As filed with the Securities and Exchange Commission on April 30, 20182019
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form20-F
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report |
For the transition period from to |
Commission file number1-14926
KT Corporation
(Exact name of Registrant as specified in its charter)
KT Corporation | The Republic of Korea | |
(Translation of Registrant’s name into English) | (Jurisdiction of incorporation or organization) |
KT Gwanghwamun Building East
33,Jong-ro3-Gil,Jongno-gu
03155 Seoul, Korea
(Address of principal executive offices)
Kyung-Keun Yoon
KT Gwanghwamun Building East
33,Jong-ro3-Gil,Jongno-gu
03155 Seoul, Korea
Telephone:+82-31-727-0114;E-mail: kk.yoon@kt.com; ktir@kt.com
(Name, telephone,e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Name of each exchange on which registered | |
American Depositary Shares, each representing | New York Stock Exchange, Inc. | |
one-half of one share of ordinary share | ||
Ordinary share, par value₩5,000 per share* | New York Stock Exchange, Inc.* |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
As of December 31, 2017,2018, there were 245,097,055245,144,768 ordinary shares, par value₩5,000 per share, outstanding
(not including 16,014,75315,967,040 ordinary shares held by the registrant as treasury shares)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐Non-accelerated filer ☐ Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.U.S. GAAP ☐ IFRS ☒ Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
* | Not for trading, but only in connection with the registration of the American Depositary Shares. |
i
ii
Item 16. | [Reserved] | |||||||||||
| ||||||||||||
| ||||||||||||
Item 16A. | Audit Committee Financial Expert | |||||||||||
Item 16B. | Code of Ethics | |||||||||||
Item 16C. | Principal Accountant Fees and Services | |||||||||||
Item 16D. | Exemptions from the Listing Standards for Audit Committees | |||||||||||
Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | |||||||||||
Item 16F. | Change in Registrant’s Certifying Accountant | |||||||||||
Item 16G. | Corporate Governance | |||||||||||
Item 16H. | Mine Safety Disclosure | |||||||||||
| ||||||||||||
| ||||||||||||
|
iii
PRESENTATION
All references to “Korea” or the “Republic” contained in this annual report mean the Republic of Korea. All references to the “Government” are to the government of the Republic of Korea. All references to “we,” “us” or the “Company” are to KT Corporation and, as the context may require, its subsidiaries.
All references to “Won” or “₩” in this annual report are to the currency of the Republic and all references to “Dollars,” “$,” “US$” or “U.S. dollars” are to the currency of the United States of America. Our monetary assets and liabilities denominated in foreign currency are translated into Won at the market average exchange rate announced by Seoul Money Brokerage Services, Ltd. (the “Market Average Exchange Rate”) on the balance sheet dates, which were, for U.S. dollars,₩1,172.01,208.5 to US$1.00,₩1,208.51,071.4 to US$1.00 and₩1,071.41,118.1 to US$1.00 on December 31, 2015, 2016, 2017 and 2017,2018, respectively. Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 20172018 have been translated into United States dollars at the rate of₩1,071.41,118.1 to US$1.00, the Market Average Exchange Rate in effect on December 29, 2017.31, 2018.
Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.
All market share data contained in this annual report, unless otherwise specified, are based on the number of subscribers announced by the Ministry of Science and ICT (the “MSIT”) (ICT standing for Information & Communication Technology), the Korea Communications Commission (the “KCC”) or the Korea Telecommunications Operators Association.
Item 1. Identity of Directors, Senior Managers and Advisers
Item 1.A.Directors and Senior Management
Not applicable.
Not applicable.
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 2.B.Method and Expected Timetable
Not applicable.
Item 3.A.Selected Financial Data
You should read theThe selected consolidated financial data presented below should be read in conjunction with theour consolidated financial statements (“Consolidated Financial Statements”) as of January 1, 2017 and December 31, 20162017 and 20172018 and for each of the years in thethree-year period ended December 31, 2018 and related notes thereto (“Consolidated Financial Statements”) and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. The selected financial data as of December 31, 2017 and the report2018 and for each of the independent registered public accounting firm on these statementsyears in the three year period ended December 31, 2018 were derived from our audited Consolidated Financial Statements included herein. These audited financial statements and the related notes have beenelsewhere in this annual report. Our Consolidated Financial Statements are prepared underin accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The selected consolidated financial data for the three years ended December 31, 2017 have been derived from our audited consolidated financial statements. We have derived the selected consolidated financial data as of December 31, 2015, 2014 and 2013 and for the years ended December 31, 2014 and 2013 from our historical consolidated financial statements not included in this annual report.
In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with IFRS as adopted by the Republic of Korea(“K-IFRS”), which we are required to file with the Financial Services Commission and the Korea Exchange under the Financial Investment Services and Capital Markets Act of Korea (“FSCMA”). English translations of such financial statements are furnished to the Securities and Exchange Commission under Form6-K. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS”K-IFRS.” for additional information.
The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our Consolidated Financial Statements and related notes included in this annual report.
ConsolidatedSelected consolidated statement of operations data
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2017 | 2017(1) | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||
(In billions of Won and millions of Dollars, except per share data) | (In billions of Won, except per share data) | |||||||||||||||||||||||||||||||||||||||||||
Continuing Operations: | ||||||||||||||||||||||||||||||||||||||||||||
Operating revenue | ₩ | 23,146 | ₩ | 22,613 | ₩ | 22,700 | ₩ | 23,121 | ₩ | 23,547 | US$ | 21,978 | ₩ | 22,619 | ₩ | 22,715 | ₩ | 23,164 | ₩ | 23,547 | ₩ | 23,436 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Revenue | 22,818 | 22,359 | 22,212 | 22,755 | 23,260 | 21,709 | 22,366 | 22,227 | 22,798 | 23,260 | 23,220 | |||||||||||||||||||||||||||||||||
Others | 328 | 253 | 488 | 366 | 287 | 269 | 253 | 488 | 366 | 287 | 216 | |||||||||||||||||||||||||||||||||
Operating expenses | 22,911 | 23,392 | 21,623 | 21,781 | 22,478 | 20,980 | 23,392 | 21,623 | 21,781 | 22,478 | 22,335 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Operating profit | 235 | (779 | ) | 1,077 | 1,340 | 1,069 | 998 | (773 | ) | 1,092 | 1,383 | 1,069 | 1,101 | |||||||||||||||||||||||||||||||
Finance income | 278 | 253 | 273 | 296 | 406 | 379 | 253 | 273 | 296 | 406 | 374 | |||||||||||||||||||||||||||||||||
Finance costs | (633 | ) | (792 | ) | (645 | ) | (515 | ) | (645 | ) | (602 | ) | (792 | ) | (645 | ) | (515 | ) | (645 | ) | (436 | ) | ||||||||||||||||||||||
Income from jointly controlled entities and associates | 7 | 19 | 6 | 3 | (14 | ) | (12 | ) | 19 | 6 | 3 | (14 | ) | (5 | ) | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Profit (loss) from continuing operations before income tax | (114 | ) | (1,299 | ) | 711 | 1,123 | 817 | 763 | (1,293 | ) | 726 | 1,167 | 817 | 1,034 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Income tax expense (benefit) | 12 | (271 | ) | 227 | 328 | 271 | 253 | (270 | ) | 231 | 335 | 271 | 315 | |||||||||||||||||||||||||||||||
Profit (loss) for the year from the continuing operations | (126 | ) | (1,028 | ) | 484 | 795 | 546 | 510 | (1,023 | ) | 495 | 832 | 546 | 719 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Discontinued operations: | ||||||||||||||||||||||||||||||||||||||||||||
Profit (loss) from discontinued operations | 38 | 86 | 141 | — | — | — | 86 | 141 | — | — | — | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Profit (loss) for the year | ₩ | (88 | ) | ₩ | (941 | ) | ₩ | 625 | ₩ | 795 | ₩ | 546 | US$ | 510 | ₩ | (937 | ) | ₩ | 636 | ₩ | 832 | ₩ | 546 | ₩ | 719 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Profit (loss) for the year attributable to: | ||||||||||||||||||||||||||||||||||||||||||||
Equity holders of the parent company | ₩ | (190 | ) | ₩ | (1,030 | ) | ₩ | 546 | ₩ | 708 | ₩ | 462 | US$ | 431 | ₩ | (1,026 | ) | ₩ | 557 | ₩ | 745 | ₩ | 462 | ₩ | 645 | |||||||||||||||||||
Profit (loss) from continuing operations | (216 | ) | (1,094 | ) | 404 | 708 | 462 | 431 | (1,090 | ) | 415 | 745 | 462 | 645 | ||||||||||||||||||||||||||||||
Profit (loss) from discontinued operations | 26 | 64 | 142 | — | — | �� | — | 64 | 142 | — | — | — | ||||||||||||||||||||||||||||||||
Non-controlling interest | ₩ | 102 | ₩ | 89 | ₩ | 78 | ₩ | 87 | ₩ | 85 | US$ | 79 | ₩ | 89 | ₩ | 79 | ₩ | 87 | ₩ | 85 | ₩ | 74 | ||||||||||||||||||||||
Profit from continuing operations | 90 | 66 | 80 | 87 | 85 | 79 | 66 | 80 | 87 | 85 | 74 | |||||||||||||||||||||||||||||||||
Profit (loss) from discontinued operations | 12 | 22 | (1 | ) | — | — | — | 22 | (1 | ) | — | — | — | |||||||||||||||||||||||||||||||
Earnings per share attributable to the equity holders of the Parent Company during the period: | ||||||||||||||||||||||||||||||||||||||||||||
Basic earnings (loss) per share | ₩ | (779 | ) | ₩ | (4,215 | ) | ₩ | 2,231 | ₩ | 2,893 | ₩ | 1,884 | US$ | 2 | ₩ | (4,194 | ) | ₩ | 2,275 | ₩ | 3,043 | ₩ | 1,884 | ₩ | 2,634 | |||||||||||||||||||
From continuing operations | (885 | ) | (4,477 | ) | 1,650 | 2,893 | 1,884 | 2 | (4,456 | ) | 1,694 | 3,043 | 1,884 | 2,634 | ||||||||||||||||||||||||||||||
From discontinued operations | 106 | 262 | 581 | — | — | — | 262 | 581 | — | — | — | |||||||||||||||||||||||||||||||||
Diluted earnings (loss) per share | ₩ | (782 | ) | ₩ | (4,215 | ) | ₩ | 2,231 | ₩ | 2,891 | ₩ | 1,883 | US$ | 2 | ₩ | (4,194 | ) | ₩ | 2,275 | ₩ | 3,041 | ₩ | 1,883 | ₩ | 2,634 | |||||||||||||||||||
From continuing operations | (888 | ) | (4,477 | ) | 1,650 | 2,891 | 1,883 | 2 | (4,456 | ) | 1,694 | 3,041 | 1,883 | 2,634 | ||||||||||||||||||||||||||||||
From discontinued operations | 106 | 262 | 581 | — | — | — | 262 | 581 | — | — | — |
ConsolidatedSelected consolidated statement of financial position data
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||||||||||||||
Selected Statement of Financial Position Data | 2013 | 2014 | 2015 | 2016 | 2017 | 2017(1) | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||||||||||||||||
(In billions of Won and millions of Dollars) | (In billions of Won) | |||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | ₩ | 2,071 | ₩ | 1,889 | ₩ | 2,559 | ₩ | 2,900 | ₩ | 1,928 | US$ | 1,800 | ₩ | 1,889 | ₩ | 2,559 | ₩ | 2,900 | ₩ | 1,928 | ₩ | 2,703 | ||||||||||||||||||||||
Trade and other receivables, net | 6,373 | 5,780 | 4,854 | 5,327 | 5,814 | 5,427 | 5,871 | 4,960 | 5,478 | 5,965 | 5,680 | |||||||||||||||||||||||||||||||||
Other financial assets | 480 | 333 | 293 | 721 | 973 | 908 | 333 | 293 | 721 | 973 | 995 | |||||||||||||||||||||||||||||||||
Current income tax assets | 35 | 4 | 4 | 2 | 9 | 8 | 4 | 4 | 2 | 9 | 4 | |||||||||||||||||||||||||||||||||
Inventories, net | 674 | 419 | 617 | 455 | 642 | 599 | 419 | 617 | 455 | 642 | 1,075 | |||||||||||||||||||||||||||||||||
Current assets held for sale | — | — | — | — | 7 | 7 | — | — | — | 7 | 13 | |||||||||||||||||||||||||||||||||
Other current assets | 340 | 350 | 317 | 311 | 305 | 284 | 351 | 318 | 311 | 305 | 1,688 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Total current assets | 9,972 | 8,774 | 8,643 | 9,716 | 9,678 | 9,033 | 8,867 | 8,751 | 9,866 | 9,829 | 12,158 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Non-current assets: | ||||||||||||||||||||||||||||||||||||||||||||
Trade and other receivables, net | 1,739 | 1,759 | 704 | 709 | 829 | 774 | 1,759 | 704 | 709 | 829 | 843 | |||||||||||||||||||||||||||||||||
Other financial assets | 673 | 705 | 658 | 665 | 755 | 705 | 705 | 658 | 665 | 755 | 623 | |||||||||||||||||||||||||||||||||
Property and equipment, net | 16,387 | 16,468 | 14,479 | 14,312 | 13,562 | 12,659 | 16,468 | 14,479 | 14,312 | 13,562 | 13,068 | |||||||||||||||||||||||||||||||||
Investment property, net | 1,105 | 1,060 | 1,102 | 1,148 | 1,190 | 1,110 | 1,060 | 1,102 | 1,148 | 1,190 | 1,091 | |||||||||||||||||||||||||||||||||
Intangible assets, net | 3,827 | 3,544 | 2,600 | 3,023 | 2,633 | 2,457 | 3,544 | 2,600 | 3,023 | 2,633 | 3,407 | |||||||||||||||||||||||||||||||||
Investments in jointly controlled entities and associates | 364 | 339 | 270 | 284 | 279 | 261 | 339 | 270 | 284 | 279 | 272 | |||||||||||||||||||||||||||||||||
Deferred income tax assets | 707 | 1,079 | 845 | 701 | 712 | 665 | 1,077 | 840 | 701 | 712 | 465 | |||||||||||||||||||||||||||||||||
Othernon-current assets | 76 | 72 | 102 | 106 | 107 | 99 | 73 | 103 | 106 | 107 | 546 | |||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Totalnon-current assets | 24,878 | 25,025 | 20,761 | 20,948 | 20,067 | 18,730 | 25,025 | 20,756 | 20,948 | 20,067 | 20,315 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Total assets | ₩ | 34,850 | ₩ | 33,799 | ₩ | 29,404 | ₩ | 30,664 | ₩ | 29,745 | US$ | 27,763 | ₩ | 33,892 | ₩ | 29,507 | ₩ | 30,815 | ₩ | 29,896 | ₩ | 32,474 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Liabilities and Equity: | ||||||||||||||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | ₩ | 7,433 | ₩ | 6,428 | ₩ | 6,335 | ₩ | 7,140 | ₩ | 7,424 | US$ | 6,929 | ₩ | 6,431 | ₩ | 6,337 | ₩ | 7,142 | ₩ | 7,426 | ₩ | 7,008 | ||||||||||||||||||||||
