KT Corporation (KT) Q2 2017 Earnings Report, Transcript and Summary

[Foreign Language] Good morning and good evening, first of all, thank you all for joining this conference call. And now we’ll begin the conference of the 2017 Second Quarter Preliminary Earnings Results by KT. We would to have welcoming remarks from Mr. Youngwoo Kim, KT’s IRO; and then Mr. Kwang-Suk Shin 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. Youngwoo Kim, KT’s IRO.

[Foreign Language] Good afternoon. I am Youngwoo Kim, KT’s IRO. Let us begin the second quarter 2017 earnings presentation. This earnings release call is being webcasted via our Web site and you can follow the slides and listen in on the call at the same time. [Foreign Language] Please note that KT has been releasing consolidated numbers under the IFRS standard since the first quarter of 2011. We will begin with our CFO, Shin’s opening remarks followed by Q2 2017 results.

[Foreign Language] Good afternoon. This is Kwang-Suk Shin, KT’s CFO. Supported by robust GiGA Internet and media business and steady earnings from the group’s subsidiaries, KT recorded a sound operating profit of around KRW400 billion over two consecutive quarters. [Foreign Language] First of all, the Internet business acquired 3.2 million GiGA subscribers as of the end of the second quarter. This is 91% of this year’s GiGA Internet subscriber target of 3.5 million and as such we believe we will be able to achieve the target ahead of schedule. [Foreign Language] IPTV also recorded a net addition of more than 100,000 subscribers in the second quarter following the Q1 trend, and the group’s media revenue posted a double-digit growth year-over-year. KT tapped into the market ahead of others by launching GiGA Gini, the AI set-up box and by expanding quality subscribers supported by competitive content and through increases in platform revenue from PPVs and home shopping and commission fees, the company is strengthening its position as Korea’s top media player and we believe this will work as a solid basis for achieving annual PEPs [ph] for the media business. [Foreign Language] We are also seeing visible results from five main platform businesses which is very pivotal to the future of the company. In smart energy, first half revenue already surpassed full year revenue of last year. KT will soon introduce a new platform for energy efficiency services and focus on building a market leadership in the smart energy market. [Foreign Language] Korean telecom operators, including KT, are currently facing a critical crossroads and I’m quite aware of the concerns of investors and shareholders on the direction forward. KT would consider countermeasures from various different angles in line with the changing telecom business environment and do its utmost to make sure that our growth and bottom line are not undermined. With that, I will move on to Q2 2017 earnings results. [Foreign Language] Q2 operating revenue was up 2.9% year-over-year coming in at KRW5,842.5 billion. Operating profit was up 4.8% year-over-year recording KRW447.3 billion. And even if we exclude one-off gain of KRW40.7 billion from sales of MasterCard shares or by BC Card, operating profit was still more than KRW400 billion. [Foreign Language] Net income was up 1.1% year-over-year to KRW258.1 billion and EBITDA was at KRW1,288.3 billion. Next is on operating expenses. [Foreign Language] Q2 operating expense was KRW5,395.2 billion, up 2.8% year-over-year. Marketing expense increased marginally Q-on-Q on increased fixed and wireless subscribers and launch of premium handsets by domestic handset makers, but it was down 4% year-over-year. Next is on the financial position. [Foreign Language] Second quarter debt to equity ratio was 113.2%, down 17.1 percentage points year-over-year. Net debt ratio was 37.3%, down 4.4 percentage points year-over-year. Next is on CapEx. [Foreign Language] Total CapEx spend up to the second quarter was KRW688.6 billion. In the first half, investments were made into new spectrum and commercialization of NB-IoT which is a dedicated network for Internet of Small Things and there are various investments scheduled for the second half but we will effectively manage it within the annual CapEx byline of KRW2.4 trillion. Next, earnings results for each business line. [Foreign Language] Wireless revenue was down 5.2% year-over-year to KRW1,781.4 billion. And due to a temporary operational stop in June for an upgrade to next-generation IT systems, MNO, net add dipped marginally Q-on-Q. But on sustained net add trend with second device and IoT subscribers, total wireless subscribers posted a growth of 287,000 Q-on-Q. With increases in tariff discount subscribers and the impact from accounting changes to handset insurance from last September, wireless service revenue declined 1.7% year-over-year. Wireless ARPU was at KRW34,554, almost flat Q-on-Q. Next is on the fixed line business. [Foreign Language] Fixed line revenue was down 4.7% year-over-year recording KRW1,226.1 billion. Telephony revenue declined cumulative 10.2% for the first half of the year which is within our original projection. But Internet revenue was up 1% Q-on-Q and 4.4% year-over-year continuing the top line growth for eighth consecutive quarters since the second quarter of 2015 when GiGA Internet subscriber acquisition actually took off, and is defending the PSTN erosion. Next is on media and content business. [Foreign Language] Media and content revenue was up 19.2% year-over-year to KRW561.4 billion. Next is on financial and other services. [Foreign Language] Financial revenue was up 6.6% year-over-year growing to KRW914.7 billion driven by one-off gains from sale of MasterCard shares and increases in domestic acquiring volume. Other services revenue was up 7.2% year-over-year recording KRW585.5 billion on good performance from real estate, IDC and overseas SI business. [Foreign Language] For more details, please refer to the distributed documents. We will now entertain your questions.

