KT Corporation

Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference of the third 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. This conference will start with a presentation followed by a Q&A session. If you have a question, please press star one That is star and one on your phone during the Q&A. Now we would like to turn the conference over to KT IRO.

Hello, I'm KT IRO Yoon Young-kyun. We will begin the 3rd quarter of KT IRO in 2024. This conference call is provided by KT IRO's website as a web casting, and you can watch the presentation with the presentation slides. The content of today's presentation is It includes the estimated financial performance and sales performance based on the KIFRS before the external audit. In addition to the past data that has been confirmed, we cannot guarantee the accuracy and perfection of all financial and business performance data, and we hope that it will be changed in the future. Then, I will explain the 3-minute performance of the party's Jang Min CFO in 2024.

Good morning. I am Youngkyun Yoon, IRO of KT. We will now begin the earnings presentation for the third quarter of 2024. This earnings call is being webcast live on the company website. Slides are also available for you to follow while listening to this call. Please note that today's presentation includes estimates of financial and operating performance based on KIFRS that have not been reviewed by an outside auditor. Therefore, other than confirmed historical data, We cannot guarantee the accuracy and completeness of financial and business-related information and may change in the future. Now, Min Jang, CFO of KT, will present the earnings for the third quarter of 2024.

Hello, I'm Jang Min, KT's General Manager. KT has established the direction of business transformation as an AICT company. Through the transformation of the AICT structure, we will innovate our business Good morning. I am Min Jang, CFO of KT.

The business direction that KT has set for the future is transformation into an AICT company. We plan to lay the foundation for sustainable growth by innovating our core businesses with AICT transformation and expanding customized offerings to customers as an AX partner in the B2B segment. To this end, we have been striving to achieve structural innovation in our skills, businesses, and workforce this year.

In order to strengthen our capacity as an AICT company, we have signed a strategic partnership with Microsoft on September 28th. In the next five years, we will continue to develop On September 28, in order to strengthen our capacity as an AICT company, we aimed a strategic partnership with Microsoft.

The two companies will be engaging in a full range of cooperation in the AI and cloud areas for the next five years, such as jointly developing the Korean AI cloud service. We will also be working together to preoccupy new markets in the AI IT sector by jointly establishing a company specializing in AX and jointly implementing talent fostering programs.

Also, under the goal of fundamental and sustainable growth, In addition, we are improving the business portfolio to achieve fundamental and sustainable growth.

As these efforts lead to stronger profitability of the B2B business in earnest, the mid-long-term profitability improvement should become more evident.

More recently, as part of the AICT transformation efforts,

we are innovating the HR structure. To strengthen the competitiveness of the data business, we are planning to merge KT Nexar, a subsidiary specializing in big data, while redistributing core capabilities by establishing two new subsidiaries specializing in network services.

On November 5th, we announced a value-up plan with a long-term plan to expand the value of the stock market and increase the value of the company. Until 2028, our goal of connecting ROE On November 5th, KT announced the Value Up program, which includes the mid-long-term plan to boost shareholder and corporate value.

The mid-long-term target is to reach a consolidated ROE of 9% to 10% by 2028. To this end, we plan to triple the AI and IT business revenue compared to 2023, generate a consolidated operating profit margin of 9%, liquidate non-core assets, and implement a share buyback and cancellation program of 1 trillion won in cumulative terms.

Also, on October 15, we decided to pay 500 won in cash in three minutes. Also, on October 15th, we declared a cash dividend of 501 per share for Q3.

In Q4, we will continue to implement a stable shareholder return program based on the mid-long-term shareholder return policy.

Group-wide connection standard sales have grown in real estate, ICT, cloud, and other key businesses, but in the past year, it has decreased by 6.6546 billion won compared to the previous year due to poor performance of content companies. Separate standard sales have grown by 2.0% with a stable growth of 4.7650 billion won in B2C and B2B sectors.

Next, I will go over the financial highlights of 2024 Q3. The group's total consolidated revenues slightly decreased on a YY basis to $6.654.6 billion due to weak performance of the content subsidiary, despite the growth of the core businesses, such as real estate, IDC, and cloud. On a separate basis,

Revenue rose by 2.0% to 4,765,000,000 won thanks to stable growth of the B2C and B2B businesses.

Consolidated and separate operating income jumped 44.2% and 75.1% respectively on YOY basis, which was mainly driven by the base effect from wage negotiations of 2023 Q3 and profitability enhancement of core businesses.

