KT Corporation (A030200) Earnings Call Transcript & Summary

Good morning, and good evening, thank you all for joining this conference call. And now we will begin the conference of the second quarter of fiscal year 2024 earnings results by KT. We would like to have welcoming remarks from KT IRO, and then CFO will present earnings results and entertain your questions. [Operator Instructions] Now we would like to turn the conference over to KT IRO.

Good afternoon. I am KT's IRO, Young-Kyun Yoon. Let's begin KT's second quarter 2024 earnings presentation. Do note that the earnings release call is currently being webcast live on the company website, so you can listen in on the call and follow the presentation slides as we go along. Let me also remind you that today's presentation includes financial estimates and operating results under the K-IFRS standard that are yet to be reviewed by an outside auditor. We, therefore, cannot ensure the accuracy nor completeness of financial and business data, aside from the historical actuals. So please note that these figures may be subject to certain changes. With that, I invite the company's CFO, Min Jang, to run through the results of the second quarter of 2024.

Good afternoon. I'm Min Jang, KT's CFO. During the first half of this year, KT focused its efforts around growth guided by the AICT company vision while driving structural profitability improvement. We speed up the charge towards becoming an AICT company. In June, we executed a strategic partnership with Microsoft to engage in an all-around cooperation across AI, cloud, and the IT domain. Using KT's robust B2B customer base and technological capabilities of Microsoft, who's spearheading the AI market with its global top AI models, we will be able to respond to Korea's sharply rising AX demand. Through this partnership, we plan to lead the Korean market by developing sovereign cloud and sovereign AI that provides level of security, which enables and ensures data and AI sovereignty to domestic customers. The two companies, thus, are planning to work together in joint R&D projects, service development tailored to Korea, build innovation center and cultivate talent together. We will come back to you with more details in the upcoming quarters. We are also placing momentum behind streamlining our low-margin businesses, a process which KT has embarked on since the second half of last year. Under the objective of sustainable intrinsic growth, we are going through business rationalization through the approach of selective focus and implementing a redesign of the profit structure with service-centricity. As part of our select and focused approach, we rationalized our solar energy, digital logistics and healthcare businesses, while enhancing the business structure and streamlining AICC and robotics business from previously an infrastructure and on-premise basis to a service-oriented business. In the short term, the sales may go down, but we expect to see profit improvement in the longer run, and we will make sure to strike a balance between growth and profit. Coupled with structural improvements, we will be improving the ways of working, placing performance at the core and running a profitability-centric business system. Through such efforts, we will power fundamental profit growth that which is sustainable. With that said, I will move on to key financial highlights for the second quarter. On the back of balanced growth from B2C and B2B as well as growth momentum from core affiliates, including IDC cloud and real estate, consolidated revenue reported KRW 6,546.4 billion and separate basis revenue came in at KRW 4,548.3 billion. Consolidated revenue, thus, was flat year-over-year, while stand-alone revenue recorded an increase of 1.4%. Operating profit fell 14.3% year-over-year on a consolidated basis and 12% on a separate basis due to collective wage agreements reflected in the second quarter, which was earlier than usual. Now, but excluding the collective bargaining impact, operating profit decreased 3.1% year-over-year on a consolidated basis to KRW 558.4 billion, while separate basis operating profit increased 3.9% year-on-year, reporting KRW 423.3 billion. Last May, KT canceled 5.14 million treasury shares, which account for 2% of total outstanding shares and decided on Q2 cash dividend payout of KRW 500 per share on July 16. Next, on the details of the earnings breakdown. Operating revenue was flat year-over-year at KRW 6,546.4 billion. Operating profit declined 14.3% year-over-year, reporting KRW 494 billion on the back of collective wage bargaining impact captured in the second quarter accounts. Net income was down 5.1% year-over-year to KRW 410.5 billion on lower operating profit while EBITDA was down 3% on year, reporting KRW 1,460.2 billion. Next page is on operating expense. Operating expense was 1.4% year-over-year, reporting KRW 6,052.4 billion on the back of increases in labor costs and business expense. Next is on financial position of the company. Debt-to-equity ratio as of June end '24 was 127.3% while net debt-to-equity ratio dipped 11.1 percentage points year-over-year, reporting 33.5%. Next is CapEx. Total CapEx up to second quarter on a cumulative basis for KT and its major affiliates amounted to KRW 1,335 billion. KT separate basis, Q2 cumulative CapEx was KRW 960.9 billion, while CapEx from key growth businesses of finance, IDC cloud, real estate reported KRW 374.1 billion. Next is on performance of each business segment. Wireless revenue was up 2.5% year-over-year, reporting KRW 1,765.1 billion. 