Borrowings | 3,021 | 2,956 | 1,726 | 1,820 | 1,573 | 1,469 | 2,956 | 1,726 | 1,820 | 1,573 | 1,368 | |||||||||||||||||||||||||||||||||
Other financial liabilities | 64 | 24 | 44 | 1 | 37 | 35 | 24 | 44 | 0 | 37 | 1 | |||||||||||||||||||||||||||||||||
Current income tax liabilities | 100 | 46 | 81 | 89 | 69 | 64 | 48 | 83 | 103 | 83 | 250 | |||||||||||||||||||||||||||||||||
Provisions | 115 | 111 | 104 | 96 | 78 | 73 | 111 | 104 | 96 | 78 | 118 | |||||||||||||||||||||||||||||||||
Deferred income | 144 | 144 | 98 | 36 | 18 | 17 | 144 | 98 | 36 | 18 | 53 | |||||||||||||||||||||||||||||||||
Other current liabilities | 348 | 279 | 311 | 342 | 258 | 241 | 279 | 311 | 342 | 259 | 597 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Total current liabilities | 11,224 | 9,987 | 8,699 | 9,524 | 9,458 | 8,828 | 9,993 | 8,703 | 9,539 | 9,474 | 9,394 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Non-current liabilities: | ||||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | 1,108 | 944 | 669 | 1,188 | 1,001 | 935 | 944 | 669 | 1,188 | 1,001 | 1,514 | |||||||||||||||||||||||||||||||||
Borrowings | 8,463 | 9,860 | 6,909 | 6,301 | 5,110 | 4,770 | 9,860 | 6,909 | 6,301 | 5,110 | 5,280 | |||||||||||||||||||||||||||||||||
Other financial liabilities | 179 | 191 | 104 | 108 | 149 | 139 | 191 | 104 | 108 | 149 | 163 | |||||||||||||||||||||||||||||||||
Retirement benefit liabilities | 586 | 594 | 524 | 378 | 395 | 369 | 594 | 524 | 378 | 395 | 561 | |||||||||||||||||||||||||||||||||
Provisions | 134 | 106 | 91 | 101 | 125 | 117 | 106 | 91 | 101 | 125 | 164 | |||||||||||||||||||||||||||||||||
Deferred income | 148 | 147 | 96 | 85 | 92 | 86 | 147 | 96 | 85 | 92 | 111 | |||||||||||||||||||||||||||||||||
Deferred income tax liabilities | 169 | 144 | 130 | 138 | 128 | 120 | 144 | 130 | 138 | 128 | 205 | |||||||||||||||||||||||||||||||||
Othernon-current liabilities | 2 | 39 | 27 | 59 | 237 | 220 | 39 | 27 | 59 | 237 | 424 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Totalnon-current liabilities | 10,789 | 12,025 | 8,550 | 8,358 | 7,238 | 6,756 | 12,025 | 8,550 | 8,358 | 7,238 | 8,422 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Total liabilities | ₩ | 22,013 | ₩ | 22,012 | ₩ | 17,249 | ₩ | 17,882 | ₩ | 16,696 | US$ | 15,584 | ₩ | 22,018 | ₩ | 17,253 | ₩ | 17,898 | ₩ | 16,712 | ₩ | 17,816 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Equity attributable to owners of the Parent Company | ||||||||||||||||||||||||||||||||||||||||||||
Equity attributable to owners of the Parent Company: | ||||||||||||||||||||||||||||||||||||||||||||
Paid-in capital | ||||||||||||||||||||||||||||||||||||||||||||
Share capital | ₩ | 1,564 | ₩ | 1,564 | ₩ | 1,564 | ₩ | 1,564 | ₩ | 1,564 | US$ | 1,460 | ₩ | 1,564 | ₩ | 1,564 | ₩ | 1,564 | ₩ | 1,564 | ₩ | 1,564 | ||||||||||||||||||||||
Share premium | 1,440 | 1,440 | 1,440 | 1,440 | 1,440 | 1,344 | 1,440 | 1,440 | 1,440 | 1,440 | 1,440 | |||||||||||||||||||||||||||||||||
Retained earnings | 10,019 | 8,568 | 9,050 | 9,644 | 9,827 | 9,172 | 8,568 | 9,147 | 9,779 | 9,961 | 11,256 | |||||||||||||||||||||||||||||||||
Accumulated other comprehensive income (expense) | 25 | 26 | 14 | (1 | ) | 31 | 29 | 112 | 14 | (1 | ) | 31 | 50 | |||||||||||||||||||||||||||||||
Other components of equity | (1,321 | ) | (1,261 | ) | (1,233 | ) | (1,218 | ) | (1,205 | ) | (1,125 | ) | (1,261 | ) | (1,233 | ) | (1,218 | ) | (1,205 | ) | (1,181 | ) | ||||||||||||||||||||||
11,728 | 10,338 | 10,836 | 11,430 | 11,657 | 10,880 | |||||||||||||||||||||||||||||||||||||||
Total equity attributable to owners of the parent company | 10,425 | 10,934 | 11,564 | 11,792 | 13,130 | |||||||||||||||||||||||||||||||||||||||
Non-controlling interest | 1,110 | 1,449 | 1,320 | 1,353 | 1,392 | 1,299 | 1,449 | 1,320 | 1,353 | 1,392 | 1,529 | |||||||||||||||||||||||||||||||||
Total equity | 12,837 | 11,788 | 12,156 | 12,783 | 13,049 | 12,179 | 11,874 | 12,254 | 12,917 | 13,183 | 14,658 | |||||||||||||||||||||||||||||||||
Total liabilities and equity | ₩ | 34,850 | ₩ | 33,799 | ₩ | 29,404 | ₩ | 30,664 | ₩ | 29,745 | US$ | 27,763 | ₩ | 33,892 | ₩ | 29,507 | ₩ | 30,815 | ₩ | 29,896 | ₩ | 32,474 |
ConsolidatedSelected consolidated statement of cash flow data
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2017 | 2017(1) | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||
(In billions of Won and millions of Dollars) | (In billions of Won) | |||||||||||||||||||||||||||||||||||||||||||
Net cash generated from operating activities | ₩ | 4,111 | ₩ | 1,916 | ₩ | 4,230 | ₩ | 4,771 | ₩ | 3,878 | US$ | 3,621 | ₩ | 1,916 | ₩ | 4,230 | ₩ | 4,771 | ₩ | 3,878 | ₩ | 4,010 | ||||||||||||||||||||||
Net cash provided by (used in) investing activities | (3,783 | ) | (3,171 | ) | (2,402 | ) | (3,485 | ) | (3,483 | ) | (3,252 | ) | ||||||||||||||||||||||||||||||||
Net cash used in investing activities | (3,171 | ) | (2,402 | ) | (3,485 | ) | (3,483 | ) | (2,704 | ) | ||||||||||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | (312 | ) | 1,072 | (1,164 | ) | (943 | ) | (1,363 | ) | (1,274 | ) | 1,072 | (1,164 | ) | (943 | ) | (1,363 | ) | (532 | ) |
Operating Data
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2017 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||||||||||||||
Lines installed (thousands) | 24,264 | 23,930 | 23,607 | 24,858 | 24,343 | 23,930 | 23,607 | 24,858 | 24,343 | 23,660 | ||||||||||||||||||||||||||||||
Lines in service (thousands) | 14,032 | 13,713 | 12,440 | 11,871 | 11,220 | 13,713 | 12,440 | 11,871 | 11,220 | 10,655 | ||||||||||||||||||||||||||||||
Lines in service per 100 inhabitants | 27.4 | 26.7 | 24.6 | 23.0 | 21.7 | 26.7 | 24.6 | 23.0 | 21.7 | 20.6 | ||||||||||||||||||||||||||||||
Mobile subscribers (thousands) | 16,454 | 17,300 | 18,038 | 18,892 | 20,015 | 17,300 | 18,038 | 18,892 | 20,015 | 21,120 | ||||||||||||||||||||||||||||||
Broadband Internet subscribers (thousands) | 8,067 | 8,129 | 8,328 | 8,516 | 8,781 | 8,129 | 8,328 | 8,516 | 8,758 | 8,729 |
(1) |
Including public telephones. |
Exchange Rate Information
The following table sets out information concerning the Market Average Exchange Rate for the periods and dates indicated:
Period | At End of Period | Average Rate(1) | High | Low | ||||||||||||
(Won per US$1.00) | ||||||||||||||||
2011 | 1,153.3 | 1,108.1 | 1,199.5 | 1,049.5 | ||||||||||||
2012 | 1,071.1 | 1,126.9 | 1,181.8 | 1,071.1 | ||||||||||||
2013 | 1,055.3 | 1,095.0 | 1,159.1 | 1,051.5 | ||||||||||||
2014 | 1,099.2 | 1,053.2 | 1,118.3 | 1,008.9 | ||||||||||||
2015 | 1,172.0 | 1,131.5 | 1,203.1 | 1,068.1 | ||||||||||||
2016 | 1,208.5 | 1,160.5 | 1,240.9 | 1,093.2 | ||||||||||||
2017 | 1,071.4 | 1,130.8 | 1,208.5 | 1,071.4 | ||||||||||||
October | 1,125.0 | 1,131.6 | 1,145.7 | 1,124.7 | ||||||||||||
November | 1,082.4 | 1,105.0 | 1,121.2 | 1,082.4 | ||||||||||||
December | 1,071.4 | 1,085.8 | 1,093.4 | 1,071.4 | ||||||||||||
2018 (through April 16) | 1,070.0 | 1,071.0 | 1,094.3 | 1,057.6 | ||||||||||||
January | 1,071.5 | 1,066.7 | 1,071.5 | 1,061.3 | ||||||||||||
February | 1,071.0 | 1,079.6 | 1,094.3 | 1,068.0 | ||||||||||||
March | 1,066.5 | 1,071.9 | 1,081.9 | 1,064.3 | ||||||||||||
April (through April 16) | 1,070.0 | 1,064.0 | 1,070.0 | 1,057.6 |
Source: Seoul Money Brokerage Services, Ltd.
Our monetary assets and liabilities denominated in foreign currency are translated into Won at the Market Average Exchange Rate on the balance sheet dates, which were, for U.S. dollars,₩1,172.0 to US$1.00,₩1,208.5 to US$1.00 and₩1,071.4 to US$1.00, at December 31, 2015, 2016 and 2017, respectively.
Our consolidated financial statements are expressed in Won and, solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2017
have been translated into United States dollars at the rate of₩1,071.4 to US$1.00, the Market Average Exchange Rate in effect on December 29, 2017.
We make no representation that the Won or Dollar amounts contained in this annual report could have been or could be converted into Dollar or Won, as the case may be, at any particular rate or at all.
Item 3.B. Capitalization and Indebtedness
Not applicable.
Item 3.C. Reasons for the Offer and Use of Proceeds
Not applicable.
You should carefully consider the following factors.
Risks Relating to Our Company and Business
Competition in the Korean telecommunications industryeach of our principal business areas is intense.
CompetitionWe face significant competition in each of our principal business areas. In the telecommunications sector in Korea is intense. Business combinations in the telecommunications industry significantly changed the competitive landscape of the Korean telecommunications industry. Currently,markets for mobile services, fixed-line services and media and content services, we compete primarily with two other integrated telecommunications service providers, SK Telecom Co., Ltd. (“SK Telecom”) and LG Uplus Corp. (“LG U+”) (including their affiliates). SK Telecom acquiredIn the past two decades, considerable consolidation in the telecommunications industry has occurred, resulting in the current competitive landscape comprising three network service providers that offer a wide range of telecommunications and data communications services. In early 2019, each of our primary competitors announced plans to acquire a leading cable TV operator in Korea to significantly increase their market shares in the pay TV market, which we expect will further intensify competition. In January 2019, LG U+ announced its plan to acquire a controlling stakeinterest in Hanarotelecom Incorporated in 2008, which was renamed SK BroadbandCJ HelloVision Co., Ltd. (“SK Broadband”CJ HelloVision”). The acquisition enabledIn February 2019, SK Telecom announced its plan to provide fixed-line telecommunications, broadband Internet access and Internet Protocol Television (“IPTV”) services togethermerge with its mobile telecommunications services. In January 2010, LG Dacom Corporation (“LG Dacom”) and LG Powercomt-broad Co., Ltd.(“LG Powercom”t-broad”) merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enabled LG U+ to provide To a similar range of services as SK Telecomlesser extent, we also compete with various value-added service providers and us. Our inability to compete against such competitors could have a material adverse effect on our business, financial condition and results of operations.
In addition, we face increasing competition from specific service providers as classified under the Framework Act on Telecommunications and the Telecommunications Business Act, including mobile virtual network operators (“MVNOs”) that lease mobile networks and offer mobile services, VoIP service providers that offer Internet telephone services, cable TV operators, text messaging service providers (particularly Kakao Corp. (“Kakao”)) and voice resellers, many of which offer competing services at lower prices. The entrance of new service providers in the markets for mobile services, fixed-line services and media and content services may further increase competition, as well as cause downward price pressure on the fees we
charge for our services. For a discussion of our market shares in key markets, please see “Item 4. Information on the Company—Item 4.B. Business Overview—Competition.”
We compete primarily based on our service performance, quality and reliability, ability to accurately identify and respond to evolving consumer demand, and pricing. With the launch of the next generation 5G mobile services in April 2019, we expect competition to further intensify among the three network service providers, which may result in an increase in marketing expenses, as well as additional capital expenditures related to implementing 5G mobile services. Mobile service providers also grant subsidies or subscription discount rates to subscribers who purchase new handsets and agree to a minimum subscription period and we compete also based on such amounts. We and SK Telecom have been designated as market-dominating business entities in the local telephone and mobile markets, respectively, under the Telecommunications Business Act. Under this Act, a market-dominating business entity may not engage in any act of abuse, such as Internet phoneunreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers. In addition, changes in our local telephone rates and mobile rates of SK Telecom require prior approval from the MSIT. The KCC has also issued guidelines on fair competition of the telecommunications companies.
In the financial services market, our credit and check cards issued under the “BC Card” brand pursuant toco-brand agreements with member companies compete principally with cards issued by other leading credit card companies in Korea with their own merchant payment networks, such as Shinhan Card, Hyundai Card and Samsung Card. Our member companies that issueco-branded credit or check cards include Woori Card, NH Card, Industrial Bank of Korea and KB Kookmin Card. We also compete with service providers Internet text message service providers, voice resellersthat provide outsourcing services related to business operations of credit card companies. Competition in the credit card and call-back service providers. In recent years, the increasing popularity of free messaging services, Internet phonecheck card businesses has increased substantially as existing credit card companies, consumer finance companies and other communications services offered by Google, Facebook, Kakao Talk, Linefinancial institutions in Korea have made significant investments and Skype has had a negative impact on demandengaged in aggressive marketing campaigns and promotions for their credit and check cards, as well as investing in operational infrastructure that may reduce the need for our telecommunications and text message services while creating additional data transmission usage by our Internet and mobile subscribers. outsourcing services.