Let me tell you about the detailed results. Sales revenue was 6,546,000 won in the previous year, and sales revenue was Now I will go into more detail.

Operating revenue amounted 6,654.6 billion won, which is similar to the previous year. Operating income increased by 44.2% to 464.1 billion won, which was mainly driven by the base effect of the 2023 Q3 wage negotiations.

Next page. Next page.

Net income rose by 32.9% to $383.2 billion won, thanks to the growth of operating income. EBITDA increased by 13.4% to $1,428.9 billion won. I will go over the operating expense on the next page.

영업 비용은 인건비, 판매비, 서비스 구입비 등의 감소 영향으로 전년 동기 대비 2.9% 감소한

Operating expense decreased by 2.9% YOY to 6,190.5 billion won due to the reduction of labor cost, SG&A, and cost of service. I will now move on to the balance sheet on the next page.

2024년 9월 말 부채 비율은 122.8%이며 순부채 비율은 전년 동기 대비 As of September 2024, the debt ratio was 122.8%.

The net debt ratio decreased by 8.2 percentage points YOY to 30.3%. Next, I will go over CapEx.

KT와 주요 그룹사가 2024년 3분기 누적으로 집행한 투자 지출은 KT 별도 기준의 3분기 누적 투자 지출 규모는 1조 4,160억 원이고, 금융, ICT, 클라우드, 부동산 등 주요 핵심 성장 분야 그룹사의 3분기 누적 투자 지출은 6,178억 원입니다. 지금부터는 사업별 실적에 대해서 설명드리겠습니다.

Cumulative CAPEX by KT and main subsidiaries as of 2024 Q3 amounted to 2 trillion 33.8 billion won. On separate basis, cumulative CAPEX expenditure as of Q3 was 1 trillion 416 billion won. The cumulative CAPEX of subsidiaries was 617.8 billion won. Next, I will go over the performance of each business unit.

First of all, it is wireless. Wireless income is Wireless revenue increased by 1.9% YY to 1,740.4 billion won.

5G subscribers take up 76% of total handset subscribers and is continuing to grow. KT is expanding the contactless distribution channels to increase customer convenience and boost profitability.

Following the eight direct payment types, Yogo released Yogo Season 2 in August. We already have Yogo, a direct online brand which encompasses eight types of payment plans.

In August, we released Yogo Season 2 and launched a promotion campaign for online-only flagship devices. We will continuously work to expand our customer base on contactless channels. Now I will move on to the fixed-line business.

Internet revenue increased by 0.4% compared to the previous year, with a growth of 6,185 billion won.

Rock Band Revenue stood at 618.5 billion won, which is a 0.4% YOY growth, supported by an increase of the portion of Giga subscribers.

The media business maintained the IPTV subscriber net worth, In the media business, IPTV subscribers maintain a net growth trend,

However, PPV and advertising revenue declined, which resulted in a revenue decrease of 1.2% on YY basis. In Q4, we will be launching the on-device AI set-up box to recover revenue and proactively apply AI technology to the entire process of production and distribution of content.

Home 유선전화 수익은 전년 동기 대비 7.6% 줄어든 1,722억 원입니다. 다음은 기업 서비스입니다.

Home telephony revenue decreased by 7.6% to 172.2 billion won. Next is B2B service.

The increase of demand for AX and the steady growth of services including dedicated lines

have contributed to a 2.5% YY growth of B2B service revenue. I'd like to note that AICC, one of the main drivers of AX, is generating double-digit growth with the expansion of the subscription model ASIN Cloud.

기업 서비스 사업은 저수익 사업의 수익성 개선을 통해서 질적 성장을 지속해 나갈 계획입니다. 다음은 주요 그룹 사실적입니다.

We will continue to pursue quality growth by improving the profitability of low-profit businesses. The next page is on major subsidiaries.

PC card의 수익은 매일 매일 감소하면서 전년 동기 대비 6.5% 감소한 9,314억 원을 기록했으나, 영업이익은 금융자산의 건전성을 강화시키면서 전년 동기 대비 큰 폭으로 증가하였습니다.

Skylife는 유료 방송 서비스 가입자 간절호,

Revenue of Sky Life declined by 1.4% to 256.9 billion won YOY due to reduction of pay TV subscription base.

The content subsidiary experienced an 18.3% YY decline in revenue due to a shrinking market. Despite the slow market, drama series that were released in Q3, namely Your Honor and Dear Harry, were successful, showing strong future growth potential.

KT Cloud is a global customer. KT Cloud is a global customer. 클라우드 사업의 공공 분야 고객 리텐션 강화를 통해서 전년 동기 대비 매출이 6.8% 증가했습니다.

