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KT Corporation (NYSE:KT)
Q3 2021 Earnings Call
Nov 09, 2021, 2:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Seung-Hoon Chi

[Foreign language] Good afternoon. I am Chi Seung-Hoon, KT's IRO. This earnings release call is currently being webcasted live on our website, and you can follow the slides as you listen in on the call. Let us now begin KT's Q3 2021 earnings presentation.

[Foreign language] Before we begin, please note that today's presentation includes financial estimates and operating results under the K-IFRS standards and have not yet been reviewed by an outside auditor. As we cannot ensure accuracy and completeness of financial business data, except for historical performances, please be reminded that these figures are subject to possible changes. [Foreign language] I will now invite the CFO, Kim Young Jin, for his remarks and presentation on Q3 '21 earnings.

Young-Jin Kim -- Senior Managing Director, Chief Financial Officer

[Foreign language] Good afternoon. This is Kim Young Jin, KT's CFO. Let's begin with key earnings highlights for Q3 2021. Consolidated revenue was KRW 6,217.4 billion, while service revenue reported KRW 5,402.4 billion, and operating profit reported KRW 382.4 billion.

[Foreign language] Driven by growth from legacy telecom business, including 5G and internet as well as platform businesses, which include B2B, media, content, and financial services, there was overall performance improvement for KT and its affiliates, which drove revenue up 3.6% on year and operating profit up 30% year over year. On a separate basis, revenue was up 3.2% on year, reported KRW 4,664.7 billion, with operating profit up 24.3% on year to KRW 259.1 billion. [Foreign language] In particular, there was a salient service revenue growth as stand-alone service revenue increased KRW 114.1 billion, with Q3 cumulative revenue of KRW 312.7 billion. This is attributable to steady topline growth from KT's traditional telco business and expansion of its B2B and platform business.

[Foreign language] KT has classified its business domain into four segments: digico and telco in accordance with the characteristics of the business, and B2C and B2B based on the customer. KT's legacy business was in B2C telco business, which comprises of wireless internet, fixed-line telephony, and they account for around 61% of the topline revenue. [Foreign language] Since KT's digico transformation announced back in 2020, we've been focused on the platform-based digico domain, especially B2C-based digico domain exemplified by IPTV and B2B-based digico, which represents cloud and IDC, have benefited from the content free habits becoming prevalent following the pandemic and on greater digital demand from the corporate market to which KT responded swiftly, we've seen greater revenue uptrend versus 2019, the pre-digico era. [Foreign language] With digico KT transformation, we plan to expand this domain from 39% as of today to 50% by 2025.

[Foreign language] Yet again, in Q3, we've seen meaningful results from the B2B digico domain. In Q3, B2B businesses orders booked amounted to around KRW 1 trillion, reporting a record high quarterly figure. On a Q3 '21 cumulative basis, order book amounted to KRW 2.5 trillion, significantly outpacing 2020's full year amount. [Foreign language] Another core business of KT digico is AI and DX, which was up 29.7% year over year.

This was mainly driven by full-fledged initiation of the AI contact center business or AICC, for short, an expanded user base for IDC and cloud. [Foreign language] For the IDC business, on top of steady revenue stream from current IDCs received revenue base expanding on the back of newly opened Yongsan IDC and KT's first branded South Guro IDC. Also, from the DBO business, which we newly launched, we are gaining new clients and building a new basis for further growth. [Foreign language] KT recently announced that it will place a full momentum behind the AI business by employing AI-based active conversational technology that enables human-like speech.

KT already employs AI technology in our own contact centers and provides AICC to major financial restaurants and logistics companies. [Foreign language] We are also actively considering to adopt KT's AICC center to the public domain for central and local government for the benefit of disaster, safety management, and care for the vulnerable. And also, for small merchants run by a single person, hair salons and small mom-and-pop eateries, we introduced KT AI Secretary that would take reservations, orders and respond to questions 24/7 all year around doing what customer centers do. As such, KT will be the front runner in domestic AICC market and launch many services that employ AI technology.