Our inability to adapt to such changes in the competitive landscape and compete against our competitors in our principal business areas could have a material adverse effect on our business, financial condition and results of operations.
Mobile Service. We provide mobile services based on Wideband Code Division Multiple Access(“W-CDMA”) technology (commonly known as the third-generation (“3G”) mobile telecommunications technology) and Long-Term Evolution (“LTE”) technology (commonly known as the fourth-generation (“4G”) mobile telecommunications technology). Competitors in the mobile telecommunications service industry are SK Telecom and LG U+. We had a market share of 31.4% as of December 31, 2017, making us the second largest mobile telecommunications service provider in Korea. SK Telecom had a market share of 47.8% as of December 31, 2017. Mobile subscribers are
allowed to switch their service provider while retaining the same mobile phone number. Mobile service providers also grant subsidies to subscribers who purchase new handsets and agree to a minimum subscription period. Such mobile number portability and handset subsidies previously intensified competition among the mobile service providers and increased their marketing expenses. In addition, wide variation in subsidy amounts paid to subscribers led to concerns relating to consumer discrimination over time. Consequently, in order to enhance transparency in subsidy amounts paid to subscribers, the Act on Improvement of Mobile Telecommunication Device Distribution System (the “Handset Distribution Reform Act”), which imposed upper limit on the amount of handset subsidies offered by service providers, was enacted in October 2014. However, the upper limit on the handset subsidies was phased out on October 1, 2017. As a result, price competition through handset subsidies which became less prevalent after the passage of the Handset Distribution Reform Act may intensify again and such competition could lead to a decrease in our net profit margins.
Since 2011, SK Telecom, LG U+ and we have launched 4G mobile telecommunications services based on LTE technology, which has further intensified competition among the three companies and resulted in an increase in marketing expenses and capital expenditures related to implementing and providing 4G LTE services. We are also competing with the other two companies to introduce fifth-generation (“5G”) mobile telecommunications services as early as 2019, one year ahead of our initial plan. As SK Telecom, LG U+ and we continue to compete to improve network quality and to introduce new technologies in order to accommodate increased data usage of subscribers, we may incur significant expenses to acquire additional bandwidth spectrums and various fixed assets and to expand technologicalknow-how and capacity. Furthermore, on April 10, 2018, to facilitate expedient establishment of 5G services infrastructure, the Government announced its initiatives to facilitateco-use and sharing of telecommunications infrastructure as follows: (i) we should permit fixed-line telecommunication service providers and mobile service providers (such as SK Telecom and LG U+) toco-use our telecommunications infrastructure necessary for provision of 5G services, (ii) the Government determined that we, SK Telecom and LG U+ possessed essential infrastructure with respect to the interval between the cable entry at a building and the initial occurrence of connection within the building and required that the three companies share such infrastructure throughout buildings in Korea with each other, and (iii) fixed-line telecommunications service providers and mobile service providers are required to participate in joint efforts to construct additional fixed-line and mobile network architecture. We believe that the continuing intense competition among major telecommunications operators in Korea may have a material adverse impact on our results of operations.
Fixed-line Telephone Services. Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. Since then, various competitors have entered the local, domestic long-distance and international long-distance telephone service markets in Korea, which have eroded our market shares. LG U+ and SK Broadband currently provide local, domestic long-distance and international long-distance telephone services. In addition, Sejong Telecom, Inc. (formerly, Onse Telecom Corporation) and SK Telink, Inc. currently provide domestic long-distance and international long-distance telephone services. We also compete with specific service providers, such as Internet phone service providers, voice resellers and call-back service providers that offer international long-distance service in Korea. While we offer our own Internet phone service, the entry of these and other potential competitors into the local, domestic long-distance and international long-distance telephone service markets has had and may continue to have a material adverse effect on our revenues and profitability from these services. As of December 31, 2017, we had a market share in local telephone service of 80.5% and a market share in domestic long distance service of 79.8%. Further increase in competition may decrease our market shares in such services. As part of our efforts to improve our operational efficiencies, we transferred all operations relating to fixed-line sales activities (includingon-site sales, line activation, after service, and customer center operations) to our subsidiaries in 2014.
Internet Services. The Korean broadband Internet access service market has experienced significant growth in the past decade. SK Broadband (formerly Hanarotelecom) entered the broadband market in 1999 offering both Hybrid Fiber Coaxial (“HFC”) and Asymmetric Digital Subscriber Line (“ADSL”) services. We also began offering broadband Internet access service in 1999, followed by Dreamline, Sejong and LG U+. In recent years, numerous cable television operators have also begun to offerHFC-based services at rates lower than ours. We had a market share of 41.3% as of December 31, 2017. As a result of having to compete with a number of competitors and the maturing of the Internet access service market, we currently encounter, and we expect to encounter, pressure to increase marketing expenses in the future.
The market for other Internet-related services in Korea, including IPTV and Internet phone services, is also very competitive. We anticipate that competition will continue to intensify as the usage and popularity of the Internet grows and as domestic and international competitors newly enter the Internet industry in Korea or expand product offerings such as gigabit Internet service. The substantial growth of the Internet industry in Korea has attracted many competitors and as a result may lead to increasing price competition to provide Internet-related services. Increased competition in the Internet industry could have a material adverse effect on the number of subscribers of our Internet-related service and on our results of operations.
Failure to renew existing bandwidth spectrum,licenses, acquire adequate additional bandwidth spectrumlicenses or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.
One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to a service provider. We currently use 40 MHzhave acquired a number of licenses to secure bandwidth in the 2.1 GHz spectrum,capacity to provide our broad range of which 20 MHz is usedservices, for our 4G LTE services and the remaining 20 MHz of bandwidth for ourIMT-2000 services based onW-CDMA wireless network standards. We also use (i) 20 MHz of bandwidth in the 900 MHz spectrum and 35 MHz of bandwidth in the 1.8 GHz spectrum for our 4G LTE services; (ii) 20 MHz of bandwidth in the 1.8 GHz spectrum, which we acquiredtypically make an initial payment as well as pay usage fees during the license period. We made bandwidth license payments of₩416 billion in May 2016, for₩271 billion in 2017 and₩573 billion in 2018. For our WidebandLTE-A services;outstanding payment obligations relating to our bandwidth licenses as of December 31, 2018, see “Item 5. Operating and (iii) 30 MHzFinancial Review and Prospects—Item 5.A. Operating Results—Overview—Acquisition of bandwidth in the 2.3 GHz spectrum for our WiBro services. The MSIT announced its plan to auction additional bandwidth starting in 2018 to enable provision of 5G servicesNew Bandwidth Licenses and our ability to commercialize and provide 5G services depends in part on acquisition of adequate bandwidth spectrum at such auctions.Usage Fees.” For more information on our bandwidth licenses, to bandwidth spectrum, see “Item“ Item 4. Information on the Company—Item 4.D. Property, PlantsPlant and Equipment—Mobile Networks.”
The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant factors insignificantly increased the increased utilization of our bandwidth, since because
wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia contents are likely to put additional strain on the bandwidth capacity of mobile service providers. In the event we are unable to maintain sufficient bandwidth capacity by renewing existing bandwidth spectrum,licenses, receiving additional bandwidth allocation or cost-effectively implementing technologies that enhance the efficiency of our bandwidth usage, efficiency, our subscribers may perceive a general decrease in the quality of mobile telecommunications services. No assurance can be given that bandwidth constraints will not adversely affect the growth of our mobile telecommunications business. Furthermore, we may be required to pay amake substantial amountpayments to acquire additional bandwidth capacity in order to meet increasing bandwidth demand, which may adversely affect our business, financial condition and results of operations.
Introduction of new services, including our 4G LTE5G mobile services and 5G services to be commercialized,launched in April 2019, poses challenges and risks to us.
The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology upgrades and additional telecommunicationtelecommunications services to maintain our competitiveness. For example, we have been building more advanced mobile telecommunications networks based on LTE technology, which is generally referred to as 4G5G technology and commenced providing commercial 4G LTE5G mobile services with transmission speed of up to 1 Gbps in April 2019 in the Seoul metropolitan area, in January 2012, while subsequently expandingsix additional metropolitan cities, high-traffic commercial areas and university campuses as well as major transportation infrastructure such as highways, railways and airports. We plan to gradually expand the coverage nationwide and increasingincrease the transmission speed of our 5G services thereafter. As we continue to compete with SK Telecom and LG U+ to improve network quality, introduce new services and accommodate increased data usage of subscribers, we may incur significant expenses to acquire additional bandwidth licenses and incur significant capital expenditures to build out and improve our network. We have made extensive efforts to develop advanced technologies as well as to provide a variety of services with enhanced speed, latency and connectivity. Furthermore, we are also continually upgrading our broadband network to enable betterfiber-to-the-home (“FTTH”) connection, which enhances data transmission speed and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cablescable extending from the telecommunications operator’s switching equipment to the boundary of homehomes or office.offices. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH also enables us to deliver digital media content,enhanced services that require high bandwidth with stability, such as IPTV with higher stability.and other digital media and content services.
In recent years, we have been making capital expenditures and investing in additional research and development to roll out 5G telecommunication services by 2019, one year earlier than our initial plan. However, noNo assurance can be given that our new services will gain broad market acceptance such that we will be able to derive revenuesrevenue from such services to justify the license fee,fees, capital expenditures and other investments required to provide such services. For example, in March 2005, we acquired a license to providediscontinued our wireless broadband Internet access (“WiBro”) service, and commercially launched our service in June 2006 to expand the WiBro service coverage nationwide by 2011. However, the number of our WiBro subscribers have decreasedservices in the fourth quarter of 2018, following a steady decrease in its subscriber base in recent years as more WiBro subscribers chose to access the Internet using our 4G LTE network rather than WiBro following the proliferationreflecting an increase in popularity of 4G LTE services since 2013.services. If our new services do not gain broad market acceptance, our business, financial condition and results of operations and financial condition may be adversely affected.
We may not be able to successfully pursue our strategy to acquire businesses and enter into joint ventures that complement or diversify our current business, and we may need to incur additional debt to finance such expansion activities.
One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business.businesses. For example, we have pursued investment opportunities in the financial sector in the past decade that we believe provide attractive growth opportunities. In March 2014, the investment business division of KT Capital Co., Ltd., including 3,059,560 common shares ofOctober 2011, we acquired a controlling interest in BC Card Co., Ltd. that KT Capital Co.
(“BC Card”), Ltd. held, was spun off and merged into KT Corporation. On August 20, 2015,a leading credit card solutions provider in Korea in which we and our consolidated subsidiary, KT Hitel Co., Ltd., soldhold a 69.54% interest. We also acquired 10.00% of the entire 100% stake of KT Capital Co., Ltd. to JCF III K Holdings LLC for a total of₩299 billion. In January 2011, we acquired 5,600,000common shares of redeemable convertible preferred stock with voting rights and convertible bondsK Bank Inc. (“K Bank”), an Internet-only bank that were convertible into 5,600,000 sharesbegan its commercial operations in April 2017, which interest is accounted for using the equity method of common stock of KT Skylife Co., Ltd. (“KT Skylife”), a provider of satellite TV service which may also be packaged with our IPTV services, from Dutch Savings Holdings B.V. for approximately₩246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.3% interest in KT Skylife as of December 31, 2017. In March 2015, KT Media Hub Co., Ltd. was merged into KT Corporation to increase management efficiency and promote synergy among our existing businesses.accounting.
While we plan to continue our search for other suitable acquisition and joint venture opportunities, we cannot provide assurance that we will be able to identify additional attractive opportunities or that we will successfully complete the transactions without encountering
administrative, technical, political, financial or other difficulties, or at all. Even if we were to successfully complete the transactions, the success of an acquisition or a joint venture depends largely on our ability to achieve the anticipated synergies, cost savings and growth opportunities from integrating the business of the acquired company or the joint venture with our business.current businesses. There can be no assurance that we will achieve the anticipated benefits of the transaction, which may adversely affect our business, financial condition and results of operations.
Pursuing acquisitions or joint venture transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital through incurring loans or through issuances of bonds or other securities in the international capital markets.
Disputes with our labor union may disrupt our business operations.
In the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing ofnon-core businesses and reducing our employee base. Although we have not experienced any significant labor disputes or unrests in recent years,there can be no assurance that we will not experience labor disputes or unrests in the future, including extended protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operations.
We also negotiate collective bargaining agreements every two years with our labor union and annually negotiate a wage agreement. Our current collective bargaining agreement expires on October 9, 2019.Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience labor disputes and unrests resulting from disagreements with the labor union in the future.
The Korean telecommunications and Internet protocol broadcastingInternet-related industries are subject to extensive Government regulations, and changes in Government policy relating to these industries could have a material adverse effect on our operations and financial condition.
The Government, primarily through the MSIT and the KCC, has the authority to regulate the telecommunications industry. Until March 2013, regulation ofindustry in Korea. The MSIT and the telecommunicationsKCC also have the authority to regulate the pay TV industry had mainly beenunder the responsibility ofKorea Broadcasting Act, which covers our IPTV services as well as our satellite TV services provided through KT Skylife Co., Ltd. (“KT Skylife”), in which we own a 49.99% interest. See “Item 4. Information on the KCC. With the establishment of the newly created the Ministry of Science, ICT & Future Planning (the predecessor to the MSIT, the “MSIP”) on March 23, 2013, however, such regulatory responsibility has mostly been transferred to the MSIP (and later to MSIT).Company—Item 4.B. Business Overview—Regulation.” The MSIT’s policy is to promote competition in the Korean telecommunications markets through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as tothat would prevent the emergence and development of viable competitors.
Under the current Governmentsuch regulations, if a network service provider has the largest market share for a specified type of telecommunications service and its revenue from that service for the previous year exceeds a specific revenue amount set by the MSIT, it must obtain prior approvalsuch entity may be designated as a market-dominating business entity that may not engage in any act of abuse, such as unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers. Furthermore, under the Internet Multimedia Broadcasting Services Act, an IPTV service provider, together with its affiliates providing IPTV services, is restricted from having more thanone-third of the MSITmarket share of all paid broadcasting subscribers in Korea (consisting of IPTV, cable TV and satellite TV subscribers). As of December 31, 2018, KT Skylife and we together had an aggregate market share of 31.2% of all paid broadcasting subscribers in Korea. The KCC has also issued guidelines on fair competition of telecommunications and Internet-related companies. In addition, the Government sets the policies regarding the use of radio frequency bandwidths and allocates the bandwidths used for the rates and the general terms for that service. Each year, the MSIT designates service providers whose rates and general terms of service must be approvedwireless telecommunications by the MSIT. In 1997, the MSIT had designated us for local telephone servicean auction process or by a planned allocation.