KT Estate는 오피스와 호텔 등 임대 매출 중심으로 전년 동기 대비

AT Estate experienced a revenue growth of 3.6% YOY, mainly driven by lease revenue from offices and hotels.

The occupancy and average room rate of the five hotels in Seoul that the company operates

are continuously on the rise, solidifying the foundation for revenue growth.

This concludes the earnings presentation for 2024 Q3. KT will strive to jump to the next level in terms of corporate value by structurally transforming into an AICT company and successfully implementing the corporate value up plan. I ask for the continued support and interest of investors and analysts. Thank you.

In this Q&A session, we will talk about technology innovation, For more details, please refer to the earnings presentation, which has been circulated already.

We will now begin the Q&A session. Today, we have Mr. Chan-ho Chung, Open Tech Innovation Lead, joining us to take questions. In order to allow as many Q&A opportunities as possible, we will appreciate only two questions per participant. Thank you.

Now Q&A session will begin. Please press star 1, that is star and 1 if you have any questions. Questions will be taken according to the order you have pressed, the number star 1. For cancellation, please press star 2, that is star and 2 on your phone. The first question will be provided by Hwe Jae Kim from Dae Shin Securities. Please go ahead with your question.

Hello, I'm Hwe Jae Kim from Dae Shin Securities. I'd like to ask two questions regarding the stock market value measurement plan. You set your goal of 9% to 10% for ROE in 2018. Recently, it's about 6%, so it seems to be a challenging goal. I'd appreciate it if you could tell us one more specific way to achieve it. Secondly, you announced a one-second plan for self-sufficiency from 2025 to 2028. I don't know if this will be implemented in a 2-minute scale every year. And in addition, our basic self-reliance policy is to restore 50% of the current short-term interest rate, but after providing a minimum DPS, we have a policy to take the rest as self-reliance. Now that you have announced self-reliance for a year, then all of the existing self-reliance policies Thank you for the opportunity today.

I am Kim Hyo-jae from Beijing Securities, and I have two questions regarding the corporate value-add plan. The first question is regarding your ROE target. You have set 9% to 10% for 2028. The current number is around 6%, so I believe this can be a quite ambitious goal. So I would like to have a little bit more color on how KT plans to achieve these targets. Second question is regarding the share buyback and cancellation program. From 2025 to 2028, you mentioned that the buyback and cancellation will be around $1 trillion in cumulative terms. Will this program be implemented equally across the years? That is my first question regarding this. And if you look at the current shareholder return policy of KT, it's currently 50% of the adjusted net income, and you pay a minimum DPS, And the resources remaining after the minimum DPS payment is to be used for share buyback. And given that you have launched a 2025-2028 share buyback and cancellation program, I would also like to recommend that you may think about increasing your dividend payments with the resources that you have. So I would like to hear some of your thoughts on that. Thank you.

Thank you for your question.

Regarding the ROE target, we tried to lay out the details in the presentation. But I think there are largely three ways that we are trying to achieve this target.

The first is to change the business structure through AICT. I think this is going to be the hardest part for us. First, to go from a city-centered company to an AICT company, we have expanded our group business portfolio, and we have explained our capabilities,

The first strategy that we have is transformation into an AICT company. And I believe that this pillar of the strategy can be the most challenging for KT. So we are trying to transform ourselves from AICT company to an AICT company. And to that end, we have been innovating the businesses, the capacities that we have, and also our workforce. so that we can successfully adjust our business portfolio.

The second part is about enhancing the efficiency of our assets.

So we may dispose or develop some of the real estate that are not considered to be core to the business. Also, we have some assets in equity as well that may be disposed or used to boost the efficiency of our assets.

The third is our capital placement strategy. According to the plan I explained earlier until 2028, we are planning to increase the amount of money The last one is about the use of capital.

So until 2028, as mentioned in the presentation, we will be using the excess cash to make investments to enhance ROE, or we can also use those resources in the 1 trillion won shareholder return program. So these are largely the three ways that we are trying to achieve the ROE target.

So these are largely the three ways that we are trying to achieve the ROE target.

And then your second question regarding whether the share buyback and cancellation program up to 2028 will be implemented equally across the years. So we don't believe that it will be volatile, but we think it will be gradually increasing across the next couple of years. So we plan to implement the buyback and cancellation program in a gradually increasing and stable manner.

