream trend will be definitely an upward trend. [Foreign language] Regarding KT's B2B business, we have on numerous occasions communicated that we will become a platform provider underpinned by our telecom infrastructure. As a No. 1 B2B telecom service provider, we have been engaged not only in the basic network provision, but also, we were engaged in the national disaster safety network, maritime, and railway network.

We have experience of participating in such large-scale national infrastructure build-out project. And we have also been engaged in IDC businesses as well. Since the launch of 5G services, we were able to gain about 170 B2B use cases. Through such efforts, we want to be able to create a business and be able to create a new market segment for us.

[Foreign language] And also, KT is committed to expanding the B2B market through its DX services. On top of the 5G service and network capability that we have, we also have a competitive edge in terms of AI, Big Data, and cloud. In the AI segment, we started off by providing GiGA Genie set-top boxes and we very successfully expanded into other AI services, including hotels and apartments, as well as AI call centers. So we have an experience of bringing to success new B2B business models.

If you look at AI call center, we're currently engaged in this business together with our subsidiary, KTIS, and we have been able to win 12 customers as of today. If you look at Big Data, KT has its expertise in terms of telecom, location-based, and finance and payment data. And it is underpinned by these elements that we wish to further develop on these businesses. [Foreign language] And also, KT as Korea's No.

1 cloud and IDC business provider, we will very actively respond to a fast-rising demand in this segment. We have actually opened Yongsan IDC only a couple of days ago actually, on the 4th of November. And now, we have a total of 13 IDCs in Korea, which really helped us further bolster our No. 1 position in the domestic IDC space.

Especially when it comes to cloud, we are providing very specialized and bespoke services to public and financial industry. And in November, with the launch of KT DX platform, we expect our cloud business capabilities will further strengthen our customers. And actually, we were able to actually win 7,000 clients at this point in time. And basically, our B2B client can enjoy KT'S very strong network and the biggest scale IDC and cloud infrastructure, and we will also be able to provide them with the solutions.

So our customer base will be able to enjoy integrated services going forward. [Foreign language] And as I previously mentioned, we also launched our B2B brand, KT Enterprise. Through this effort, we want to really solidify our image as a B2B specialized company. And on top of that, we have a very strong competitive edge in nationwide sales channel.

So driven by all of these factors, we expect that for next year, just like we've done for this year, we will be able to sustain a double-digit growth. [Foreign language] Regarding your question, particularly about Microsoft, because it involves another service provider, please understand that there are some confidentiality aspects to that. When it comes to the cloud business, rather than our arrangement with specific companies, I think what's important is that we will continuously be able to cooperate with companies, both home and abroad, in terms of IDC and cloud, and we will be able to expand on that collaboration in the future.

Seung-Hoon Chi -- Investor Relations Officer

[Foreign language] We will take the next question, please.

Operator

[Foreign language] The next question will be presented by Joonsop Kim from KB Securities. Mr. Joonsop Kim, please go ahead with your question.

Joonsop Kim -- KB Securities -- Analyst

[Foreign language] Thank you. I'm from KB Securities. I am Kim Joonsop. We'd like to ask you two questions.

The first, could you provide some more elaboration on this 5G mid- to low-end tariff plan? Would there be any cannibalization with your existing 5G plans? And what impact would this have on your subscriber growth? And can you also share with us your financial impact from iPhone launch?

Kyung-Keun Yoon -- Chief Financial Officer

[Foreign language] In order for us to further increase on the penetration of 5G services, on top of the current premium rate plan, in order to facilitate the migration of the mid- to low-end rate users, the LTE subscribers to migrate much faster to 5G, we introduced 4569 rate plan last October. [Foreign language] It's been only a month since the launch of this rate plan, it's difficult to give you any specifics about its impact. But having said that, if you look at the October figures, there has been some increase in the percentage of subscribers taking out this mid- to low-end tariff plan below KRW 80,000. But still, we see that people who's actually taking out the Super Plan rate plan, which is above the premium tariff plan, above KRW 80,000, that percentage is still at around 80%.

[Foreign language] And also, especially at the end of October, we launched a Netflix Choice rate plan. We think that this could actually help us attract more high-end subscribers who take out rate plans in the range of KRW 90,000 or KRW 110,000. This new rate plan could that have some of -- there's some pressure on the 5G ARPU decline. But we think that it is helpful in that we can expand the base for 5G subscribers and that it could have a bigger impact, therefore, on the top line.

[Foreign language] Responding to your iPhone question, iPhone 12 is selling quite well. And with the launch of iPhone in Q4, we expect there to be a more accelerated migration from LTE to 5G as a handset upgrade. And by the end of the year, we think 5G penetration based on the handset will increase to 25%. [Foreign language] And most of the iPhone subscribers actually choose the selective discount rate plan.

So we expect iPhone sales is not going to significantly increase the marketing expense on our side. So with more expanded 5G subscribers and lowering of the cost, we think that we will have an uplift support to profit.

Seung-Hoon Chi -- Investor Relations Officer

[Foreign language] There are no further questions, so we would like to now close our earnings presentation. Once again, thank you very much for joining KT'S Q3 2020 earnings presentation. Thank you.

Duration: 51 minutes

Call participants:

Seung-Hoon Chi -- Investor Relations Officer

Kyung-Keun Yoon -- Chief Financial Officer

Hoi Jae Kim -- Daishin Securities -- Analyst

Jae-min Ahn -- NH Investment & Securities -- Analyst

Joonsop Kim -- KB Securities -- Analyst

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