We and SK Telecom forhave been designated as market-dominating business entities in the local telephone and mobile service,markets, respectively, and the MSIT, in consultation with the Ministry of StrategyEconomy and Finance (“MOEF”), currently approves rates charged by us and SK Telecom for such services. The form of our standard agreement for providing local network serviceservices and each agreement for interconnection with other service providers must also be reported to the MSIT. Although we compete freely with other network service providers in terms of rate plans for our principal telecommunications and Internet-related services except for rates we charge for local calls, our inability
The MSIT currently does not regulate our domestic long-distance, international long-distance, broadband Internet access and mobile service rates, but the inability
to freely set our local telephone service rates may hurt profits from such businessbusinesses and impede our ability to compete effectively against
our competitors. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation—Rates.” In addition, the MSIT may periodically announce public policy guidelines or suggestions that we may be recommended to take into consideration in setting our tariffs fortelecommunications and Internet-related businesses.In recent years, the MSIT has announced policy guidelines with the objectives of reducing mobile service rates and promoting transparency in the decision making of telecommunications service providers. Specific policy guidelines include monthly rate reductions applicable to certainnon-regulatedlow-income services.In March 2015, we completely abolished our activation fee relating to our mobile services. In July 2016, we lowered our early termination fee for our broadband Internet access service, Internet phone or IPTV or such products bundled with our fixed-line telephone service. Onsubscribers as well as subscription rate discounts in lieu of handset subsidies. Starting in December 22, 2017, we startedbegan providing rate discounts of up to provide additional tariff reductions of₩11,000 per month to certainourlow-income mobile subscribers on government welfare programs. We also increased the maximum discount rate applicable to mobile subscribers who elect not to receive handset subsidies from 20.0% to 25.0% starting in September 2017. Such discounts have contributed to a decrease in the average monthly revenue per subscriber of our mobile services from₩34,444 in 2017 to₩32,021 in 2018.
The Government welfare. In July 2017,may pursue additional measures to regulate the MSIT announced its planmarkets in which we compete. For example, according to adopt “universal” mobile subscription fees sometime in 2018 in connection with the Government’s efforts to reduce mobile service fees paid by individuals. According to the draft version of thea proposed revisionamendment to the Telecommunications Business Act, subject to approval bywhich is currently pending at the National Assembly, the dominantmarket-dominating mobile network service provider (SK Telecom) shall beis required to provide a “universal” mobile subscription plan at a significant discount to the rates currently available. The current proposal contemplates that the plan be priced at₩20,000 per month (at a significant discount(including value added tax (“VAT”)) for up to currently available mobile subscription plans) which allows data use of between 1 and 1.4 GB and 200 call minutes. Furthermore, in responseminutes and data usage of 1 GB. If adopted as proposed, we may offer similar rate plans to a social interest group’s lawsuit against the MSIT to lower consumers’ telecommunication bills, it is expected that, in May 2018, the MSIT will make public disclosure of previouslynon-public regulatory financial reports and other supporting and evaluation materials submitted by the network service providers (including us) for determining tariffs of various 2G and 3G mobile subscription plans for asix-year period ending in May 2011.compete more effectively with SK Telecom. There can be no assurance that we will not adopt additional measures that reduce rates charged to our subscribers as well as adjustments to our handset subsidies and other tariff-reducing measures in the future to comply with regulatory requirements or the Government’s public policy guidelines or suggestions.guidelines.
The MSIT may revoke our licenses or suspend any of our businesses if we fail to comply with its rules, regulations and corrective orders, including the rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the MSIT may levy a monetary penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years. For example, on March 12, 2015, theFrom time to time, we have been imposed fines for violation of regulations imposed by MSIT and KCC, imposedincluding an imposition of a fine of₩870 million for violation of restrictions on handset subsidies relating to our compensation program for used handsets. On June 24, 2015,12.5 billion in January 2018 by the KCC imposed a fine of₩52 million for violating privacy related regulations and undermining consumer interests. On July 31, 2015 and January 19, 2016, the KCC imposed a fine of₩350 million and₩560 million, respectively, on us for infringing upon consumer interests by advertising false and exaggerated information about bundled products. On March 8, 2016, the KCC imposed a fine of₩32 million on us for offering excessively reduced rates and waivers to certain customers. On December 6, 2016, the KCC imposed a combined fine of approximately₩10.7 billion on SK Telecom, LG U+, SK Broadband,t-broad, D’live, CJ HelloVision and us (our fine being approximately₩2.3 billion) and ordered to take corrective measures for providing excessive promotional gifts to bundled products customers. In April 2017, the Fair Trade Commission imposed a combined fine of approximately₩47 million on us for failing to include developments relating to our management in our public disclosures. In October 2017, the Fair Trade Commission imposed a fine of approximately₩360 million on us for not including transactions between our affiliates in our public disclosures. On January 24, 2018, the KCC imposed a combined fine of approximately₩50.6 billion on SK Telecom, LG U+ and us (our fine being approximately₩12.5 billion) for violation of regulations relating to handset sales insales. There is no guarantee that the form of wholesale, online salelaws and others. For more information about the penalties imposed for violating Government regulations see “Item 8. Financial Information—Item 8.A.Consolidated Statements and Other Financial Information—Legal Proceedings.” The revocation of our licenses, suspension of our businessto which we are or imposition of monetary penalties by the MSIT couldbecome subject will not have a material adverse effect on our business.
On October 1, 2014, the Handset Distribution Reform Act went into effect. The Handset Distribution Reform Act regulates, among other matters, the sale and subsidies of mobile devices such as smartphones, with one of its purposes being to induce telecommunication operators to compete in lowering the costs of communications and encourage the manufacturers to reduce handset factory prices, while improving service quality. Under the Handset Distribution Reform Act, consumers may not
be discriminated in terms of subsidies based on their age, place of residencebusiness, financial condition or monthly subscription plan when using their existing mobile phones, buying a new phone or switching their mobile carriers. Furthermore, everyone, regardless of their status, is entitled to receive either a handset subsidy for the purchase of mobile phone models that were launched within the last 15 months, or a tariff discount (with the current discount rate set at 25%, effective since September 15, 2017). Since April 8, 2015, the maximum amount of handset subsidy that telecommunications operators and handset manufacturers may offer was₩330,000. The maximum amount of the handset subsidy was phased out on October 1, 2017. On September 15, 2017, in compliance with the policy initiatives announced by the MSIT, we increased the maximum tariff discount to 25% from the prior 20% (which had been in effect since April 24, 2015). According to the Government, excessive handset subsidies may cause mobile subscribers to subscribe to more expensive monthly plans in return for greater handset subsidies or may cause handset vendors to provide discriminatory subsidies based on consumers’ age, residence and subscription plan, among others. It was reported that the Government plans to introduce measures to curb excessive competition for handset subsidies such as guidelines on subsidies for online handset sales and requirement for public disclosure of the portion or amount of handset subsidies provided by each party involved in handset sales.
The Government also sets the policies regarding the use of radio frequencies and allocates the spectrum of radio frequencies used for wireless telecommunications by an auction process or by a planned allocation. For a discussion of the Government’s recent policies and practices on bandwidth spectrum allocation, see “—Item 3.D. Risk Factors—Failure to renew existing bandwidth spectrum, acquire adequate additional bandwidth spectrum or use our bandwidth efficiently may adversely affect our mobile telecommunications business and results of operations.” The new allocations of bandwidth could increase competition among wireless service providers, which may have an adverse effect on our business.
We also plan to put more focus on the Internet protocol (“IP”) media market, and we began offering IPTV services in November 2008. IPTV is a service which combinesvideo-on-demand services with real-time high definition broadcasting via broadband networks. The MSIT and the KCC have the authority to regulate IPTV services. Under the Internet Multimedia Broadcasting Services Act, anyone intending to engage in the IPTV services business must first obtain a license from the MSIT. Moreover, anyone intending to provide linear channel programs focused on news or contents that generally combine news, culture entertainment, and any other similar contents with IPTV providers, must obtain approval from the KCC. Furthermore, anyone intending to provide contents relating to the introduction of consumer products and other similar marketing linear channel programs with IPTV providers must obtain additional approval from the MSIT. In addition, KT Skylife (formerly Korea Digital Satellite Broadcasting Co., Ltd.), which became our consolidated subsidiary starting in January 2011, offers satellite TV services, which may also be packaged with our IPTV services. KT Skylife is also subject to regulation by the MSIT and the KCC pursuant to the Korea Broadcasting Act. In March 2015, amendments to the Internet Multimedia Broadcasting Services Act were promulgated. Under such amendments, a single pay TV operator (including its affiliates) may not have more thanone-third of the market share of all pay TV subscribers in Korea. The restriction on market share is in effect until June 27, 2018, subject to the Government’s decision to renew the market share restriction or phase out the restriction as originally planned.
Government policies and regulations relating to the above as well as other regulations involving the Korean telecommunications and IP broadcasting industries (including as a result of the implementation of free trade agreements between Korea and other countries, including the United States and the European Union) could impose restrictions on our business operations, which could have a material adverse effect on our operations and financial condition, and may also change in ways that could materially and adversely affect us. See “Item 4. Information on the Company—Item 4.B. Business Overview—Regulation.”
The pending legal cases againstMr. Suk-chae Lee, oura former chief executive officer, and other former executive officers or directors—and related adverse publicity—could have a material adverse effect on our business, reputation and stock price.
In April 2014, the Seoul Central District prosecutor’s office chargedMr. Suk-chae Lee, oura former chief executive officer who resigned in November 2013, with embezzlement and breach of fiduciary duty. Mr. Il Yung Kim, oura former standing director and former president of the KT Corporate Center, was charged as aco-conspirator in the breach of fiduciary duty by Mr. Lee, andMr. Yu-yeol Seo, oura former president of Home Business Group, was charged as aco-conspirator in Mr. Lee’s embezzlement. On September 24, 2015, the Seoul District Court acquitted Mr. Lee of the charges of embezzlement and breach of fiduciary duty. Mr. Kim and Mr. Seo were also acquitted of the conspiracy charges. The prosecution has appealed the judgments and on May 27, 2016, the Seoul High Court found Mr. Lee and Mr. Seo guilty of embezzlement and sentenced them to 18 months of prison term, to be suspended for 2two years, for having embezzled and createdoff-the-books funds of₩1.1 billion between 2009 and 2013, using such funds for personal purposes such as payments at weddings and funerals of Mr. Lee’s friends and acquaintances and Mr. Seo’s living and entertainment expenses. However, Mr. Lee and Mr. Kim were acquitted on the charge of breach of fiduciary duty. These judgments have been
appealed by the prosecution as well as by Mr. Lee and Mr. Seo to the Supreme Court of Korea, which, on May 30, 2017, confirmed the acquittal of Mr. Lee and Mr. Kim on the charge of breach of fiduciary duty, and vacated the appellate judgment against Mr. Lee and Mr. Seo on the charge of embezzlement and remanded the case back to the Seoul High Court. On April 26, 2018, the Seoul High Court acquitted Mr. Lee and Mr. Seo on the charge of embezzlement.
The legal cases against Mr. Lee, Mr. Seo, and Mr. Kim do not involve charges of wrongdoing by us. Nevertheless, an adverse determination in any such case or proceeding may harm our reputation and adversely affect the trading price of our shares. The outcome of any related claims, investigations and proceedings is inherently uncertain and there can be no assurance that any further developments in the legal proceedings against Mr. Lee, Mr. Seo, and Mr. Kim, including adverse publicity, will not adversely affect our business, reputation or stock price.
Our charitable or political donations, employment of certain individuals and engagement of an advertising agency connected to a scandal involvingMs. Soon-sil Choi, a confidante of former PresidentGeun-hye Park, and other incidents and allegations could have a material adverse effect on our business, reputation and stock price.
In March 2017, the Constitutional Court of Korea found that many Korean corporations, including the Company,us, made donations to twonon-profit foundations, Mir Foundation andK-Sports Foundation, at former President Park’s request. Our contributions comprised₩1.1 billion of the total₩48.6 billion given to Mir Foundation and₩700 million of the total₩28.8 billion given toK-Sports Foundation. The Constitutional Court also found that an aide of former President Park, at the direction of the former President, on several occasions asked our chief executive officer to hire (and later to promote) two individuals,Mr. Dong-Soo Lee andMs. Hye-Sung Shin:Shin. Mr. Lee was hired and later promoted to the head of a business unit in charge of our marketing and advertisement campaigns and Ms. Shin was hired to another position in the same business unit. Subsequently, the same presidential aide also requested that Mr. Lee and our other officers award advertising contracts to Playground Communications Co., Ltd. (“Playground”), an advertising agency over whichMs. Soon-sil Choi, a confidante of former President Park, effectively owns 70% equity interest, according to the Constitutional Court. The Constitutional Court further held that the companies receiving the purported “requests” from former President Park’s aide appeared to have felt immense pressure to comply with the requests and could not easily have rejected them. Playground was awarded seven advertising contracts for a total of approximately₩6.8 billion in 2016, amounting to approximately 3.7% of our annual advertising spending in 2016. In 2016, our payments to Playground amounted to approximately
₩517 million. We have not awarded additional advertising contractcontracts to Playground since September 2016, and Mr. Lee and Ms. Shin resigned from the Company in November 2016 and May 2016, respectively.
In April 2017, the Korean prosecution indicted former President Park on charges of bribery, coercion and abuse of power, among others. On April 6,August 24, 2018, the Seoul CentralHigh Court sentenced the former President to 24 years ofa prison term of 25 years and a monetary fine of₩1820 billion, having found the former President guilty on many of the charges, including the coercion charges relating to the same events underlying the Constitutional Court decisions described above: (i) the employment and promotions of Mr. Lee and Ms. Shin at KT Corporation, (ii) the entry into advertising contracts with Playground and (iii) the donations to Mir Foundation andK-Sports Foundation by us and other Korean corporations. The prosecution appealed the trialappellate court’s decision.decision to the Supreme Court of Korea.
On January 18, 2018, the Korean prosecution indictedMr. Byung-Hun Jun, a former member of the National Assembly, for charges of bribery, corruption and coercion, among others. One of the allegations iswas that Mr. Jun, during his term as a member of the former Science, ICT, Future Planning, Broadcasting and Communications Committee (currently the Science, ICT, Broadcasting and Communications Committee) of the National Assembly, solicited donations or financial sponsorship
from various corporations, including us, to an organization where he used to serve as the president. In February 2019, the Seoul Central District Court found Mr. Jun guilty of the bribery charges and sentenced him to a prison term of five years and an aggregate monetary fine of₩375 million, guilty of abuse of authority and sentenced him to a prison term of one year on probation for two years, and not guilty of the charge in connection with soliciting financial sponsorship of₩100 million from us. Both Mr. Jun and the Korean prosecution appealed the court’s decision. While the prosecution indicted Mr. Jun for these allegations, no indictment or charges of wrongdoing were brought against us or any of our executives or employees in connection with Mr. Jun’s indictment.