5G subscribers surpassed 10 million count, achieving 75% penetration. And coupled with higher roaming revenue and MVNO business expansion, wireless revenue growth received a boost. With the release of variety of rate plans, KT is giving more choices back to users, which is helping to cement our subscriber base. We are offering eight types of direct rate plans called Yogo, which we are using to grow the share of our online channel, while following the release of 10 mid-tier, 5G plans in January, we launched [ TV Genie and MILLIE's Choice ] plan back in July, further expanding customers' choice for 5G tariffs. Next, on the Fixed Line business. Internet revenue was up 1% on year driven by growth in GiGA Internet subscribers, posting KRW 618.5 billion. Media business saw IPTV subscriber net addition trend continue posting 0.9% growth versus last year. For content production, and the entire chain of distribution, KT at the group level will actively utilize its AI strategy and capabilities to spearhead the AX of the media industry. And as part of that effort, we are planning on introducing an on-device AI set-top box in the second half of the year. Home Fixed Line revenue was down 7.8% year-over-year to KRW 175.6 billion. Next is on B2B services. B2B business revenue declined 1% on year due to the rationalization of low-margin businesses, including the solar energy business. Now if we were to exclude the low-margin businesses, which are currently under rationalization process, B2B service revenue has sustained an uptrend, generating results, especially from the AI-related businesses. Despite the changes made to AI contact center from an on-premise to a service-centric business structure, which was done to strengthen profitability, we are still seeing a double-digit growth continue. And in the second quarter, KT's own LLM model made its first attempt at global expansion, generating meaningful revenue from LLM project at the Jasmine Group of Thailand. B2B service will continue on with its quality-driven growth by improving the low-profit business structure and through business and customer expansion, powered by our core capabilities, including AI. Now moving to KT's subsidiary performance. Revenue for BC Card was down 6.8% on year to KRW 977.7 billion on lower acquiring volume following the economic downturn, while its operating profit increased significantly year-over-year on the back of stabilizing cost trend, including write-off costs. Due to declining number of pay-TV subscribers and the home shopping advertising market slump, Skylife revenue dipped 2.5% year-over-year to KRW 254.6 billion. Operating profit fell year-over-year on the back of an increase in amortization costs from content of Skylife TV. Content subsidiary saw a 14.8% year-over-year revenue decline on the back of a reduction in number of original drama productions. Despite sluggishness in the industry, Nasmedia secured a firm leading position in digital advertising market by being selected as Google's official MCM partner and Crash, which is Studiogenie's drama topped viewership ranking for Mondays and Tuesdays drama time slot. As such, we are seeing meaningful results from each of these business areas. For KT Cloud, we saw an increase in IDC revenue mostly from global customers and on timely monetization of DBO, design, build, operate projects. Revenue increased 17.1% year-over-year with operating profit reporting sizable expansion. Driven by balanced growth in rental revenues across office, hotels, et cetera, KT estate saw 7.1% year-on-year increase in its revenue. In particular, hotel segment drove KT estate's growth on higher revenue per room, which was driven by increases in demand from global tourists. So that was the highlights of KT's second quarter 2024 earnings performance. KT will expand cooperation with global IT tech companies so that we may make the leap as the AICT company, and through continued streamlining of our businesses, we will drive shareholder value enhancement. Dear investors and analysts, we once again ask for your continued interest and support. Thank you.

For more information, please refer to the presentation deck that we have previously circulated. We will now take your questions. [Operator Instructions]

[Operator Instructions] The first question will be provided by Hoi Jae Kim from Daishin Securities.

