KT Corp (NYSE:KT) Q2 2019 Earnings Conference Call August 7, 2019 2:00 AM ET
Seung-Hoon Chi - IR Officer
Kyung-Keun Yoon - CFO
Conference Call Participants
Jong In Yang - Korea Investment & Securities
BeiBei Hu - Maple-Brown Abbott
Hong-sik Kim - Hana Financial Investment
Good afternoon. I'm 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 2019 second quarter earnings presentation. Please note that KT's earnings are presented based on consolidated financial statements under the IFRS standards. We will now begin with CFO Kyung-Keun Yoon's opening remarks, followed by highlights on 2019 Q2 results.
Good afternoon. I'm KT CFO, Kyung-Keun Yoon. Thank you for joining our Q2 earnings conference call. Last April, KT launched the world's first 5G services with 5G subscribers surpassing 420,000 in just 3 months since its launch and we are seeing growth faster than initial market expectations. KT was ahead of others in launching a complete unlimited 5G data plan called the Super Plan, significantly relieving customers of any concern they may have in using data, which led to more than 82% of 5G subscribers opting for this plan.
As a result, Q2 wireless service revenue and ARPU were up 1.1% and 0.8%, respectively, Q-on-Q basis successfully rebounding since Q2 of 2018. 5G coverage expansion also continues for initial service quality enhancement and customer satisfaction. KT was first to open its 5G coverage map in Korea so that customers can use 5G services with trust. We are transparent in sharing not only number of activated base stations, but also information on in-building coverage, which we disclose every day. As of July end, there are 45,339 5G BSTs activated as 5G service coverage expands evenly across all through the nation.
We are also exploring various business opportunities in 5G B2B segment as well. Last April, KT was first in the world to launch B2B 5G plan offering 5G network service specialized to meet the needs of businesses.In June, we opened the second KT 5G Open Lab in Pangyo following the one at Yangjae-dong. We plan to cooperate with promising startups located in Pangyo in developing new technologies in next-generation media, IoT, device and many more. Through such efforts, we believe we can discover creative services that combine KT's 5G infrastructure and platform.
Going forward, KT will continue to enhance customer value through its number 1 5G service as felt by customers and through 5G B2B, which will bring vitality to industry. And also, we will lay the basis for a rebounding growth for wireless business.
In the Internet business, we saw a continued expansion of GiGA Internet subscribers. GiGA Internet saw 160,000 net additions in Q2 accounting for 59% of total Internet subscriber base, growing to 5,220,000 subscribers. 1-GiGA Internet, which is top of the quality scale, reached over 1 million subscribers with the subscribers around premium services continuing the growth trajectory. Thanks to growth in high quality subscribers, Internet business revenue was up by more than 2% year-over-year.
IPTV business continued a double-digit revenue growth driven by growth in subscribers. KT olleh tv, which is Korea's number 1 IPTV service, posted a net addition of 147,000 in Q2 with total base at 8,110,000 subscribers. olleh tv's continuous growth is underpinned by competitive content offerings.
olleh tv is reputed for its vast library of content with 240,000 VOD titles and 256 channels. Every week, it offers exclusive view of Hollywood movies not screened in theaters in Korea on top of a vast amount of content and services. Also content geared for certain age groups like kids and seniors have gained positive responses. For instance, Kids' Land 3.0, an English educational content for kids which was launched last May, drove an increase in VOD usage rate by more than 100%.
For the OTT service, olleh tv Mobile offers not only IPTV content, but also ultrahigh definition multi-angle contents like musician live, professional baseball live, VR, among other 5G-based immersive content. IPTV will continue on its growth trajectory driven by diverse array of content and customized services, which will lead to higher customer satisfaction. KT is also endeavoring to lay the basis for long-term growth from its future platform business. First, Korea's number one platform GiGA Genie reported 1,780,000 cumulative subscribers in Q2 and we expect to possibly reach 2 million subscribers by the end of the year.
In the first half, there was additional device lineup introductions through Table TV and GiGA Genie LTE launch. And GiGA Genie is expanding its subscriber base as different customer segments welcomed services that offer them practical assistant, i.e. in education, music, commerce, real estate, among others.
Also GiGA Drive, which is number 1 auto platform in the domestic markets saw its cumulative subscribers surpass 1 million in Q2 from domestic and foreign car manufacturers. There was stronger cooperation with 14 domestic and foreign OEM brands.
And most recently, together with renowned Renault Samsung Motors, we launched Easy Link which is an in-vehicle infotainment system enabled with AI GiGA Genie services. We will expand on the 5G-based in-vehicle infotainment service and further upgrade connected-to-car service in the 5G era, including developing remote vehicle command and control systems and operating self-driving shuttles.
KT also was first in the world to launch a blockchain development platform called KT GiGA Chain, applying blockchain to a commercial network. We are spearheading the move to make blockchain-based service more prevalent in areas such as security, finance, logistics and local currencies. We expect to see greater application of blockchain in the 5G hyper-connected era, which will entail explosive growth in security-related issues.