In January 2018, the Korean police commenced an investigation in connection with the allegations that our current and former executives and employees violated the Political Funds Act of Korea, by making certain donations to various lawmakers using corporate funds. This investigationmatter is currently being investigated by the Prosecutors’ Office.
The Seoul Southern District Prosecutor’s Office is currently conducting an investigation on our public recruiting process in 2012. In connection with this investigation, in March and April 2019, the Prosecutor’s Office arrested two former executive officers for engaging in a number of improper hirings during the public recruiting process of college graduates in the second half of 2012.In March 2019, the KT New Labor Union filed criminal complaints with the Seoul Central District Prosecutor’s Office against our current chief executive officer, alleging charges including a criminal breach of fiduciary duty, in connection with management consulting (research and survey) contracts entered into between us and certain public officials since November 2014. The investigation by the Prosecutor’s Office is ongoing.
We cannot be certain at this time how the above-described matters and the publicity around them will develop. While we have not been charged with wrongdoingindicted in connection with the above-mentioned matters, related allegations, claims, investigations and proceedings remain a possibility, and we cannot provide any assurances as to likely outcomes. There can be no assurance that any further developments relating to the above-mentioned matters, including adverse publicity, will not adversely affect our business, reputation or stock price.
The reported investigation, insolvency proceedings ofCybersecurity breaches may expose us to significant legal and any adverse publicity associated withfinancial exposure, damage to our previous subsidiary, KT ENGCORE, could have a material adverse effect on our business, reputation and stock price.a loss of confidence of our customers.
An employeeOur business involves the storage and transmission of KT ENGCORE Co., Ltd. (formerly known as KT ENS Corporation until April 2015) (“KT ENGCORE”), our consolidated subsidiary until August 2014, and several companies, somelarge amounts of which are KT ENGCORE’s subcontractors, allegedly worked together to forge documents, including a forged proof of accounts receivable, to incur borrowings, of which₩290 billion remains unpaid, from 16 Korean banks since 2008 in over 460 transactions, which were allegedly secured by the forged accounts receivable and endorsed by KT ENGCORE. KT ENGCORE’s management neither had knowledge of nor approved such transactions. On February 11, 2014, police raided the offices of the subcontractors in connection with their investigation of the loans. Upon discovery of the incident, KT ENGCORE immediately suspended the employee in question without pay, pending the results of the investigations for any further disciplinary actions. The employee and several other persons involved in the incident were sentenced to prison terms by the Seoul Central District Court in August 2014 and by the appellate court subsequently.
In March 2014, KT ENGCORE filed for court receivership with the Seoul Central District Court, based on its inability to pay approximately₩49 billion in commercial paper that became due after early
redemption rights were exercised. The commercial paper had been issued in connection with construction of a solar power plant by a contractor of the project and guaranteed by KT ENGCORE. KT ENGCORE faced difficulties in preventing such exercise of redemption rights following the above incident, and we declined to provide additional financial support to KT ENGCORE to repay the redeemed commercial paper. In August 2014, the Seoul Central District Court approved KT ENGCORE’s restructuring plan, and determined that KT ENGCORE is only responsible for 15% to 20% of the borrowings which remain unpaid, or approximately₩46 billion. Pursuant to the plan, KT ENGCORE is expected to repay all of its currently outstanding obligations. The banks had appealed the decision of the Seoul Central District Court, and it was determined that KT ENGCORE is responsible for 30% to 40% of the borrowings which remain unpaid. The court decision was appealed and in February 2017, the Seoul High Court found that KT ENGCORE is responsible for 40% of the borrowings which remain unpaid. Such appellate court decision was subsequently affirmed by the Supreme Court of Korea in June 2017. While KT ENGCORE’s restructuring is unlikely to have a material impact on our results of operations or financial condition on a consolidated basis, as KT ENGCORE has not been our consolidated subsidiary since 2014 due to its filing for court receivership, and our interest in KT ENGCORE was classified asavailable-for-sale securities, any future legal proceedings against KT ENGCORE and/or us may lead to significant losses. Such losses, as well as any adverse publicity associated with the incident, could have a material adverse effect on our business, reputation and stock price.
The data breach incidents involving us in recent years have resulted in government investigations and civil litigation, and if our efforts to protect personalconfidential information of our subscribers are unsuccessful, future issuesand cardholders, and cybersecurity breaches expose us to a risk of loss of this information, which may result in further government enforcement actionslead to improper use or disclosure of such information, ensuing potential liability and civil litigation, any of which could harm our reputation and may significantly impactadversely affect our results of operation and reputation.
The nature of our business involves the receipt and storage of personal information of our subscribers. The uninterrupted operation of our information systems and confidentiality of the customer information that resides in such systems are critical to our successful operations. As such, we have a program in place to detect and respond to data security incidents. However, evenbusiness. Even though we maystrive to take all steps we believe are necessary to protect personal information, hardware, software or applications we develop or procure from third parties may contain defects in design, manufacturing defects or other problems that could unexpectedly compromise information security. Unauthorized parties may also attempt to circumvent our security measures to gain access to our systems or facilities through fraud, trickery or other forms of deceiving our employees, contractors and temporary staff. In addition, because the techniques used to obtain unauthorized access or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures.
In the past, we have experienced cyber-attacks of varying degrees from time to time, including theft of personal information of our subscribers by third parties that have led to lawsuits and administrative actions against us alleging that the leak was caused by our poor management of subscribers’ personal information. For example, in July 2012, the police arrested two third-party individuals in connection with the alleged theft of personal information relating to approximately
8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into our New Service and Technology Evolution Program(“N-STEP”), our mobile customer information system. Since the incident, approximately 29,800 of our mobile phone subscribers filed a total of 16 lawsuits against us in connection with theN-STEP hackings, alleging that we failed to protect their personal information, and are seeking total damages of approximately₩15 billion. From August 2014 to October 2016, various district courts have awarded damages of₩100,000 per plaintiff for 14 of the cases involving a total of approximately 29,000 of the subscribers, resulting in damages of approximately₩3 billion to us, while the remaining two trials are currently ongoing at various district courts. We have appealed the district courts’ decisions. We won three of the appeals without further appellate proceedings. The other appeal which we won has been appealed to
the Supreme Court. We lost one of the appeals and we appealed such decision to the Supreme Court. The other nine appeals are currently ongoing at the Seoul High Court or the Seoul Central Court.
system starting from February 2012. Furthermore, in March 2014, the police arrested three third-party individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. Since the incident, approximately 15,000 subscribers filed 22 lawsuits against us in connection with the information theft, seeking total damages of approximately₩7 billion. From November 2016 to January 2018, we won 17 trials, lost two trials and the remaining three trials are currently ongoing at various district courts. The plaintiffs of nine of the 17 cases have appealed the district courts’ decisions to the Seoul High Court or the Seoul District Court. We appealed the district courts’ decisions of the two trials where we lost. In June 2014, we were fined₩85 million by the KCC and were ordered to take corrective measures in connection with the most recent hacking incident. We filed an administrative appeal in August 2014 in connection with the KCC fine and prevailed. The KCC appealed the administrative decision and the appeal is currently ongoing at the Seoul High Court.
We are unable to predict with any meaningful degree of certainty the outcome of these incidents at this time, including the scope of investigations or the maximum potential exposure. However, ifIf we experience additional significant data securitycybersecurity breaches or fail to detect and appropriately respond to significant data securitycybersecurity breaches, we could be subject to additional government enforcement actions, regulatory sanctions and litigation in the future. In addition, our mobile subscribers and cardholders could lose confidence in our ability to protect their personal information, which could cause them to discontinue using our services altogether. Furthermore, adverse final determinations, decisions or resolutions regarding such matters could encourage other parties to bring related claims and actions against us. Accordingly, the outcome of these incidentsour failure to prevent cybersecurity breaches may materially and adversely impact our business, financial condition and results of operations.
Our business and performance may be harmed by a disruption in our services due to failures in or changes to our systems, or by our failure to timely and effectively expand and upgrade our technology and infrastructure.
Our reputation and ability to attract, retain, and serve our subscribers, cardholders and other business partners are dependent in large part upon the reliable performance of our services and the underlying technical infrastructure. Our telecommunications network systems and information technology systems may not be adequately designed with the necessary reliability and redundancy to avoid performance delays or outages that could be harmful to our business. We have experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, hardware failures, capacity constraints due to an overwhelming number of people accessing our services simultaneously, computer viruses, power losses, fraud and security attacks. Our technical infrastructure is also vulnerable to the risk of damage from natural and other disasters, such as fires, earthquakes, floods, and typhoons, as well as from acts of terrorism and other criminal acts. For example, in November 2018, a fire broke out at one of our facilities located in the Ahyeon district of western Seoul, which temporarily disrupted our wireless, fixed-line and IPTV services in seven districts covered by the facility. We restored most of our services within four days and our fixed-line public switched telephone network (“PSTN”) services within 11 days, and we refunded subscription fees ranging from one to six months as compensation to our affected subscribers. In addition, we are accepting applications from small business owners for financial assistance, which we plan to provide as appropriate to assist in their recovery from the incident.
As the number of our subscribers and cardholders increases and as our customers access, download and transmit increasing volumes of media contents as well as engage in increasing volumes of financial transactions, we may be required to expand and upgrade our technology and infrastructure to continue to reliably deliver our telecommunications, Internet-related and financial services. We cannot provide assurance that we will be able to expand and upgrade our technology and infrastructure to meet user demand in a timely manner, or on favorable economic terms. We purchase telecommunications network equipment from a limited number of key suppliers, and any discontinuation or interruption in the availability of equipment from our key suppliers for any reason could have an adverse effect on our operations. If our users are unable to readily access our services or access is disrupted, users may seek other service providers instead, and may not return to our services or use our services as often in the future. This would negatively impact our ability to attract subscribers, cardholders and other business partners as well as increase engagement of our customers. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed or continually develop our technology and infrastructure to accommodate actual and
anticipated changes in our customers’ needs, our business, financial condition and results of operations may be harmed.
Our intellectual property rights are valuable, and our inability to protect them could reduce the value of our products, services and brands.
Our trade secrets, trademarks, copyrights, patents and other intellectual property rights are important assets for us. We rely on, and expect to continue to rely on, a combination of confidentiality and license agreements with our employees, consultants and third parties with whom we have relationships, as well as trademark, trade dress, domain name, copyright, trade secret and patent laws, to protect our brands and other intellectual property rights. However, various events outside of our control may pose a threat to our intellectual property rights, as well as to our products, services and technologies. For example, we may fail to obtain effective intellectual property protection, or effective intellectual property protection may not be available, in every country in which our services are available. Also, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective, and any of our intellectual property rights may be challenged, which could result in them being narrowed in scope or declared invalid or unenforceable. There can be no assurance that our intellectual property rights will be sufficient to protect against others offering services that are substantially similar to ours and compete with our business.
We also rely onnon-patented proprietary information and technology, such as trade secrets, confidential information,know-how and technical information. While in certain cases we have agreements in place with employees and third parties that place restrictions on the use and disclosure of such intellectual property, these agreements may be breached, or such intellectual property may otherwise be disclosed or become known to our competitors, which could cause us to lose competitive advantages resulting from such intellectual property.
We are also pursuing registration of trademarks and domain names in Korea and in select jurisdictions outside of Korea. Effective protection of trademarks, domain names and other intellectual property is expensive and difficult to maintain, both in terms of application and registration costs as well as the costs of defending and enforcing those rights.
We also seek to obtain patent protection for some of our technology, and we have filed various applications in Korea and elsewhere for protection of certain aspects of our intellectual property and currently hold a number of issued patents in multiple jurisdictions. We may be unable to obtain patent or trademark protection for our technologies and brands, and our existing patents and trademarks, and any patents or trademarks that may be issued in the future, may not provide us with competitive advantages or distinguish our products and services from those of our competitors. In addition, any patents and trademarks may be contested, circumvented, or found unenforceable or invalid, and we may not be able to prevent third parties from infringing, diluting or otherwise violating them. Significant infringements of our intellectual property rights, and limitations on our ability to assert our intellectual property rights against others, could harm our ability to compete and our business, financial condition.condition and results of operations could be adversely affected.
We may become party to intellectual property rights claims in the future that may be expensive and time consuming to defend, and such claims, if resolved adversely, could have a significant impact on our business.
Telecommunications and information technology companies own large numbers of patents, copyrights, trademarks, licenses and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. In addition, various“non-practicing entities” that own intellectual property rights often attempt to
aggressively assert claims in order to extract payments from companies like us. From time to time, we have received, and may receive in the future, claims from third parties which allege that we have infringed upon their intellectual property rights. Furthermore, from time to time, we may introduce or acquire new services or content, including in areas where we currently do not compete, which could increase our exposure to intellectual property claims from competitors andnon-practicing entities.
As we face increasing competition, the number and scope of intellectual property claims against us may grow. There may be intellectual property or other rights held by others, including issued or pending patents, that cover significant aspects of our services, and we cannot be certain that we are not infringing or violating, and have not infringed or violated, any third-party intellectual property rights or that we will not be held to have done so or be accused of doing so in the future. Any claim or litigation alleging that we have infringed or otherwise violated intellectual property or other rights of third parties, with or without merit, and whether or not settled out of court or determined in our favor, could be time consuming and costly to address and resolve, and could divert the time and attention of our management and technical personnel. The outcome of any litigation is inherently uncertain, and there can be no assurance that favorable final outcomes will be obtained. In addition, plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations.
If any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. The terms of any such judgment or any settlement may require us to cease some or all of our operations, pay substantial amounts to the other party or seek licensing arrangements. If we are required or choose to enter into royalty or licensing arrangements, such arrangements may not be available on commercially reasonable terms, or at all. In addition, the development or procurement of alternative technology could require significant effort and expense or may not be feasible. Accordingly, an unfavorable resolution of any intellectual property rights claims could adversely affect our business, financial condition and results of operations.
We rely on key researchers and engineers and senior management, and the loss of the services of any such key personnel or the inability to attract and retain replacements may negatively affect our business.
Our success depends to a significant extent upon the continued service of our research and development and engineering personnel, and on our ability to continue to attract, retain and motivate qualified researchers and engineers. In particular, our focus on leading the market in introducing new telecommunications and Internet-related services has meant that we must aggressively recruit engineers with expertise in cutting-edge technologies. In addition, our ability to execute our strategy effectively is dependent upon contributions from our key senior management. Our future success will depend on the continued service of our key executive officers and managers who possess significant expertise and knowledge of our industry. A limited number of individuals have primary responsibility for the management of our business, including our relationships with key business partners. From time to time, there may be changes in our senior management team that may be disruptive to our business, and we may not be able to find replacement key personnel in a timely manner. Any loss or interruption of the services of these individuals, whether from retirement, loss to competitors or other causes, or failure to attract and retain other qualified new personnel, could prevent us from effectively executing our business strategy, cause us to lose key business relationships, or otherwise materially affect our operations.