Now the Q&A session will begin. [Operator Instructions]. The first question was provided by Mr. Hue-Jae Kim from Daishin Securities and the next question will be provided by Mr. Jong-In Yang from Korea Investment Securities. Mr. Hue-Jae Kim, please go ahead, sir.

[Foreign Language] I would like to pose two questions. Could you provide some color as to what you’re dividend payout policy will be like in the second half of this year. And also provide us some direction in terms of a mid- to long-term horizon? We asked this question to your other competitors as well. I would like to understand what KT’s position is with respect to the government’s recent move or measures to try to reduce the burden of household telecom cost in Korea.

[Foreign Language] Your first question was on the dividend and as we have mentioned this during our Corporate Day, we have planned to expand our dividend on a year-over-year basis in 2017. However, in terms of the actual amount of the dividend, it will be determined by our Board of Directors meeting based on the annual performance. And the decision will take place in the beginning of 2018. And even after 2017, we would do our best to improve our profitability and also efficiently make use of our capital so that we can increase the size of the shareholder return, and also we have plans to increase payout ratio. [Foreign Language] You asked about KT’s position with respect to the government service and plan to release the household burden on telecom cost. We do understand, basically the spirit of that approach and we do agree with the fact regarding the lessening of the burden for the people. But it is quite regrettable that this measure is solely focusing or targeting against the telecom companies. We have to be mindful of the fact that the data traffic is growing very rapidly and in order for us to maintain high service quality and also to prepare ourselves for the fourth industrial revolution, we need to make investments into the 5G network. And doing that groundwork is an urgent matter from the company’s perspective; hence, we do have some concerns. And also, the whole effort to reduce the telecom costs for the household should not be solely borne by a telco itself, but there are other stakeholders such as the government, the handset maker and the portal companies. I believe that there needs to be a sharing of role across these entities. And also we believe that there is a role that the government can also play because the actual prices with the spectrum, the usage fees for the frequencies as well as other telecom-related funds, it actually is funded by all the telecom-related expenses that the people of a nation actually bears. Hence, we believe that it will be important for other stakeholders in this ecosystem to actually participate, namely the handset makers as well as portal companies in overall reducing the burden of the household.

The next question will be presented by Mr. Jong-In Yang from Korea Investment Securities. And the following questions will be presented by Mr. Kyung Deok Kim from Hanwha Investment & Securities. Mr. Mr. Jong-In Yang, please go ahead with your question.

[Foreign Language] I would like to post two questions. First, I would like to understand the recent update on your GiGA Gini product, would like to know much of it that you are selling and do you have a specific target for either this year and next year 2018? And also is there any ways for you to try to connect this not only with the VOD on the music side, but also with the commerce side? My second question is that come June of next year, the SO-related regulation is going to be listed in terms – and what impact would that have on your media business in terms of the subscriber as well as potential impact to the platform? If there is that deregulation, if the restructuring is removed, then if KT were to actually acquire an SO player, would that be positive?

[Foreign Language] GiGA Gini, which is an AI set-top box, which we launched in the first quarter recently saw its subscribers above 100,000 level, and it is rapidly taking root in the market. Going forward, we want to build GiGA Gini as a hub inside households where people could actually enjoy different multi-medias, like the TVs and the music, and we, therefore, would like to set it up as a home IoT hub. And also, such artificial intelligence technology can be expanded to other areas like the intelligent apartment, finance, education and shopping as well. We would like to utilize this platform as such an expanded AI platform. [Foreign Language] To elaborate a little more, we have entered into a MoU with construction companies like Daerim, Hyundai and Lotte [ph] and basically – so that we can conduct an AI-based apartment project. And also we plan to provide financial services based on AI, and we will collaborate with companies like Mirae Asset and Woori Bank. And also together with KTH’s K Shopping services, we will launch a conversation-based commerce services and also by opening up our software development kit, we wish to actually foster and create an AI ecosystem. [Foreign Language] You asked about any specific target for GiGA Gini in terms of subscribers, our target is to reach 500,000 subscribers. After we launched in January, we saw 30,000 subscribers in Q1 and 100,000 in Q2, so we see a very fast traction in terms of growth. In terms of plans afterwards, we do not have any specifics as of yet, but we would be mindful of how this AI ecosystem matures, and we will make appropriate decisions based on that. [Foreign Language] You asked about our future direction for media business. We’ve seen a subscriber growth and also we’ve seen our subscribers become high quality based on the differentiated services that we have provided. And also the growth in the platform revenue actually driven by items such as the home shopping commission fees received both an improvement in terms of size and quality. So regardless of how the regulation actually plays out, we are going to continuously maintain the current business direction and approach. [Foreign Language] In terms of the media business, we will continuously consider different approaches that could further expand the value of this business, but we do not have any concerns of certain measures, including any plans to actually acquire an SO at this point in time. However, we are of the view that the combined regulations between the types of entities, we think these types of regulations, we believe it is only natural that it shall be repealed. That is KT’s position.