KT will continue to secure a sustainable growth engine in future platform businesses, including AI, smart energy, converged security and smart mobility among others. With that, I now move onto 2019 Q2 earnings results.
2019 second quarter consolidated revenue was up 5% year-over-year to KRW 6,098.5 billion. Service revenue, in particular, was up 1.7% year-over-year coming in at KRW 5,088.2 billion on wireless service revenue improvements and continued growth in Internet and media businesses.
On higher labor costs following collective bargaining agreement and increase in initial marketing spend for 5G, operating profit was down 27.8% year-over-year, reporting KRW 288.2 billion. Net profit was down 27.6% year-over-year to KRW 203 billion. EBITDA was down 2.4% year-over-year to KRW 1,191.3 billion.
Next on operating expense. 2019 Q2 operating expense was up 7.4% year-over-year, reporting KRW 5,810.3 billion. On 5G initial subscriber acquisition and stronger subscriber retention for fixed and wireless services, marketing expense was up 20.2% year-over-year. Next is financial position. Q2 end debt-to-equity ratio was 123.1%, net debt ratio was 26.7%. Next is CapEx. Total CapEx spend up to Q2 was KRW 1,354.1 billion.
Now on each of the business lines. Wireless revenue was down 1.2% year-over-year to KRW 1,743.4 billion. Of this, wireless service revenue was down 0.1% year-over-year to KRW 1,643.6 billion. Wireless subscribers saw net addition of 220,000 in Q2, reporting a total of 21,540,000 subscribers. Next is fixed line business. Fixed line revenue was up 0.6% year-over-year to KRW 1,188.9 billion on higher broadband and lease line communications revenue despite PSTN erosion.
Broadband Internet, in particular, saw continued subscriber growth from GiGA Internet with its revenue up 2.3% year-over-year, reporting KRW 506.1 billion. Next is media and content business.
Media and content revenue was up 15.9% year-over-year to KRW 689.9 billion. Media business posted a growth of 11.7% year-over-year. IPTV especially recorded a revenue growth of 14.3% year-over-year on a KT stand-alone basis driven by high quality subscriber growth, which accompanied VAS, value-added service, revenue. Driven by growth in Genie Music subscribers and KTH's T-commerce revenue as well as positive performances from other subsidiaries, content revenue was up 35.1% year-over-year. Next is financial and other services.
Financial revenue was down 1.9% year-over-year to KRW 849.8 billion on reduction in merchant fees for BC Card. Other services revenue was up 3.3% year-over-year to KRW 616.1 billion on growth of IT Solution and Internet Data Center business.
For more details, please refer to the documents that we previously circulated. We will now begin the Q&A session.
The first question will be provided by Jong In Yang from Korea Investment & Securities. And the next question will be provided by BeiBei Hu from Maple-Brown Abbott. Mr. Jong In Yang, please go ahead with your question.
Jong In Yang
Thank you for giving me the opportunity to ask questions. I would like to pose 2 questions. First, we have seen a very fierce competition around subscriber acquisitions with 5G.
Can KT provide us with some color with respect to what your forecast is in regards to the number of 5G subscribers as well as penetration of 5G services for this year as well as next year? Second question relates to ARPU. Your ARPU figure has gone up about 0.8% on a Q-on-Q basis. What is your outlook for ARPU for coming quarters, the third quarter and fourth quarter? Also I would like to understand which had a bigger impact, the lower impact, the reduction in the amount of people taking out the selective discount rate plans or the launch of 5G? Which had a bigger impact on the increase in ARPU?
Responding to your first question about our 5G subscriber outlook for 2019 and '20, in light of the current market situation, we expect that from KT perspective, by the end of year 2019, we will see about 10% of 5G subscribers out of its total handset subscribers. And also in light of the broadening of the handset and device lineup and the stabilization of the network, we expect to reach around 30% by 2020. Responding to your question on ARPU and what our outlook is, due to a very fast growth of 5G services and the subscribers, we expect that by the first quarter, we would be able to achieve a wireless revenue turnaround. And in the second half of the year, with a growth in the number of subscribers, we also expect ARPU to actually go up and turn around. So we think that turnaround of this figure would be possible in the fourth quarter.
With respect to the impact of selective discount rate plans, we've seen this portion actually reach 50%. So the impact from this factor has almost disappeared one could safely say that. So most of the ARPU increase we've experienced is driven by 5G subscribers.
The next question will be presented by BeiBei Hu from Maple-Brown Abbott. And the following question will be presented by Kim Hong-sik from Hana Financial Investment. Mr. Hu please go ahead with your question.
Thank you very much for your time. I have two questions, One is in relation to your 5G as well. It seems to me that the ARPU retention is improving and customer acquisition is continuing in relation to 5G. My question is relating to merchandise revenue versus merchandise cost. Clearly, acquiring these 5G customers has consistently put the Company at a particular cost in relation to the handsets. Are we just going to continue to see that level of intensity in terms of expenses on those items before we can see the revenue turning around in the wireless services to more than cover for the cost on the handsets?