I'm Kim Hoi Jae from Daishin Securities. I would like to ask you two questions. First, just a little bit more color on your alliance with Microsoft. You did say that you would come back to us next quarter with more information but can you provide some color on the business model? Is it a revenue share model? Or will it take a different form? So if you can talk about the business model, that will be quite helpful. And if we can look forward to monetization, what would be the timing of that monetization? And second, it seems that your large investment cycle has been concluded. And I think that there may be an opportunity going forward then for a spectrum allocation. And in which case, that spectrum that -- to be allocated is not going to be the adjacent spectrum to the spectrum that you currently own. So do you think that in that case, carrier aggregation, CA, would be made possible? Is that another option that you can think about? And also, if you're going to make additional investment into the spectrum, do you think that the size will be such that it will actually pressure your current bottom line improvement trend?

I will respond to your second question first. The government has introduced a draft plan for the digital spectrum plan in the early year, but I understand that the final version is yet to be confirmed. So because of that, because we do not know as to the specific spectrum that is up for allocation or the pricing that is attached to it, none of that has yet been confirmed. So it's very difficult at this point to project the impact it may have on the financials. But if the spectrum is allocated from a technical perspective, in terms of carrier aggregation, we do not see that there will be any issue or any hurdle in going through with CA if needed. And also, even if that additional spectrum is assigned, if you look at our current 5G spectrum, we still do have ample buffer. So in the near future, we do not believe that there's going to be any additional burden in terms of CapEx or in terms of our finances. So once the government finalizes their plan, we will come back to you and share with you more information about its potential impact on the company. Now moving on to your first question about our partnership or alliance with Microsoft, the business model and the timing of monetization. Now first, talking about the business model. Just simply put, Microsoft, as you know, is a global tech company that owns a top AI model. KT is the #1 domestic player in the B2B area. And these two companies coming together, we believe, can create meaningful opportunities in the Korean market. So that is the background of this partnership. And also in terms of the business model per se, basically, the both companies, we would like to work together and our plan is to work together in the areas of AI, cloud and smaller LLM and a small multi-model language model, so SLLM and SMM. So we will be working together in those segments and launching some products into -- products and services into the market. And the second aspect is it's more about -- not specifically about the business per se, but more about cultivating the required talent in the areas of AI and cloud. So it will be an opportunity for KT to learn from Microsoft regarding the technical capabilities. And Microsoft will have an opportunity to gain further insight and understanding about the Korean market. And just to elaborate on the service that we are currently planning to provide is, and I mentioned during my presentation, terminologies like sovereign AI and sovereign cloud. And what that means is we will be developing a service that could give our customers like the government organizations, the public entities and financial institutions ample amount of conviction that they are the ones that have the authority over data as well as the ownership and control over the data that is used under the whole AI and cloud domain. So these are -- the customers will be the ones that will independently and autonomously have rights to an authority over the data and the ownership.

The following question will be presented by Jae-min Ahn from NH Investment & Securities.

I'm Ahn Jae-min from NH Securities. I also would like to ask two questions. The first one is I see that your B2B services revenue has dipped. You did talk about streamlining low-margin businesses. Can you elaborate a little bit more on this topic? Second is with regards to the government-initiated value of program, is KT also planning to participate in that initiative? What plans do you have? And also, some schedule or timeline-related information will be appreciated?