As you know, next year, we will have a 50% discount rate and a discount rate of more than 1,960 won, which is now 2,000 won. It's a policy that will be maintained until next year. After that, how will you implement it? And then your last comment was regarding the mix between the share buyback cancellation and dividend payment.

So until next year, the current shareholder return policy is effective. So that's 50% of adjusted net income and minimum DPS of 1,961 per share. We pay quarterly dividends, so annually currently it's around 2,001. So this policy will continue until next year. And then as to the mix after that, the board of directors will be making the decision on how to move forward. But we do believe that the shareholder return policy will become stronger in future years.

The next question will be presented by Junseop Kim from KB Securities. Please go ahead with your question.

Thank you for the question. I'm Junseop Kim from KB Securities. I'm curious about the type of service provided. According to the ASNSP, it is said that it is similar to the existing CloudNSP, but I would like to know if there is anything else or if there is anything that can be predicted. Secondly, I'm also curious about the type of ASNSP. First of all, you said that there are about 6,000 employees who receive AAP professional training. I wonder if the number of employees of these 6,000 people is related to the AAP professional law. Also, I would like you to confirm whether the project revenue that you announced in our program is related to the AAP professional law.

Thank you. I'm sorry, but the content of the question I couldn't hear you well because the wire was not in good condition.

Could you do it again briefly? Yes. First of all, I would like to tell you about the service condition provided by the AX professional law. Second, I think the AX professional law needs to know the size of the business or the sales size.

Thank you for the opportunity today. I am Kim Junseo from KB Securities, and I have two questions regarding the AX subsidiary. So you are working with Microsoft to establish an AX specializing subsidiary. I would like to have better understanding on types of services that this company will be offering. And also, what is the size of the business that you are expecting that will be derived from this company? And maybe you can also talk about the number of employees that will be reassigned to the AX company as well.

Hello, I'm Chan-ho Jung from the Technology Innovation Department. I'd like to briefly explain the two situations you mentioned. We are currently working on establishing the AX expertise. I'd like to talk about the specific services and forms in more detail, but I'd like to talk about the overall direction.

Yes, thank you for the question. My name is from the Open Tech Innovation Lead. And currently we are discussing and cooperating with MS to develop and establish the AX company. But currently we are still in the development phase. So unfortunately we are not able to talk about the exact details of the services that we are planning to offer. So today, I think I can give you a more overall picture on this cooperation.

And when you asked the question earlier, you compared it to MSP. In fact, this AX professional law is not a comparison with MSP. To tell you about this role, when a customer has a need to change AX to some internal work, And so AX is different from MSP.

So if you assume that there is a customer or a client that has the demand to transform some of its businesses, tasks, and projects to AX, They may have the need to do so, but they may not know where to start. So they may need some help in developing the approach or trying to come up with concrete service types that they can use AX to transform their business.

Yes, so this expert group understands the needs of C-level consulting or pre-consulting customers, I think the biggest role will be offering technical consulting.

So it will be mainly C-level consulting services or pre-consulting service, understanding the AX needs of the customer and giving advice on how they can leverage technology

to achieve their AX goals.

So when I say consulting, you may think of more conceptual consulting, but this is the reason why I mentioned that it will be a technological consulting service because the customer will be having a clear idea on the final output all the way up to the POV stage. And so I think this type of additional service is something that we can differentiate ourselves from other competitors in the market.

So in order to do this really well, we will hire the best experts within KT and the best experts who can play a role in the foreign market. And through this partnership, we will also be provided with the professional capabilities of MS, so that the experts can really be formed. As of now, it's not confirmed yet, but we're going to start with about 100 people. So this type of service offering requires high level of expertise.

This is why we will be fostering talent within KT. We will be recruiting experts from the market, and we will be working together with Microsoft to ensure that we have the technology and the ability to foster talent in this area. You asked about the size, so the size has not been confirmed yet, but maybe just a preliminary and ballpark number will be around 100 employees, although even that number can subject to change based on the needs of the market that we can identify at the establishment of the company.

Lastly, As a result, the price system and sales volume will be different because it is a different type of consulting based on high influence. This is a POV at the beginning of the market, but in the end, it is connected to the main business, so it is the most important role that can increase the sales of KT itself. You can understand it as a role that increases the sales of KT while holding the sales ahead.

And lastly, this is a high performing or high expertise based consulting. So the level of consulting that we provide to the customers, I believe, will be differentiated in the market. Therefore, while it is too early to talk about revenue, I think the value that we can put on this consulting services will be significantly high. While the company subsidiary will work until the POV stage, the customer will have to find a partner for the main project as well. And I think this will be a very significant opportunity for KT. So this business can ultimately contribute to higher revenues of KT as well.