[Foreign language] We also embarked on AI service robot business with the release of serving robots. This service is currently used by restaurants and cafes, as well as hospitals and golf driving range as it sets the ground for popularizing use of robots. We will continue to enhance the operating platform and launch many different types of new robots so that we may become Korea's front runner and robotics service provider. [Foreign language] KTDS, one of KT's affiliates, is a software developer and designer who builds IT data systems for clients.

And they are broadening our digital business by winning projects on business platform and AI-based predictive system from financial institutions and government agencies as well. [Foreign language] Also, to strengthen our competitive edge and quickly respond to needs of global customers in the fast-growing global data market, we acquired a global data specialist company called Epsilon based in Singapore. Epsilon is a company with global infrastructure, technical capabilities, and sales bases all across the world. Through this acquisition, KT will expand its global data business from Asia to North America and Europe, and we expect to win new business customers from both home and abroad.

[Foreign language] We also saw solid topline growth, both in terms of size and quality, mainly around premium subscribers from KT's incumbent telecom business. 5G subscribers continue to display an uptrend with wireless service revenue up 3.8% on year and wireless ARPU up 2.7% on year, reporting KRW 32,476. [Foreign language] Driven by higher sales of giga based products and offerings for a single member household, broadband Internet business also saw a sustained subscriber expansion. [Foreign language] Restructuring of the group business geared toward digico transformation is also ongoing, which drove a significant rise in both revenue and profit of group affiliates.

[Foreign language] K Bank, after its first turnaround in Q2, reported a net profit of KRW 16.8 billion in the third quarter, recording an annual cumulative profit. Following a successful capital increase last July, subscribers surpassed 6.6 million as of the end of Q3 with total deposits of KRW 12 trillion and lending of more than KRW 6 trillion, which drove a stable loan-to-deposit spread. Also, by offering online mid-price range products and launching products leveraging alliances with other group companies, K Bank is actively broadening its business. K Bank will continue to expand its product coverage, upgrade its application, seek marketing partnerships, launch diverse loan products, dial-up synergies with group affiliates so as to position itself as a differentiated financial platform.

[Foreign language] In media content, we've completed governance structure around StudioGenie and further enhanced business competitiveness. We completed the acquisition of Hyundai HCN, Hyundai Media, and took equity stake in Korea's No. 1 subscription-based e-book start-up, Millie's Library, and also spun-off KT Seezn. [Foreign language] StudioGenie completed Bites offering, and its capital base now amounts to KRW 227.8 billion and recently showcased Crime Puzzle, its first original content as its content production came under full swing.

[Foreign language] On the back of Millie's Library acquisition, Genie Music will expand its business from music to audio book and other audio content business with the objective of becoming Korea's best AI audio platform provider. Audiobook content will be placed first on Genie, the AI music platform, and we plan to produce and add diverse array of audio content as we go forward. By offering Millie's Library via wide-ranging bundled services of KT, we expect growth of subscriber base of respective companies will also be supported. [Foreign language] Now, moving on to third quarter '21 earnings results.

Total revenue was up 3.6% year over year to KRW 6,217.4 billion. Operating profit was up 30% on year, reporting KRW 382.4 billion. [Foreign language] Net profit was up 46.9% year over year to KRW 337.7 billion. EBITDA was 6.5% on year to KRW 1,277.5 billion.

[Foreign language] Next on the operating expense. Operating expense on the back of rise in business expense was up 2.2% year over year to KRW 5,835 billion. Next is on the financial position. [Foreign language] Debt-to-equity ratio as of Q3 '21 was 122.6%, down 10.2 percentage points year over year.

Net debt ratio was up 1.9 percentage points on year, reporting 33%. Next is on capex. [Foreign language] Capex spend in Q3 '21 was KRW 600.7 billion and Q3 cumulative capex was a total of KRW 1,464.8 billion. Amount of orders placed for IE equipment was flat year over year.