The next question will be presented by Mr. Kyung Deok Kim from Hanwha Investment & Securities. Mr. Kyung Deok Kim, please go ahead, sir.

[Foreign Language] I have one comment that I would like to make and then a question. I just would like to say that during the April 28 session when the CEO was making certain statements, there was an executive from the CR division and he promised us that we need not be worried about the regulation. Having said that, we now see that the rates are going down and things are quite difficult from our perspective. So I would like to ask you to actually make a complaint to the government so that you could actually keep to the promise that you’ve made to the market. Moving on to my question then. I would like to ask the management of KT what is your priority across shareholders, government and employees. I ask this question because if I look at your recent business approaches, I do not think that you place the foremost priority on the shareholders. So if you do not place shareholders as a number three priority, I would like to understand what policies the company is willing to actually implement for the benefit of the shareholders?

[Foreign Language] I understand your concern regarding the shareholder aspect. I sympathize and I accept your point. In terms of how we prioritize across shareholders, government and employees, we are mindful of the importance and we are clearly aware of the importance of our shareholders. We believe that it is of our utmost responsibility to actually represent the benefits and interest of the shareholders and we will be very committed to that and we would employ that approach as we respond to the government and also as we make our internal decisions. So we will be very much and clearly aware and mindful of that.

[Foreign Language] The next question will be presented by Mr. Dan Kong from Deutsche Bank. Mr. Dan Kong, please go ahead with your questions.

[Foreign Language] My question relates to your cost savings efforts for year 2018. In 2017, you were able to actually save cost and that had a good impact on your bottom line. Come 2018, we’ve heard that you have a quite bit of an aggressive plan to hire additional headcount. And from investors’ perspective for KT, we’ve always seen the headcount issue as KT’s inherent problem. So it seems like hiring new people is actually going against the whole intension. So in light of this additional hiring plan that you have, can you provide us with your projection in terms of the cost aspects for year 2018? And give us a split between the mother company and the subsidiaries? And do you have a specific target when it comes to your human resources or your headcount?

[Foreign Language] KT has put in significant assets to bring about cost savings and the types of activities that we engaged in were actually improving the structure of the network and also making sure that we make appropriate investments in advance, and we brought about the impact of reducing the depreciation costs from the mid perspective. And also we fended off any excessive investment by setting up disciplined principles that focus on profit-centric investment. And also we implemented automation. We also reduced in the amount of workflow when it comes to activation and AS [ph] dispatches. And such an approach and direction is going to be quite similar in 2018 as well. We were continuously focused on further enhancing cost efficiencies and also really trying to strengthen our fundamentals so that we can better respond to uncertainties in the market. [Foreign Language] Responding to your second question on headcount, basically in order to bring about a virtual cycle of the human resources and the utilization of such resources, we are hiring at a level that is required by necessity. What you have seen in the press is a figure that is at the group level. From the mother company and the subsidiary level, we would decide on the size of the hiring, mindful of the most optimized level. And such hiring is not – such hiring leading to any increases in labor costs is going to be quite limited.

[Foreign Language] A follow-up question is from the investors’ perspective whether the hiring and headcount is at the group level or headquarter level, since this is an investment based on a consolidated basis, I don’t think that makes a bit difference. Then can you give us what the net addition is as of end of either 2017 or 2018, because we already have read that – we know the figure 4,000. So I would like to understand how much of that is actually net addition or how much is a replacement?

[Foreign Language] So that 4,000 figure of hiring, that kind of makes it seem quite large. But if you look at some of our subsidiaries, we have call centers and we have companies that actually provide services. And in these entities, the turnover of employees is actually quite high. So it would be very difficult for us to actually carve out what the net addition or the size of the net addition is.

Currently, there are no participants with a question. We’ll wait for a second until there is another question.

[Foreign Language] If there are no further questions, we would like to now close the Q&A session. Thank you for your questions and your interest. And once again, thank you for joining us today.