Thank you for that first question. I will provide you with the answers to that question. You asked about the reason why we see lowering of B2B services revenue and our rationalization efforts around low-margin businesses and what impact it's having. So regarding the streamlining and structural enhancement efforts that we are putting in around our B2B business is actually -- there are actually two aspects. The first one is to phase out certain businesses that is not giving good profits. So making that selection as to which low-margin or low-margin businesses we will be phasing out. So that is one aspect. Second is to realign our structure, focusing on bottom line, focusing on the profit generation capabilities. So under that first approach, some of the examples that I can state is, for instance, we sold a blockchain and also road map, which was our digital logistics initiative. So we sold off those businesses. And also, we withdrew from the healthcare business in Vietnam. Under that second approach, if I could just cite some examples where we are redesigning our business portfolio with a profit-centricity? So for instance, like our robot business, we started the robot business, but there was a distribution element that was attached to it, which was quite onerous from KT's perspective. So we decided to stop or phase out the distribution aspect and focus our efforts more on the robotics platform aspect in terms of the business. And also, as I mentioned during my opening presentation, for the AICC business, we also made some realignment and redesign, moving away from the BPO type of a project and focusing more on the services aspect, which we, KT, we believe, have differentiation. Responding to your second question about the Value-Up program and the details related to these initiatives, internally, yes, we are talking about and discussing the specifics of the Value program. We consider Value program to be positive, and we are very active in onboarding that initiative. In terms of the specifics, what indicators we have put in and what the targets are and what actions should follow, all these details, once again, are currently under discussion. KT, however, we've been very actively talking and finding ways to make improvement to this undervalued corporate valuation. And so once we are able to come up with the more specifics, we will make sure that we can live up to the expectations that the market has. And once we have that information available, we will come back to you and communicate and also make disclosures.

The following question will be presented by Joonsop Kim from KB Securities.

I'm Kim Joonsop from KB Securities. I would like to have two questions. First one on the impact from the labor cost following the collective wage agreement and your second-half outlook. Regarding the labor cost for the second quarter, it seems that labor cost had a quite a bit of an impact on your cost line item. And as you've also mentioned during the opening as well as the press news spikes that we have seen, would like to gain some understanding as to the extent of the impact that you felt from the labor cost or the collective agreement on wages. Second question is your take on the second half outlook. In the second quarter, you achieved more than 10 million -- or you surpassed the 10 million count for 5G subscribers. You've streamlined your low-margin businesses. So there are multiple issues that are existing at the same time. Just wondering whether there is any big issue that could impact your second half performances -- earnings performances? And to the extent possible, it will be helpful if you could shed some light on what your -- or take is in terms of your business outlook in the second half.

Responding to your question about the impact on the labor cost on the wage agreement, the amount that was reflected for the first half of the year is KRW 64.4 billion based upon our calculations compared to -- so that is part of the annual calculation, which is about KRW 118 billion, that will be for the entire year, and KRW 64.4 billion is part of that. And we reached an agreement in terms of the collective wage bargaining, as of July. And according to the advice that we got from the independent auditor, basically, that number has to be reflected in the first half number if all the facts are confirmed before the timing of the disclosure. So we follow the advice of the independent auditor in reflecting this figure in our semiannual financial statement. Last year -- if you compare with last year, basically, this expense was captured in Q3 number. This year, it was captured in the second quarter number. But if you look at the extent of the impact on an annual basis, it's about KRW 40 billion less compared to the previous year. So aside from KRW 64.4 billion, which we had booked basically, the KRW 118 billion of wage increase effect is going to be spread across the accounts for the second half of the year. So it is not going to undermine or have -- or be pressuring down on a specific quarter's profit. Now on the question about our second half earnings outlook. In terms of the labor cost, as I have just explained, in the second half of the year, this is not going to work as a big burden for the company. And also, as we are continuing on with the streamlining of our noncore low-margin businesses, that would actually help with company's profitability. Also in terms of the depreciation cost and selling-related costs, we are controlling these cost items very well. And on the back of inflation that we are seeing, there is increases in the electricity cost as well as other business-related expenses, but all of that is already reflected in the company's business plan. So we will do our best to make sure that we overachieve on the earnings in the second half of the year compared to the previous year. Lastly, if I may also talk about our group affiliates. The content market, as you know, the market is very sluggish. And there was a change in the criteria upon which we calculate our depreciation cost and that had pushed down on the profit a bit. But we believe we will do our best in the second half of the year so that on a consolidated basis, in terms of the top-line revenue and operating profit, all of our group affiliates in the finance, AI, IDC cloud can actually perform robustly. Well, thank you very much for all of your interest and the questions since we have no questions in the queue, we would like to now close the Q&A session. Once again, thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]