But due to COVID-19 pandemic, actual spending somewhat declined. Next, moving on to performances from respective businesses. [Foreign language] Wireless revenue was up 3% on year KRW 1,794.7 billion. On the back of 5G subscriber growth, wireless service revenue was up 3.8% year over year, reporting KRW 1,697.8 billion.

[Foreign language] As of Q3 end '21, there was a total of 22,740,000 wireless subscribers. 5G subscribers were 5,610,000, which accounts for 39% of total handset subscribers. Next is on fixed-line and IPTV business. [Foreign language] Next slide.

Revenue was down 1.2% on year to KRW 368.4 billion. And sustained growth from enterprise subscriber voice DX service revenue stream started to take off, significantly mitigating the revenue downfall. Broadband internet revenue saw a subscriber growth up 2.4% on year to KRW 510.7 billion, driven by active sales of product for single member households and offering of stronger customer benefit. On the back of enhanced offerings of kids content and launch of OLED TV tab, there was growth in subscribers, driving IPTV revenue up 3.1% on year to KRW 473.4 billion.

Next is on the B2B business. [Foreign language] B2B business was up 6% on year to KRW 727.7 billion. Due to COVID pandemic infrastructure projects, including global ones, were delayed and in the process of reorganizing low-margin businesses, B2B IT solutions revenue declined. However, on growing data traffic and digital transformation demand inched up, bringing corporate fixed-line revenue up 2.7% year-over-year.

[Foreign language] For the AI and DX business, revenue posted a steep growth of 29.7% year over year, driven by higher AICC revenue following AI solution adoption by the financial sector and new projects in public and financial cloud and growth in IDC DBO, design, build, operate business. Next is on group affiliate earnings. [Foreign language] BC Card revenue on higher domestic acquiring volume was up 2.9% on year to KRW 888.1 billion. Skylife revenue was up 1% year over year to KRW 178.4 billion, driven by MVNO business expansion and higher internet reselling.

[Foreign language] As one of core businesses of KT digico transformation, content subsidiary revenue was up 24.6% on year to KRW 241.6 billion, on the back of rise in platform-based revenue from major companies. [Foreign language] That was a brief update on KT's Q3 2021 results. Ever since its proclaimed transformation from a telco to a digico, we are crystallizing the changes as a digico. In 2021, together with revenue and profit growth, we reorganized group's business portfolio around B2B and platform, laying the basis for mid to longer-term growth.

We will continue to endeavor to bring success to digico performance. [Foreign language] Last but not least, with respect to the network failure that we experienced previous month, we once again would like to express our commitment that through process improvement, we will endeavor and exert our utmost efforts so that we could operate our network stably. Once again, we look forward to your interest and support. Thank you.

[Foreign language] For more details, please refer to our earnings presentation deck, which we previously circulated. We will now move on to Q&A. To give as much chance as possible to as many people as possible, I would like to ask you to limit your questions to no more than two questions per person.

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. Please go ahead.

Hoi-Jae Kim -- Daishan Securities -- Analyst

[Foreign language] I'm Kim Hoi Jae from Daishin Securities. I'd like to first ask you a question on your result. If you look at Q3 performance result, it was quite good. But usually, when the fourth quarter comes, there are some individual cost impact and non-OP impact that kind of slowed the performance trend.

The extent of that did alleviate last year. However, do we -- can we -- should we expect more significant or any, you now, one-off factors upcoming in Q4? And second, regarding StudioGenie, you've mentioned that you released an original content called Crime Puzzle. What is the lineup for next year as well as do you have any outlook on topline revenue?

Young-Jin Kim -- Senior Managing Director, Chief Financial Officer

[Foreign language] Yes. Thank you for those questions. You asked two questions. First, regarding our Q4 outlook, any seasonality factor or non-OP impacting factors and what our forecast is for Q4.