Government regulation of the credit card industry may adversely affect the operations of BC Card in which we hold a 69.54% interest.
Due to the rapid growth of the credit card market and rising consumer debt levels in Korea, the Government has heightened its regulatory oversight of the credit card industry in recent decades. In
particular, the FSC and the Financial Supervisory Service (“FSS”) have adopted a variety of regulations governing the credit card industry. Among other things, these regulations impose minimum capital adequacy ratios, minimum required provisioning levels applicable to credit card receivables and stringent lending ratios. The FSC and FSS also impose rules governing the evaluation and reporting of credit card balances, procedures governing which persons may receive credit cards as well as processing fees paid by merchants. For example, the FSC and FSS announce periodic guidelines every three years for processing fees paid by merchants for credit card and check card transactions. In November 2018, the FSC and FSS announced guidelines reducing credit card processing fees paid by merchants with annual revenue between₩500 million to₩50 billion from a range of 2.05% to 2.17% to a revised range of 1.4% to 1.95%. In addition, the guidelines reduced check card processing fees paid by merchants with annual revenue exceeding₩500 million from a range of 1.56% to 1.60% to a revised range of 1.10% to 1.45%. BC card implemented such reductions in February 2019.
Pursuant to the FSS’s capital adequacy guidelines, which are derived from standards established by the Bank for International Settlements, credit card companies in Korea are required to maintain a total capital adequacy ratio of at least 8.0% on a consolidated basis. To the extent a credit card company fails to maintain such ratio, Korean regulatory authorities may impose penalties on such company ranging from a warning to a suspension or revocation of its license. BC Card’s capital adequacy ratios were 27.1% as of December 31, 2017 and 29.3% as of December 31, 2018. Such capital adequacy ratio will decrease if the growth in BC Card’s asset base is not matched by corresponding growth in its regulatory capital. In addition, BC Card’s capital base and its capital adequacy ratio may decrease if its results of operations or financial condition deteriorates. Accordingly, there can be no assurance that BC Card will not be required to obtain additional capital in the future in order to maintain its capital adequacy ratio above the minimum required levels. There can be no assurance that, if BC Card requires additional capital in the future, it will be able to obtain such capital on favorable terms or at all, which could have a material adverse effect on the business, financial condition and results of operations of BC Card.
The Government may adopt further regulatory changes in the future that affect the credit card industry. Depending on their nature, such changes may adversely affect the operations of BC Card, by restricting its growth or scope, subjecting it to stricter requirements and potential sanctions or greater competition, constraining its profitability or otherwise.
Disputes with our labor union may disrupt our business operations.
In the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing ofnon-core businesses and reducing our employee base. Although we have not experienced any significant labor disputes or unrests in recent years,there can be no assurance that we will not experience labor disputes or unrests in the future, including extended protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operations.
We also negotiate collective bargaining agreements every two years with our labor union and annually negotiate a wage agreement. Our current collective bargaining agreement expires on October 9, 2019.Although we have been able to reach collective bargaining agreements and wage agreements with our labor union in recent years, there can be no assurance that we will not experience labor disputes and unrest resulting from disagreements with the labor union in the future.
We are subject to various laws and regulations in Korea and other jurisdictions, including the Monopoly Regulation and Fair Trade Act of Korea and other laws and regulations governing our business activities and acts of our management and employees.
Our business operations and acts of our management, employees and other relevant parties are subject to various laws and regulations in and outside Korea. These laws are complicated and sometimes conflicting and our efforts to comply with these laws could increase our cost of doing business, restrict our business activities and expose us or our employees to legal sanctions and liabilities.
The Monopoly Regulation and Fair Trade Act provides for various regulations and restrictions on large business groups enforced by the Korea Fair Trade Commission to prohibit or restrict actions that impede competition and fair trade. The Korea Fair Trade Commission designated us as a large business group under the Monopoly Regulation and Fair Trade Act on April 1, 2002. Our business relationships and transactions with our subsidiaries, affiliates and other companies within the KT group are subject to ongoing scrutiny by the Fair Trade Commission as to, among other things, whether such relationships and transactions constitute undue financial support among companies of the same business group. We are also subject to the fair trade regulations limiting debt guarantees for other domestic member companies of the same group and cross-shareholdings among domestic member companies of the same group, as well as requiring disclosure of the status of such cross-shareholdings. Additionally, we are subject to a prohibition, in effect since July 25, 2014, against circular shareholding among any three or more entities within our business group. For example, in 2015, we were fined₩2 billion by the Korea Fair Trade Commission for using monopolistic status to exclude competitors in the corporate messaging business. However, the sentence was revoked by the
Seoul High Court in 2018, subject to the disposition by the Supreme Court of Korea. In 2016, we were issued consent orders by the Korea Fair Trade Commission for unfairly comparative advertisements on quality and coverage of our LTE service. Any future determination by the Korea Fair Trade Commission that we have engaged in transactions that violate the fair trade laws and regulations may result in fines or other punitive measures and may have a material adverse effect on our reputation and our business.
Certain of our business activities or acts of our management, employees or other relevant parties, including, without limitation, investigations, claims or legal proceedings involving our former chief executive officer Mr. Lee and incidents relating to the employment of certain executives and execution of certain advertising contracts described above, may raise concerns about compliance with laws of Korea and other relevant jurisdictions, including the United States. These various and sometimes conflicting laws and regulations include the U.S. Foreign Corrupt Practices Act and other laws prohibiting corrupt payments to governmental officials and commercial counterparties. Compliance with complex Korean and foreign laws and regulations that apply to our operations increases our cost of doing business. Failure to comply with these laws and regulations could also result in fines, penalties and criminal sanctions against us, our officers, or our employees, prohibitions on conduct of our business, and damage to our reputation. Criminal or civil investigation by Korean or other authorities may result inhave a material impact toon our business or reputation, which in turn could impact our relationships with certain of our customers and business partners, and which potentially could give rise to additional regulatory inquiries in Korea or elsewhere. Defending us against any allegations or charges of wrongdoing also could be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel. There can be no assurance that we or our employees and other relevant parties will always be in full compliance with these laws and regulations, or that future legal or regulatory developments applicable to us will not have an adverse impact on our business, reputation or stock price.
Concerns that radio frequency emissions may be linked to various health concerns could adversely affect our business and we could be subject to litigation relating to these health concerns.
In the past, allegations that serious health risks may result from the use of wireless telecommunications devices or other transmission equipment have adversely affected the share prices of some wireless telecommunications companies in the United States. In May 2011, the International
Agency for Research on Cancer (“IARC”) announced that it has classified radiofrequency electromagnetic fields associated with wireless phone use as possibly carcinogenic to humans, based on an increased risk for glioma, a malignant type of brain cancer. The IARC is part of the World Health Organization that conducts research on the causes of human cancer and the mechanisms of carcinogenesis, and aims to develop scientific strategies for cancer control. We cannot assure you that such health concerns will not adversely affect our business. Several class action and personal injury lawsuits have been filed in the United States against several wireless phone manufacturers and carriers, asserting product liability, breach of warranty and other claims relating to radio transmissions to and from wireless phones. Certain of these lawsuits have been dismissed. In addition, to protectpre-school and elementary school children, the Office of Education inGyeonggi-do, one of Korea’s highly populated provinces, implemented an ordinance named “Protective Ordinance for Social Groups Vulnerable to Electromagnetic Radiation” in April 2016. The ordinance prohibits installation of cellular towers nearpre-schools and elementary schools inGyeonggi-do. In December 2016, the minister of the MSIP filed a petition with the Supreme Court to invalidate the ordinance. The provincial assembly ofGyeonggi-do decided to file a criminal complaint against the minister of the MSIP. In December 2017, the Supreme Court of Korea ruled that the ordinance is invalid as the ordinance has no legal basis. We could be subject to liability or incur significant costs defending lawsuits brought by our subscribers or other parties who claim to have been harmed by or as a result of our services. In
addition, the actual or perceived risk of wireless telecommunications devices could have an adverse effect on us by reducing our number of subscribers or our usage per subscriber.
Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on the results of our operations and on the prices of our securities.
Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect the results of our operations because, among other things, it causes an increase in the amount of Won required by us to make interest and principal payments on our foreign-currency-denominated debt, the costs of telecommunications equipment that we purchase from overseas sources, net settlement payments to foreign carriers and certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. Of the₩6,6846,648 billion total book value of debentures and borrowings outstanding as of December 31, 2017,2018,₩2,0622,392 billion was denominated in foreign currencies. The interest rates of such debt denominated in foreign currencies ranged from 0.48% (Japanese Yen 15 billion bond due 2018) to 6.50% (US$100 million fixed rate notes due 2034 issued under our suspended medium-term note program). Upon identification and evaluation of our currency risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to manage some ofmitigate such risks. Although the impact of exchange rate fluctuations has in the past been partially mitigated by such strategies, our results of operations have historically been affected by exchange rate fluctuations, and there can be no assurance that such strategies will be sufficient to reduce or eliminate the adverse impact of such fluctuations in the future. See “—Item 3.A. Selected Financial Data—Exchange Rate Information”, “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Exchange Rate Risk.”
Fluctuations in the exchange rate between the Won and the Dollar will also affect the Dollar equivalent of the Won price of our ordinary shares on the KRX Korea Composite Stock Price Index (“KOSPI”) Market and, as a result, will likely affect the market price of the ADSs. These fluctuations will also affect the Dollar conversion by the depositary for the American Depositary Receipts (“ADRs”) of cash dividends, if any, paid in Won on our ordinary shares represented by the ADSs.
We may be exposed to potential claims for unpaid wages and become subject to additional labor costs arising from the Supreme Court of Korea’s interpretation of ordinary wages.
Under the Labor Standards Act, an employee’s “ordinary wage” is a key legal construct used to calculate many statutory benefits and entitlements in Korea. Increasing or decreasing the amount of compensation included in employees’ ordinary wages has the effect of increasing or decreasing the amounts of various statutory entitlements that are calculated based on “ordinary wage,” such as overtime premium pay. Under guidelines previously issued by the Ministry of Employment and Labor, prior to the Supreme Court decision described below, an employee’s ordinary wage included base salary and certain fixed monthly allowances for work performed overtime during night shifts and holidays. Prior to the Supreme Court of Korea’s decision described below, companies in Korea had typically interpreted these guidelines as excluding from the scope of ordinary wages fixed bonuses that are paid other than on a monthly basis, namely on abi-monthly, quarterly or biannual basis.
On
In December 18, 2013, the Supreme Court of Korea ruled that regular bonuses (including those that are paid other than on a monthly basis) shall be deemed ordinary wages if these bonuses are paid “regularly” and “uniformly” on a “fixed basis” notwithstanding differential amounts based on seniority. Under this decision, any collective bargaining agreement or labor-management agreement which attempts to exclude such regular bonuses from employees’ ordinary wages will be deemed void for violation of the mandatory provisions of Korean law. However, the Supreme Court of Korea further
ruled that, in certain limited situations, an employee’s claim of underpayment under the expanded scope of ordinary wages for the past three years may be denied based on the principles of good faith, even thoughif the claim is raised within the statute of limitations period. Following this Supreme Court decision, the Ministry of Employment and Labor issued a Guideline for Labor and Management on Ordinary Wages onin January 23, 2014. A bill for amendment to the Labor Standard Act, which includes a definition of “ordinary wages” as “entire money and valuables determined in advance to be provided to the employee by the employer as wages, regardless of its name, in exchange of the prescribed or total work of the employee,” is currently pending at thesub-committee level of the National Assembly.
While we currently are not subject to any claims of underpayment from our current or former employees,the Supreme Court decision may result in additional labor costs for us in the form of additional payments required under the expanded scope of ordinary wages, both those incurred during the past three years and those to be incurred in the future. Any such additional payments may have an adverse effect on our financial condition and results of operation.
Risks Relating to Korea
If economic conditions in Korea is our most important market, anddeteriorate, our current business and future growth could be materially and adversely affected if economic or political conditionsaffected.
We are incorporated in Korea, deteriorate.
Substantially alland we generate most of our operations, customers and assets are locatedoperating revenue in Korea. Accordingly, the performanceAs a result, we are subject to economic, political, legal and successful fulfillment of our operational strategies are necessarily dependent on the overall Korean economy and the resulting impact on the demand for telecommunications services.regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs of growth and uncertainty, and future growth of the Korean economy is subject to many factors beyond our control, including developments in the global economy and domestic political scandals.
The Korean economy is closely integrated with, and is significantly affected by, developments in the global economy and financial markets. Substantial uncertainties remain for the global and Korean economy in the form of continued tightening of the U.S. monetary policy, continued fiscal and financial challenges for the European, U.S. and global economies, fluctuations in oil and commodity prices, trade tensions involving Korea’s trading partners, signs of cooling of the Chinese economy and a rise of military and political tension in the Middle East, the Eastern Europe and former members of the Soviet Union. Accordingly, the overall prospects for the Korean and global economy in 2018 and beyond remain uncertain.economy. Any future deterioration of the global economy may have an adverse impact on the Korean economy, which in turnas a result of unfavorable global economic conditions or otherwise, could adversely affect our business, financial condition and results of operations. As Korea’s economy is highly dependent onoperations and the health and direction of the global economy, investors’ reactions to developments in one country can have adverse effects on the securitiesmarket price of companies in other countries. Factors that determine economic and business cycles of the Korean or global economy are for the most part beyond our control and inherently uncertain. In light of the high level of interdependence of the global economy, any of the foregoing developments could have a material adverse effect on the Korean economy and financial markets, and in turn on the our business and profitability.ADSs.
Developments that could have an adverse impact on Korea’s economy in the future also include:
adverse conditions in the economies of countries and regions that are important export markets for Korea, such as China, the United States, Europe and Japan, or in emerging market economies in Asia or elsewhere, as well as increased uncertainties regarding a future Brexit, including the possibility of additional countries exiting from the European Union;
decreases in the market prices of Korean real estate;
adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar, the Euro or the Japanese Yen exchange rates or revaluation of the Chinese Renminbi), interest rates, inflation rates or stock markets;
increased sovereign default risk in select countries and the resulting adverse effects on the global financial markets;
investigations of large Korean business groups and their senior management for possible misconduct;
a continuing rise in the level of household debt and increasing strife amongdelinquencies and credit defaults by retail andsmall- andmedium-sized enterprise borrowers in Korea;
social and labor unrest;
the economic impact of any pending or within political partiesfuture free trade agreements or changes in existing free trade agreements;
a decrease in tax revenue or a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that would lead to an increased government budget deficit;
financial problems or lack of progress in the restructuring of Korean business groups, other large troubled companies (including those in the shipbuilding and shipping sectors), their suppliers or the financial sector;
loss of investor confidence arising from corporate accounting irregularities or corporate governance issues at certain Korean companies;
increases in social expenditures to support an aging population in Korea and political gridlock withinor decreases in economic productivity due to the Government ordeclining population size in the legislature, which prevent or disrupt timely and effective policy making;Korea;
geo-political uncertainty and the risk of further attacks by terrorist groups around the world;
the occurrence of severe health epidemics in Korea or other parts of the world (such as the Middle East Respiratory Syndrome outbreak in Korea in 2015);
natural orman-made disasters that have a significant adverse economic or other impact on Korea or its major trading partners;
political uncertainty or increasing strife among or within political parties in Korea;
increase in the statutory minimum wage in Korea, to the extent its benefits (such as an increase in consumer confidence or spending level of employees earning the minimum wage) are outweighed by its costs (such as an increase in unemployment rate);
hostilities or political or social tensions involving oil producing countries in the Middle East and North Africa and any material disruption in the global supply of oil or significant decrease orsudden increase in the price of oil; and
increased reliance on exports to service foreign currency debts, which could cause friction with Korea’s trading partners;
the continued growth of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);
political or social tensions involving Russia and any resulting adverse effects on the global supply of oil or the global financial markets; and
an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.
