[Concall Summary] KT's Operating Profit Soars "Expanding 5G B2B... Strengthening Synergy with Netflix"

[Asia Economy Reporter Joeslgina] "So far, more than 30 companies are discussing the adoption of KT's 5G-based smart factory solutions. We will continue to launch specialized 5G services dedicated to enterprises."

Despite the impact of the novel coronavirus disease (COVID-19) in the second quarter of this year, KT, which recorded double-digit operating profit growth, announced its plan to accelerate its core new growth business in business-to-business (B2B). It is evaluated that KT was able to establish a solid growth foundation through proactive acquisitions, investments, and partnerships.

KT disclosed on the 7th that it recorded consolidated sales of KRW 5.8765 trillion and operating profit of KRW 341.8 billion based on Korean International Financial Reporting Standards (K-IFRS) for the second quarter of 2020. Overall sales decreased by 3.6% compared to the same period last year due to the impact of COVID-19, while operating profit increased by 18.6%.

With growth in wireless and media businesses, the B2B business performed well, and service revenue remained at a similar level to the second quarter of last year. Additionally, efforts to strengthen profitability, such as optimizing cost expenditures, contributed to operating profit growth approaching 20%. However, sales decreased compared to a year ago due to a decline in device revenue and some group company sales such as cards.

◆"Launching Specialized Services such as Enterprise 5G Edge Cloud" Expanding B2B

Yoon Kyung-geun, KT's Chief Financial Officer (CFO), who attended the conference call that afternoon, expressed expectations for the B2B business, saying, "Currently, not only new customers but also enterprise LTE customers are increasingly demanding to switch to 5G." The B2B business sales on a standalone basis increased by 2.4% year-on-year in the second quarter. With growth in cloud and blockchain sales, AI/DX business sales increased by 16% compared to the same period last year, showing the highest growth rate among KT's major businesses.

He said, "More than 30 companies are discussing the adoption of KT's 5G-based smart factory solutions," and emphasized, "We plan to launch specialized services such as enterprise 5G edge cloud tailored to customer demand. In the second half of the year, we will complete the KT AI·DX platform." KT, which previously led the industry-academia-research council 'AI One Team,' plans to respond swiftly to the digital new deal project, contribute to overcoming COVID-19, and grow as a B2B platform provider.

KT will also strengthen synergy with global operators such as Netflix, with whom it recently partnered. CFO Yoon said, "Currently, the enforcement ordinance of the Telecommunications Business Act regarding the obligation to maintain network quality for global content providers (CP) is being prepared, and we will faithfully comply with government policies in line with the legal amendments." He added, "Both companies (KT and Netflix) have agreed to comply with relevant laws and work together to stabilize services."

Through the partnership with Netflix, KT expects a virtuous cycle of strengthening Olleh TV content capabilities → expanding subscriber base → growing the media platform market. He said, "We are reviewing synergy creation with Netflix not only in IPTV but also in various areas such as wireless," adding, "Currently, it is being conducted as an additional service, and the pricing plan will be reviewed in the future."

When asked about the possibility of cooperation among native OTTs called K-OTT, he replied, "(KT's OTT) Season will continue to invest in original content targeting specific audiences such as idols and entertainment to strengthen its capabilities," and added, "We aim to be an open platform that can cooperate with any operator." He viewed the relationship between Netflix and Season as a "complementary relationship."

◆Wireless Performance Also Improves... Expecting to Reach 3.5 Million 5G Subscribers by Year-End

KT's wireless business sales in the second quarter increased by 0.6% year-on-year, supported by the expansion of 5G subscribers despite the prolonged COVID-19 pandemic. The cumulative number of 5G subscribers in the second quarter reached 2.24 million, exceeding 16% of KT's postpaid mobile phone subscribers. The Internet of Things (IoT) business also performed well, and the number of MNO subscribers increased by 295,000 in the second quarter, the largest net increase since the first quarter of 2018.

CFO Yoon said, "We believe it is possible to achieve 3.5 million 5G subscribers by the end of the year." He also expressed expectations for new device launches such as the Galaxy Note20 series and iPhone 5G. He asserted, "Although the wireless market will expand in the second half compared to the first half, we will not engage in a price war like last year even if the Apple 5G iPhone is released."

It is understood that the ARPU (average revenue per user) of customers switching from LTE to 5G rises by about 30%. Regarding criticism that KT's ARPU was sluggish in the second quarter, he responded, "Roaming revenue was hit, and the number of IoT lines increased in the second quarter," adding, "ARPU based on handsets is growing."

KT plans to continue investing in the 5G network. KT's capital expenditure (CAPEX) in the second quarter was about KRW 970 billion, the lowest among the three telecom companies. The goal is to expand in the second half compared to the first half and execute efficiently within the annual guidance. CFO Yoon said, "The three telecom companies are currently discussing the construction of a 5G shared network in 85 suburban areas," adding, "If 5G joint investment is realized, coverage expansion will be faster, and there will be advantages in quality. Investment efficiency will also improve."

Sales of high-speed internet and fixed-line telephone in the second quarter decreased by 1.2% and 7.0%, respectively, compared to the same period last year. High-speed internet surpassed 9 million subscribers in the second quarter, solidifying its market leadership. IPTV added nearly 137,000 new subscribers, almost double the first quarter, reaching a cumulative 8.56 million subscribers. Sales increased by 0.5% year-on-year due to subscriber and platform revenue growth.

However, group company performance was mainly affected by COVID-19 issues. BC Card's sales decreased by 1.5% year-on-year due to a decline in overseas card purchases. Real estate sales also fell by 7.9% as hotel guests decreased. Content business sales remained similar to the same period last year due to a decrease in advertising revenue despite strong T-commerce business. Skylife's sales increased by 2% as the number of subscribers to high-priced satellite-exclusive products rose.