[Foreign language] Now, first factor to mention is that with regards to the network failure that we experienced and the relevant compensation expense that we've set aside, that figure had not been reflected in Q3 numbers. So, that impact is going to come through in Q4 figure. [Foreign language] KT traditionally has seen seasonality factors that emerged in Q4. For instance, those would be fees and commissions paid in terms of repair costs, service costs, and IT and outsourcing-related expenses that would feed through usually in Q4.

[Foreign language] Regarding our projection on one-off upcoming in Q4, back in 2020, there was impairment that was booked regarding the 28 gigahertz spectrum. So, there was quite a significant one-off non operating expense factor. But this year, we do not foresee any such massive or significant one-off factor that would come into play. Having said that, usually, at the end of the year, there is an accounting-based valuation done on invested equities and assets.

So, there is always a possibility that there may be some slight expense. [Foreign language] The second question you asked related to StudioGenie's upcoming lineup for next year and revenue outlook. [Foreign language] For KT, in order to have a very stable backdrop to be able to produce content comfortably, we've recently conducted a right offering capital increase in the amount of KRW 175 billion. [Foreign language] This year, we started off with Crime Puzzle, and we plan to produce about six different titles.

And of those, two titles will be released in the second half of the year. Midnight Thriller is scheduled to be released through OTV and Seezn after end of November. [Foreign language] So, next year, we are planning to produce about 15 different original content titles. And by 2023, we want to make sure we have capability and system in place that could give -- that could enable us to produce about 20 different titles every year.

Based on those capabilities, we want to make sure that we secure an IP library of -- which comprises of about 1,000 and about 100 drama IPs by 2025. [Foreign language] So, the content that we produce from StudioGenie would, of course, be distributed through KT Group's platforms, such as OTV, Seezn, SkyTV, and Media Genie, but we also plan to distribute such content to other platforms, as well as program providers, depending on the characteristics of the content. [Foreign language] You did ask us about our topline outlook for next year. But for the time being, rather than focusing on financial performance for StudioGenie, we are at this point emphasizing laying the appropriate environment for content production, as well as driving synergy across the group affiliate.

[Foreign language] Next question, please.

Operator

[Foreign language] The following question will be presented by Joonsop Kim from KB Securities. Please go ahead with your question.

Joonsop Kim -- KB Securities -- Analyst

[Foreign language] Hello. I am Kim Joonsop from KB Securities. My first and second -- my first question relates to IDC, which is that I would like to understand what the company's take is on the IDC market. We see a lot of players entering into the market.

Compared to those other players, what is KT's position and what is your strategy? Second question relates to your OTT service, Seezn. There will be Disney+ will be soon launched in Korea. So, would there be any financial impact on Seezn? And with regards to strategy for Seezn, what is your strategic direction?

Young-Jin Kim -- Senior Managing Director, Chief Financial Officer

[Foreign language] Thank you for those questions. First question relates to KT's IDC positioning and strategy. [Foreign language] As you've correctly pointed out, if you look at the IDC providers, including global providers, we see the number of players actually increase. And I think that is a good testament to the fact that this market outlook is quite bright.

[Foreign language] Now, companies are really speeding up their digital transformation. And accompanying that, we have a significant increase in the demand for data center and there's this explosive growth there. KT as a No. 1 market player, I think we have around 40% of market share.

We are responding to that demand. And in order for us to solidify our market leadership, we will continue to make investments into additional IDCs. [Foreign language] Now, in terms of new IDCs, one has to seek out the appropriate location in sight, which is quite time-consuming. So, providing new IDC, supplying that into the market, it cannot happen overnight.

It cannot happen over a short period of time. Hence, we also developed a branded IDC business model, where we provide KT's network and command and control capabilities to other companies' IDCs. And we, for the first time, successfully opened the South Guro IDC, which is KT's first branded IDC. And we plan to continue to expand on such business model.

[Foreign language] Also, in the face of such exclusive demand growth, we are seeing new opening and new opportunities in various different types of business models, such as designing, building, and operating IDCs. We call this type of model DBO, for short, design, build, and operation. So, by adopting this business model, we will continue to strengthen our market dominance. [Foreign language] Second question related to Disney+ launch in Korea and what impact that will have on the outlook of Seezn's financials.