And second question is relating to capital management. With 5G intensifying and your plan to increase CapEx, the question is around your future outlook for a dividend for the next couple of years and also your CapEx, if there is any guidance around that?
First, responding to your question about the competition to acquire subscribers and also in relation to the subscriber acquisition costs, we believe that because we are at the initial phase of 5G, the current situation is not what you would call a normal situation.
In the second half of the year, we expect there will be different types of handsets that are slated to be launched. So there will be some marketing-related competition. However, we expect that, that will bring more choice to the users and also with broader coverage there will be more stabilized network as well as more types of content that will be provided for 5G, which will lead to an actual increase in the people's needs that they have with respect to 5G.
And so, we believe that rather than competition based on subsidies, we will see more competition based on the core fundamental services that 5G actually offers and we expect market to become more stabilized.
And I can assure you that KT will also endeavor to make sure that market stabilizes and is underpinned by competition based on service quality.
Moving on to CapEx and dividend, as we shared with you during the first quarter's conference call, the 2019 CapEx guidance is at KRW 3.3 trillion. Up to the first half of 2019, the actual execution against the guidance was around 40%. We will be expanding within the KRW 3.3 trillion guidance, but however it may be subject to a slight change depending on the 5G competition-related landscape as well as expansion of the coverage.
Now on dividend, we're clearly mindful of what market expects from us with respect to continuous increase in shareholder value enhancement. But for the time being, in light of the fact that there will be some CapEx investment increases required for 5G as well as accompanying higher level of marketing expenses, there still exists quite a bit of uncertainty. That is why at this point, it will be quite difficult for me to give you any specific figure relating to dividend for this year's dividend payout.
Having said that, we will make the decision in light of what the market expects from us and from our shareholders and also be mindful of the financial condition or the financial position the Company is at. And the final specific size of shareholder return or dividend will be decided at the BoD. And once the decision is made, we will come back and communicate with you.
The next question will be presented by Hong-sik Kim from Hana Financial Investment. Mr. Hong-sik Kim please go ahead with your question.
Since others have asked a lot of questions relating to the revenue line items, I would like to ask you about your cost. At a stand-alone basis, not a company basis, the labor cost was a bit lower than what we had expected. And I presume that we are seeing some impact from natural retirement. The natural retirement impact, previously the Company had said that, that impact will kick in from 2020 and it seems like that is already working in the place of, will be your labor cost outlook next year on a stand-alone basis?
And then moving on to marketing cost. It was a Q-on-Q increase of KRW 100 billion, which is quite significant. Under the IFRS 15 last year, there was a slight increase and it seems like there is more upward pressure when it comes to marketing cost. How far do you think that there will be a further increase in marketing expenses going forward? So all-in-all, I guess, we are all quite interested in what the profit outlook is for the second half of the year.
And my second question is, KT engages in many different business areas, including wireless, media and fixed line. And so the market investment, investors have quite a bit of interest on the reshuffling or the improvement of your governance structure. I believe that, that initiative or that effort was quite subdued in recent days. Would you then resume on your efforts to improve your governance going forward?
Responding to your first question on labor cost, as you have previously said, 2019 on a KT stand-alone basis, yes, there was an impact from the increase in natural retirees and hence we expect the labor cost to be year-over-year quite flat as of 2019.
Moving on to next year, although there still is the issue although we still need to get to a collective bargaining agreement there is that factor that remains, but overall, there is also going to be an increase in natural retirees. And that will have an impact, so that will have an impact, a downward impact, that is, on the labor cost. So for next year, it will also be year-over-year flat. On marketing expense, we expect there to be some competition in light of the fact that Galaxy Note 10 is scheduled to be launched, but we will endeavor to make sure that there is market stabilization. In terms of our earnings outlook going forward, basically in terms of our wireless revenue as well as ARPU, we are seeing quarterly improvement.
On a per year basis, we do have positive expectations for turnaround in wireless revenue as well as in ARPU. Having said that, we still cannot avoid the fierce competition relating to 5G. So from a short-term perspective, it seems unavoidable that there will be some upward pressures on the marketing expenses. Hence on a per annum basis, operating profit is expected on a year-over-year basis to decline in light of the 5G competition as well as increases in related expenses.
Now having said that, we will do our best to actually manage our profit by continuing the growth that we are seeing from our Internet, media and B2B business as well as through our efforts to save cost.
On the governance side as long as the direction is actually aligned with our company's mid- to long-term vision and objective, there is, of course, always a possibility and we are open to the possibility of that change in the governance. However, we are not at a point in time where we have detailed ample enough to share with the market.
If there are no further questions, we would now like to close our Q&A session. Thank you very much for your questions and your interest. Once again, thank you very much for joining us despite your very busy schedules. This brings us to the end of 2019 Q2 earnings conference call. Thank you.