We're not just providing a plan, but we've already gone through this stage inside KT, and we've confirmed the possibility that through AX POC, we can really bring innovation and change to the business through AI through ESG-related work. In addition, we expect that the market will definitely grow, such as having contact with a few strategic customers in this way.

And just to give you a little bit more color, within KT, we have tried these type of services for the ESG parts of the company. And we have been usually working on the AX POC. The AI innovation that is possible for the customers, I think, therefore, has been already proven. And I think there is significant potential here. We are already receiving calls from some of our customers So I believe that this market can grow considerably in the future.

The next question will be presented by Eunjung Shin from DB Financial and Investment Securities. Please go ahead with your question.

Hello. Thank you for the question. First of all, you set three goals for AI IT sales by 2028. Please explain the details of the business and its importance to achieve this goal. And you just explained to us in detail about the MS part. Overall, you mentioned the 4.6 trillion won sales outlook. Yes. Thank you for the opportunity today.

And I have three questions. First, regarding the value of program. One measure is that you will be tripling revenue of AI and IT by 2028. So I would like to have a better understanding on your strategies to achieve the goal. And then second, you just went through the AX company that you are developing together with Microsoft. And I think earlier, you also mentioned revenue outlook around 4.6 trillion won. So what would be the role of KT in achieving that? And then third, there is the reassignment of workforce that is currently being implemented by KT. So I would appreciate a status update and how much the budget or impact it will have on the financials. If you can share color on that, that would be helpful too.

Yes, thank you for the question. I will answer the first and third questions, and I will answer the second question from Ms. Jung Chan-ho. For the first question, the content of the AI IT sales plan is not for the current city or company-centered sales, but for the B2B customers. We plan to achieve sales with the content of providing AI DX services.

Thank you for the questions. I will take the first and third question, and Mr. Chung will be taking the second question. So regarding the tripling the revenue of AI IT, the base assumption is that we will be transforming ourselves from a CT and line-based company to a B2B AIDX service company.

Currently, our AI IT sales are about 6% on a separate basis.

On a separate basis, the AI IT revenue is currently around 6%, and we plan to increase this number significantly by 2028. The absolute number will be around 3 trillion won.

The third question is about the progress of the improvement of the workforce. The first drop has already been made. There are 1,700 people who are moving to two new companies, and there are 2,800 people who have decided to retire, so the total number of people is about 4,500.

Regarding the reassignment of workforce, the process of receiving the request has almost come to completion now. So there will be 1,700 employees that will be reassigned to the newly established subsidiaries, 12 of them, and 28 employees have signed off for retirement program. So a total of 4,500 employees will be reduced from the headcount.

The retirement fund for these people will be settled this year. As I mentioned, the 2800 people who are retiring will be able to save from next year. The money for those who are moving out will be paid to the company that was established.

And so in terms of the impact on financials, the payment for retirement will be booked in this year's accounting. And then the payment for the salaries of the employees that are being reassigned to the new two subsidiaries will be paid as a fee from kt to the subsidiary and this amount should be lower than what we are making as payment at the current stage so uh the for the payment to the employees that are being reassigned to the new subsidiaries that amount can be saved immediately from next year

Yes, and I will be taking the second question.

Your question was regarding the revenue outlook. So when we mentioned 4.6 trillion won, it was based on projection from consulting firm, and there are largely two pillars, AI and cloud.

AI is expected to grow exponentially in the future, depending on the evolution of the AX market.

It is not an accurate number, but we believe that the breakdown between AI and cloud will be largely 50 to 50. And as the AI technology evolves and the AX market takes off, we think that the growth in this segment can be quite exponential in the next couple of years.

However, in the case of cloud, we aimed to grow the market around sovereign cloud, i.e. secure public cloud.

But regarding the cloud business, so this will be driven by partnership with Microsoft, and it will be mainly the sovereign secure public cloud business. And this business is largely impacted by government regulations.

While the finance sector is experiencing more relaxed regulations,

and others should be there for higher demand for external cloud usage. On the public sector, I think it may take longer for this market to open up to other companies.

According to this regulation, we have planned to expand our strategy to the public.

So early on, we will be mainly targeting strategic large customers who have demand for sovereign cloud services, and we will be monitoring the regulatory environment to expand into finance and the public sector later on.

Are there any questions?

No one has requested a question.

There are no further questions.

We will conclude the Q&A session. Thank you for your interest and questions.