[Foreign language] KT also will launch Disney+ Affinity package, an alliance package, and as said in November 12. And we are at this point in the process of developing the pricing package, as well as promotion for the customers. [Foreign language] Now, KT is well aware that the Korean consumers', you know, level of -- I guess, level of demand or requirement when it comes to a global standard content, that they do have high requirement. And we are, at this point developing a very reasonable and best offerings to better fit the needs of the Korean consumers.

We believe that it is meaningful and that we are able to provide more options and more choice to the Korean viewers and Korean content, and we will be able to provide more selection. And we think that it's meaningful that we can provide such abundant services through this extensive content library of Disney+. [Foreign language] KT's Seezn business also, we have continuously beefed up our content offerings, and we have been able to drive growth with the 5G bundled lineup. And also, we've shifted and changed the governance structure and have placed Seezn under the governance of StudioGenie.

[Foreign language] Now, OTT subscribers, depending on the type of content that they want to view, they actually subscribe to multiple OTT services. So, we think that the launch of Disney+ is not going to have any direct impact on Seezn per se. Seezn, supported by the overall StudioGenie umbrella, will continue to strengthen its channel, as well as competitiveness in terms of its content offerings so that we may continue to drive growth from this business. [Foreign language] Next question, please.

Operator

[Foreign language] The following question will be presented by Hong-sik Kim from Hana Financial Investments. Please go ahead.

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

[Foreign language] Thank you. I would like to ask you two questions. First, if you look at your earnings results up to Q3 and the mother company basis, operating profit and a cumulative asset basis was up by 29%. But considering that there are some expense factors that's upcoming in Q4, investors are a bit concerned.

So, under the current trend, do you think that you will be able to continue with the upward trend of dividend payout? And Q3 capex of to date have been quite slow from a bondholder's perspective. This may be something that's positive. But us as an equity investor and equity analyst, it's not something that we could actually welcome wholeheartedly because we feel that in order to drive topline growth, there needs to be investment that -- there needs to be investment. So, could you provide some color as to what your outlook for, you know, capex planning is like going forward?

Young-Jin Kim -- Senior Managing Director, Chief Financial Officer

[Foreign language] Thank you for those questions. First question related to in light of the operating profit uptrend, can the market expect a higher dividend payout? That was your question. [Foreign language] As I said previously, in Q4, there is going to be the network failure-related conversation figure that will be reflected and paid out in Q4 as well as some of the seasonality factors. But there are no non-OP, operating profit, items that will have any significant impact this year.

So, the growth in operating profit, we believe will be connected to increases in dividend. [Foreign language] Responding to your question on the slowness of the capex spend. Due to the impact of COVID, as well as the shortage of semiconductor supply, it is true that capex spend somewhat was pushed back. But if you were to look at the size of the capex comparing last year's Q3 and this year in terms of the size of the orders placed, it is actually quite flat y-o-y.

[Foreign language] So, because of these reasons, we think that capex spend is going to be focused mostly in Q4. And so on a per annum basis, we would most likely see a flat capex spend on a year-over-year basis. As you have correctly mentioned, capex is important in order for us to operate our telco business in a stable manner and also to bring an improvement in quality, as well as capex is important for us to make investment focused on our digico business expansion. So, we expect capex to be spent in accordance with plan.

[Foreign language]

Operator

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

Seung-Hoon Chi

[Foreign language] Thank you. With no further questions, we would now like to close the Q&A session. Once again, thank you for joining us and giving us your interest, as well as questions. This brings us to the end of earnings call for Q3 2021.

Thank you.

Duration: 52 minutes

Call participants:

Seung-Hoon Chi

Young-Jin Kim -- Senior Managing Director, Chief Financial Officer

Hoi-Jae Kim -- Daishan Securities -- Analyst

Joonsop Kim -- KB Securities -- Analyst

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

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