Escalations in tensions with North Korea could have an adverse effect on us.us and the market value of our ADSs.
Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of current and future events. In particular, there continues to be uncertainty regarding the long-term stability of North Korea’s political leadership since the succession of KimJong-un to power following the death of his father in December 2011, which has raised concerns with respect to the political and economic future of the region. In February 2017, Kim Jong-un’s half-brother, Kim Jong-nam, was reported to have been assassinated in an international airport in Malaysia. On April 27, 2018, Kim Jong-un and the President of South Korea attended a summit held in the Demilitarized Zone of the Korean peninsula.
In addition, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and long-rangeballistic missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:
North Korea renounced its obligations under the NuclearNon-Proliferation Treaty in January 2003 and has conducted threesix rounds of nuclear tests betweensince October 2006, to February 2013,including claimed detonations of hydrogen bombs, which increased tensions inare more powerful than plutonium bombs, and warheads that can be mounted on ballistic missiles. Over the region and elicited strong objections worldwide. Subsequently,years, North Korea continued to engage in provocative behaviors. In January 2016, North Korea announcedhas also conducted a series of ballistic missile tests, including missiles launched from submarines and intercontinental ballistic missiles that it had successfully tested a hydrogen bomb, its fourth nuclear test and allegedly first test using hydrogen, which is more explosive than plutonium. In February 2016, North Korea tested its intercontinental ballistic missile technology and launched a long-range missile, which it claimed to have launched a satellite into orbit.claims can reach the United States mainland. In response, the Government has repeatedly condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions and withdrew Korean personnel fromresolutions. In February 2016, the Government also closed the inter-Korea Kaesong industrial complex (the “Complex”) and announcedGaesong Industrial Complex (in which we provided certain telecommunications services prior to its closing. In March 2016,closure) in response to North Korea’s fourth nuclear test in January 2016. Internationally, the United Nations Security Council unanimouslyhas passed a resolutionseries of resolutions condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea. In September 2016, North Korea, announced that it had successfully tested a nuclear warhead that could be mounted on ballistic missiles. Inmost recently in December 2017 in response the Government condemned the test, and in November 2016, the United Nations Security Council unanimously passed a resolution imposing additional sanctions on North Korea. In March 2017, North Korea launched four midrange missiles aimed at the U.S. military bases in Japan, which landed off the east coast of the Korean peninsula. In late March 2017, the United States sanctioned 11 North Korean individuals and one North Korean coal company for their ties to North Korea’s nuclear weapons program. In April 2017, North Korea launched twointercontinental ballistic missiles which landed offmissile test in November 2017. Over the east coast of the Korean peninsula. In response to the missile launches, representatives of the Government,years, the United States and China expressedthe European Union have also expanded their planssanctions applicable to impose stronger sanctions on North Korea. In July 2017, North Korea conducted two intercontinental ballistic missile tests which displayed further development of its long-range ballistic missile capabilities that potentially enable it to target certain areas of the United States as well as other neighboring countries in the Asia-Pacific region. In response, the United Nations Security Council unanimously adopted stronger sanctions against North Korea. In September 2017, North Korea conducted its sixth nuclear test, prompting the United Nations Security Council to adopt additional sanctions against North Korea. In November 2017, North Korea conducted a test launch of another intercontinental ballistic missile, which, due to its improved size, power and range of distance, may potentially enable North Korea to target the United States mainland.
In August 2015, two Korean soldiers were injured in a landmine explosion near the South Korean demilitarized zone. Claiming the landmines were set by North Koreans, the South Korean armyre-initiated its propaganda program toward North Korea utilizing loudspeakers near the demilitarized zone. In retaliation, the North Korean army fired
|
North Korea’s economy also faces severe challenges, which may further aggravate social and political pressurepressures within North Korea. There
Although bilateral summit meetings were held between Korea and North Korea in April, May and September 2018 and between the United States and North Korea in June 2018 and February 2019, there can be no assurance that the level of tensiontensions affecting the Korean peninsula will not
escalate in the future. Any further increase in tensions, such aswhich may occur, for example, if North Korea’s belligerent tactics, dissolution of high levelKorea experiences a leadership crisis,high-level contacts between Korea or the United States and North Korea break down or occurrence offurther military hostilities occur, could have a material adverse effect on the Korean economy and on our business, financial condition and results of operations and financial condition.
In addition, since 2005, we have provided fixed-line telephone services, through various fixed-line telephone equipment that we installed, to certain South Korean companies located at the Complex, which was established pursuant to an agreement made during the summit meeting of the two Koreas in June 2000. The Complex was the largest economic project between the two Koreas and was designed to combine the Republic’s capital and entrepreneurial expertise with the availability of land and labor of North Korea.
For the year ended December 31, 2015, our revenue from the services provided for the Complex was approximately₩1.17 billion. We had no revenue from such services for the year ended December 31, 2016 and 2017. Our investment in the Complex was approximately₩1.88 billion as of December 31, 2015 and we have not made additional investments since the closure of the Complex. However, our services have been suspended since February 11, 2016 following the Government’s decision to halt operations of the Complex to impede North Korea’s utilization of funds from the Complex to finance its nuclear and missile programs. No assurance can be given that we will not experience any material losses as a result of the suspension of this project or failure of the project as a result of a breakdown or escalation of hostilities in the relationship between the Republic and North Korea.operations.
Korea’s legislation allowing class action suits related to securities transactions may expose us to additional litigation risk.
The Securities-related Class Action Act of Korea enacted in January 2004 allows class action suits to be brought by shareholders of companies (including us) listed on the KRX KOSPI Market for losses incurred in connection with purchases and sales of securities and other securities transactions arising from (1) false or inaccurate statements provided in the registration statements, prospectuses, business reports, audit reports, semi-annual or quarterly reports and material fact reports and omission of material information in such documents, (2) insider trading, (3) market manipulation and (4) unfair trading. This law permits 50 or more shareholders who collectively hold 0.01% of the shares of a company to bring a class action suit against, among others, the issuer and its directors and officers. Because of the relatively recent enactment of the act, there is not enough judicial precedent to predict
how the courts will apply the law. Litigation can be time-consuming and expensive to resolve, and can divert management time and attention from business operation. We are not aware of any basis upon which such suit may be brought against us, nor are any such suits pending or threatened. Any such litigation brought against us could have a material adverse effect on our business, financial condition and results of operations.
We are generally subject to Korean corporate governance and disclosure standards, which differ in significant respects from those in other countries.
Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies which differ in some respects from standards applicable in other countries, including the United States. As a reporting company registered with the Securities and Exchange Commission and listed on the New York Stock Exchange, we are, and will continue to be, subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002, as amended.standards. However, foreign private issuers, including us, are exempt from certain corporate governance standards required under the Sarbanes-Oxley Act or the rules of the New York Stock Exchange. For a description of significant differences in corporate governance practice compared to corporate governance standards of the New York Stock Exchange applicable to U.S. issuers, see “Item 16G. Corporate Governance.” There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public ornon-public companies in other countries.
Risks Relating to the Securities
If an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs.
Korean law currently limits foreign ownership of the ADSs and our shares. In addition, under our deposit agreement, the depositary bank cannot accept deposits of shares and deliver ADSs representing those shares unless (1) we have consented to such deposit or (2) Korean counsel has advised the depositary bank that the consent required under (1) is no longer required under Korean laws and regulations. Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with our consent for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number
of shares on deposit with the depositary bank at the time of such proposed deposit. The depositary bank has informed us that, at a time it considers to be appropriate, the depositary bank plans to start accepting deposits of shares without our consent and to deliver ADSs representing those shares up to the amount allowed under current Korean laws and regulations. Until such time, however, the depositary bank will continue to obtain our consent for such deposits of shares and delivery of ADSs, which we may not provide. Consequently, if an investor surrenders his ADSs to withdraw the underlying shares, he may not be allowed to deposit the shares again to obtain ADSs. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”
A foreign investor may not be able to exercise voting rights with respect to common shares exceeding the number of common shares held by our largest domestic shareholder.certain restrictions.
Under the Telecommunications Business Act, a foreign shareholder who holds 15.0%5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 15.0%5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. UnderIn addition, under the Telecommunications Business Act, the MSIT may, if it deems it
necessary to preserve substantial public interests, prohibit a foreign shareholder from being our largest shareholder. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, such foreign shareholder may not be able to exercise voting rights with respect to common shares exceeding such threshold. The MSIT may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less.
In addition, the Foreign Investment PromotionTelecommunications Business Act prohibits anyrestricts the ownership and control of network service providers by foreign shareholder from being our largest shareholder if such shareholder owns 5.0% orshareholders. Foreigners, foreign governments and “foreign invested companies” may not own more than 49.0% of ourthe issued shares with voting rights.rights of a network service provider, including us. As of December 31, 2018, 48.5% of our common shares were owned by foreign investors. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, such foreign shareholder may not be able to exercise voting rights with respect to common shares exceeding such threshold. The MSIT may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a specified period of six months or less. See “Item 4. Information of the Company—Item 4.B. Business Overview—Regulation—Foreign Investment” and “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.Association—Limitations on Shareholding.”
Holders of ADSs will not be able to exercise appraisal rights unless they have withdrawn the underlying ordinary shares and become our direct shareholders.
In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their shares under Korean law. A holder of ADSs will not be able to exercise appraisal rights unless he has withdrawn the underlying ordinary shares and become our direct shareholder. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association.”
An investor may not be able to exercise preemptive rights for additional shares and may suffer dilution of his equity interest in us.
The Commercial Code of Korea and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer any rights to subscribe for
additional ordinary shares or any rights of any other nature, the depositary bank, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The depositary bank, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:
a registration statement filed by us under the Securities Act of 1933, as amended, is in effect with respect to those shares; or
the offering and sale of those shares is exempt from or is not subject to the registration requirements of the Securities Act.
We are under no obligation to file any registration statement. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his preemptive rights for additional shares. As a result, the ADS holder may suffer dilution of his equity interest in us.
Forward-looking statements may prove to be inaccurate.
This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about us and the industries in which we operate. The forward-looking statements are subject to various risks and uncertainties. Generally, these Theseforward-looking statements can be identified by the use of forward-looking terminologyinclude, but are not limited to, those statements using words such as “anticipate,” “believe,” “estimate,“continues,” “expect,” “estimate,” “intend,” “project,” “should,“aim,” “plan,” “likely to,” “target,” “contemplate,” “predict,” “potential” and similar expressions.expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions generally intended to identify forward-looking statements. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and
that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed above. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.
Item 4. Information on the Company
Item 4.A. History and Development of the Company
In 1981, the Government established us under the Korea Telecom Act to operate the telecommunications services business that it previously directly operated. Under the Korea Telecom Act and the Government-Invested Enterprises Management Basic Act, the Government exercised substantial control over our business and affairs. Effective October 1, 1997, the Korea Telecom Act was repealed and the Government-Invested Enterprises Management Basic Act became inapplicable to us. As a result, we became a corporation under the Commercial Code, and our corporate organization and shareholders’ rights were governed by the Privatization LawGovernment’s privatization laws and the Commercial Code. Among other things, we began to exercise greater autonomy in setting our annual budget and making investments in the telecommunications industry, and our shareholders began electing our directors, who had previously been appointed by the Government under the Korea Telecom Act.
Prior to 1993, the Government owned all of the issued shares of our common stock. From 1993 through May 2002, the Government disposed of all of its equity interest in us, and the Privatization Lawprivatization laws ceased to apply to us in August 2002. We amended our legal name from Korea Telecom Corp. to KT Corporation in March 2002.
Before December 1991, we were the sole provider of local, domestic long-distance and international long-distance telephone services in Korea. The Government began to introduce competition in the telecommunications services market in the early 1990’s. As a result, including ourselves, there are currently three local telephone service providers, five domestic long-distance carriers and numerous international long-distance carriers (including voice resellers) in Korea. In addition, the Government awarded licenses to several service providers to promote competition in other telecommunications business areas such as mobile telephone services and data network services. In June 2009, KTF,KT Freetel Co., Ltd. (“KTF”), a subsidiary providing mobile telephone services, merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. See “Item 4. Information on the Company—“—Item 4.B. Business Overview—Competition.”
OurWe are a corporation with limited liability organized under the laws of Korea, and our legal and commercial name is KT Corporation. Our principal executive offices are located at KT Gwanghwamun Building East, 33,Jong-ro3-gil,Jongno-gu, 03155, Seoul, Korea, and our telephone number is(8231) 727-0114.+82-31-727-0114 and the address of our English website is https://corp.kt.com/eng/.
The SEC maintains a website (http://www.sec.gov), which contains reports, information statements and other information regarding issuers that file electronically with the SEC.
We are the leading integrated telecommunications service provider in Korea and one of the largest and most advanced in Asia. As an integrated telecommunications service provider, ourOur principal services include:
mobile voice and data telecommunications services based on 4G LTE and 3GW-CDMA technology, and 4G LTE technology;as well as 5G mobile services commercially launched in April 2019;
Ø | (i) fixed-line telephone services, including local, domestic long-distance and internationallong-distance |
Ø | broadband Internet access |
Ø | data communication services, including fixed-line and satellite leased line |
media and content services, including IPTV, satellite TV, TV home shopping, digital contents distribution, information and communication technology (“ICT”) platform consulting, digital music streaming and downloading and online advertising;
credit card processing and other financial services offered primarily through BC Card Co., Ltd.;Card;
various business activities that extend beyond telecommunications and
sale of goods, primarily sale of handsets related to our mobile services and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Skylife), media contents business and network services such as cloud computing services.Estate.
Leveraging on our dominant position in the fixed-line telephone services market and our established customer base in Korea, we have successfully pursued new growth opportunities during the past decade and obtained strong market positions in each of our principal lines of business. In particular:
in the mobile services, market in Korea, we achieved a market share of 31.4%31.8% with approximately 2021.1 million subscribers as of December 31, 2017;2018;
in the fixed-line and VoIP telephone services, market in Korea, we continue to be the dominant provider withhad approximately 24.315.0 million installed lines,subscribers, consisting of which approximately 11.211.7 million lines were in servicePSTN subscribers and 3.4 million VoIP subscribers as of December 31, 2017.2018. As of such date, our market share of the fixed-line local markettelephone and VoIP services was 80.5%65.1%; and our market share of the domestic long-distance market was 79.8%;
we are Korea’s largest broadband Internet access provider with approximately 8.88.7 million subscribers(excluding WiBro and ollehWifi subscribers)assubscribersas of December 31, 2017,2018, representing a market share of 41.3%; and
41.0%.
For the year ended December 31, 2017,2018, our operating revenues wererevenue was₩23,54723,436 billion, our profit for the periodyear was₩546724 billion and our basic profitearnings per share was₩1,884.2,654. As of December 31, 2017,2018, our total assets were₩29,74532,474 billion, total liabilities were₩16,69617,811 billion and total equity was₩13,04914,663 billion.
Business Strategy
We believe the telecommunications market in Korea is nearing saturation, despite certain areas of growth remaining due to Korea’s growing economy, consumers’ willingness to adopt new technologies, relatively high income and a relatively large middle class. To maintain our competitiveness, we believe we need to pursue growth in other areas, while maintaining our strength in
existing businesses. In order to enhance the management efficiencies of our mobile and fixed-line telecommunications operations as well as more effectively respond to the convergence trends in the telecommunications industry, KTF merged into KT Corporation in June 2009, with KT Corporation surviving the merger. As part of our efforts to improve our operational efficiencies, we transferred all operations relating to fixed-line sales activities (includingon-site sales, line activation, after service, and customer center operations) to our subsidiaries in 2014.
Since 2016, our main strategical focus was on promotion of services that converge information & communication technology with other fields such as energy, security, media, healthcare, transportation and financial transactions, utilizing our fixed-line and wireless infrastructure installed for our olleh GiGA Internet Service and LTE mobile services. In addition, we have focused on artificial intelligence and big data and plan to leverage our platforms like IPTV and network assets to introduce innovative convergence services. For example, we launched “GiGA Genie” using an artificial-intelligence based IPTVset-top box that allows users to voice-command to watch TV, use the Internet and control other Internet-connected appliances. In 2017, we launched an interactive video security service, called “GiGAeyes.” In addition, the first Internet-only bank in Korea, called K bank, over which we own a minority interest, began operation in April 2017 and seeks to operate as a virtual bank whose operation is based on its mobile application and the Internet, while promoting greater user accessibility through the convenience stores of one of our other consortium members. K bank also plans to differentiate itself from other conventional banks by utilizing big data and offering competitive products and interest rates.
Our strategical focus on convergence services builds on our “GiGAtopia” corporate vision, which refers to our goal to create a world where humans and all things are connected through ultra-fast “GiGA” infrastructure and ICTeco-system, enhanced by convergence services, industrial development and innovation. We launched our olleh GiGA Internet service, which provides transmission speed of up to 1 Gbps, in October 2014 (“olleh GiGA Internet Service”). In June 2015, we also announced the mobile data service known as “GiGA LTE,” which utilizes multipath transmission control protocol (MPTCP) technology. We continue to expand GiGA coverage, initially focusing on metropolitan areas, and further expand to other regions in Korea. By promoting our convergence services, we aim to contribute in changing the current subsidy-based Korean telecommunication market competition to one based on innovative technology, products and enhanced services.
We believe development of 5G technology will be a key driver for future innovations, fueled also by the increasing importance of big data. With our leadership in providing highly advanced 4G LTE services, we have made extensive efforts to develop and present various further advanced technologies. At the PyeongChang 2018 Winter Olympics, we unveiled the world’s first 5G trial services. We showcased a variety of services with enhanced speed, latency, and connectivity, such as broadcasting from the viewpoint of players with a360-degree panoramic view or broadcasting from multiple viewpoints. As an official telecommunications services partner of the PyeongChang 2018 Winter Olympics, we made utmost efforts to realize the vision of 5G and capture truly memorable moments of the Olympics. In this effort, we announced our plan to commercialize the 5G services by 2019, one year ahead of our initial plan. In October 2017, “5G Network Slice Orchestration” technology, independently developed by us, was approved by the International Telecommunication Union, a specialized Information & Communication Technology agency of the United Nations, as part of the 5G standard technology.
In 2017, we organized our “customer-facing” business (as compared to the internal supporting business, such as legal, accounting and investor relations departments, and operational support functions for designing and developing global network services and maintaining overseas branches and subsidiaries) into five business groups, the Marketing Group, the Customer Group, the Enterprise Business Group, the Future Convergence Business Group and the Platform Business Group, so that
we may achieve higher synergies, more effectively address differing needs of our customer segments, as well as strengthen our competitiveness and discover new growth opportunities. We aim to pursue the following strategies for our business groups:
We plan to take advantage of our industry-leading network infrastructure to attract more customers as the telecommunication and convergence markets further develop. In addition, we aim to further enhance our position in the mobile telecommunications market by leveraging on our strong brand, nationwide marketing network, competitive data usage rates, call centers dedicated to smartphone users, creative marketing strategies that address our potential customers’ needs and ability to bundle various mobile and fixed-line services. We also plan to further expand our contents and applications for smartphone users and mobile data users by cooperating with application developers in Korea and abroad, in order to further solidify our position as a leader in the convergence market.
In 2016, we launched Y24 plans which offer discounted fees and tailored data offerings for customers of age 24 or younger. We aim to differentiate ourselves from our competitors by providing broadband Internet access service using high-speed FTTH connection and offering Internet phone service with value-added features such as video communication, short message service and phone banking. We began offering real-time broadcasting service on our IPTV service in November 2008 and we were the first in the IPTV industry to achieve approximately 7.5 million subscribers in 2017. In 2017, we also introduced a new technology to minimize a smartphone’s power consumption while running on the LTE wireless network. The launch and growth of GiGA Genie services in 2017 will help us to further grow our subscriber base and strengthen our platform business.
We believe that convergence of fixed-line and mobile communications technologies provides a competitive advantage to us because we have the technologicalknow-how and experience to design and construct a unified delivery platform for a new generation of value-added services. We plan to make such platform more readily available to others so that they may create additional contents and convenience solutions such as electronic commerce and digital transaction applications that can be utilized anywhere using various media and communications devices.
The Telecommunications Industry in Korea
The Korean telecommunications industry is one of the most developed in Asia. According to the information announced by the KCC and the MSIT, the number of mobile subscribers in Korea was approximately 63.7 million and the number of broadband Internet access subscribers in Korea was approximately 21.2 million as of December 31, 2017. Based on the information announced by the Ministry of the Interior and Safety of Korea, the KCC and the MSIT, as of December 31, 2017, the mobile penetration rate, which is calculated by dividing the number of mobile subscriber accounts (including multiple counting of those who subscribe to more than one mobile service) by the population of Korea, was 124.9%, and the broadband Internet penetration rate, which is calculated by dividing the number of broadband Internet access service subscriber accounts (including multiple counting of those who subscribe to more than one broadband Internet access service) by the number of households in Korea, was 108.6%.
Mobile Telecommunications Service Market
The Korean cellular market was formally established in 1984 when SK Telecom, formerly Korea Mobile Telecom, became the first mobile telephone operator in Korea. SK Telecom remained the only cellular operator in Korea until Shinsegi Telecom began service in 1994. In order to encourage further market growth and competition, the Government awarded three 2G licenses in June 1996. KTF was awarded a license alongside LG U+ and Hansol M.com, and commercial 2G service was launched in October 1997.
Since the introduction of three new operators in 1997, the Korean mobile market has undergone consolidation and significant growth. Following SK Telecom’s purchase of a controlling stake in Shinsegi, we acquired a 47.9% interest in Hansol M.com in 2000 and renamed the company KT M.com. KT M.com merged into KTF in May 2001 and Shinsegi merged into SK Telecom in January 2002. In June 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger. KT Corporation and SK Telecom offer third-generation, high-capacity HSDPA-basedIMT-2000 wireless Internet and video multimedia communications services that use significantly greater bandwidth capacity. In July 2011, SK Telecom and LG U+ began offering 4G communications services based on LTE technology, which enables data transmission at a speed faster thanW-CDMA or WiBro networks, and we began our 4G LTE services in January 2012. Additionally, in September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidths in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps (for downloading), twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. We expanded our wideband LTE services to all of Korea in July 2014. Furthermore, in March 2014, we commercialized WidebandLTE-A services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps (for downloading), and began additionally interconnecting 10 MHz of bandwidth in the 2.1 GHz spectrum in January 2015 to support transmission speed of up to 300 Mbps (for downloading) under the “WidebandLTE-A X4” service. In June 2015, we commercialized GiGA LTE services which link “WidebandLTE-A X4” and our WiFi network to provide a faster WiFi connection in June 2015. In 2016, we won various awards for our GiGA LTE services and agreed to provide GiGA LTE technology to Turk Telekom Group, a leading telecommunications provider in Turkey.
In April 2014, LG U+, SK Telecom and we began offering various unlimited mobile service packages, offering mobile subscribers with unlimited voice calls, text messaging, and LTE data. As of December 31, 2017, the number of LTE subscribers in Korea exceeded 50 million. Due to the high mobile penetration rate in Korea, we expect the growth of new subscribers to be limited. We believe that the continuing intense competition among major telecommunications operators in Korea and the resulting pressure on our fees may have a material adverse impact on our results of operations.
The table below gives the subscription and penetration information of the mobile telecommunications industry for the periods indicated:
As of December 31, | ||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||
Total Korean Population (thousands)(1) | 51,141 | 51,328 | 51,529 | 51,696 | 50,977 | |||||||||||||||
Mobile Subscribers (thousands)(2) | 54,681 | 57,290 | 58,935 | 61,296 | 63,659 | |||||||||||||||
Mobile Subscriber Growth Rate | 2.0 | % | 4.8 | % | 2.9 | % | 4.0 | % | 3.9 | % | ||||||||||
Mobile Penetration(3) | 106.9 | % | 111.6 | % | 114.4 | % | 118.6 | % | 124.9 | % |
Broadband Internet Access Market
With the advancement of broadband technology, the Korean broadband Internet access market has experienced significant growth. The principal technologies used in providing high speed Internet access services are xDSL, HFC and fiber optic LAN. xDSL refers to various types of digital subscriber lines, including ADSL and VDSL. xDSL offers an access solution over existing telephone lines using a specialized modem while HFC service involves the use oftwo-way cable networks. Fiber optic LAN is a technology that combines fiber optic cables and Unshielded Twisted Pair (“UTP”) cables. Fiber optic cables are connected to residential and commercial buildings with UTP cable-based LAN capabilities. While xDSL and HFC are more widely used technologies because of their relative reliability, ease of provisioning and cost effectiveness, fiber optic LAN usage in Korea has been steadily increasing in recent years.
Since the subscribers oftwo-way cable networks share a limited bandwidth, the downstream speed tends to slow down as the number of subscribers increases, thereby decreasing the quality ofHFC-based service. While xDSL technology was commercially introduced after HFC technology, it has surpassed HFC to become the prevalent broadband access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in 2002. Some of the service providers have upgraded their broadband network to provide fiber opticLAN-based service to their subscribers, which further enhances data transmission speed up to 1 Gbps as well as improves connection quality, and enables such service providers to offervideo-on-demand services with real-time high definition broadcasting.
In recent years, broadband Internet access service providers and mobile telecommunications service providers have focused their attention on providing wireless Internet connection capabilities. They have introduced WiFi with speed of up to 1.3 Gbps, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops and smartphones inhot-spot zones and at home. In addition, we expect our competitors would focus their attention on upgrading data transmission capacity of their Internet services as the Government and the network service providers including us, SKT and LG U+ announced the plan to enhance transmission capacity byten-fold (up to 10 Gbps) in 2018. See “—Our Services—Fixed-line Services—Internet Services.”
Our Services
The following table sets out our operating revenue by principal product categories and the respective percentage of total operating revenue in 2017 and 2018.
For the Year Ended December 31, | ||||||||||||||||
2017 | 2018 | |||||||||||||||
Products and services | Billions of Won | % | Billions of Won | % | ||||||||||||
Mobile services | ₩ | 7,122 | 30.2 | % | ₩ | 6,828 | 29.1 | % | ||||||||
Fixed-line services: | ||||||||||||||||
Fixed-line and VoIP telephone services | 1,834 | 7.8 | 1,708 | 7.3 | ||||||||||||
Broadband Internet access services | 2,082 | 8.8 | 2,113 | 9.0 | ||||||||||||
Data communication services | 1,066 | 4.5 | 1,048 | 4.5 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Sub-total | 4,982 | 21.2 | 4,869 | 20.8 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Media and content | 2,814 | 12.0 | 3,182 | 13.6 | ||||||||||||
Financial services | 3,443 | 14.6 | 3,445 | 14.7 | ||||||||||||
Others | 1,825 | 7.8 | 1,823 | 7.8 | ||||||||||||
Sale of goods(1) | 3,361 | 14.3 | 3,289 | 14.0 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating revenue | ₩ | 23,547 | 100.0 | % | ₩ | 23,436 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
(1) | Primarily related to sale of handsets for our mobile service and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Estate. |
The following table sets out our operating revenue by principal product categories and the respective percentage of total operating revenue in 2016 and 2017. During such periods, we allocated our products and services into five principal product categories.
For the Year Ended December 31, | ||||||||||||||||
2016 | 2017 | |||||||||||||||
Products and services | Billions of Won | % | Billions of Won | % | ||||||||||||
(In billions of Won) | ||||||||||||||||
Mobile services | ₩ | 7,375 | 31.8 | % | ₩ | 7,122 | 30.2 | % | ||||||||
Fixed-line services: | ||||||||||||||||
Fixed-line and VOIP telephone services | 2,053 | 8.9 | 1,834 | 7.8 | ||||||||||||
Internet services: | ||||||||||||||||
Broadband Internet access service | 2,040 | 8.8 | 2,082 | 8.8 | ||||||||||||
Other Internet-related services (1) | 1,799 | 7.8 | 2,139 | 9.1 | ||||||||||||
Data communication services | 1,025 | 4.4 | 1,066 | 4.5 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Sub-total | 6,917 | 29.9 | 7,121 | 30.2 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Financial services | 3,428 | 14.8 | 3,443 | 14.6 | ||||||||||||
Other | 2,592 | 11.2 | 2,500 | 10.6 | ||||||||||||
Sale of goods(2) | 2,852 | 12.3 | 3,361 | 14.3 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating revenue | ₩ | 23,164 | 100.0 | % | ₩ | 23,547 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
(1) | Primarily related to revenue from IPTV services. |
(2) | Primarily related to sale of handsets for our mobile service and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Estate. |
Mobile ServiceServices
We provide mobile services primarily based on 4G LTE and 3GW-CDMA technology and 4G LTE technology. Prior to the merger of KTF into KT Corporation, we provided such services through KTF, which was formerly a consolidated subsidiary. KTF obtained one of the three licenses to provide nationwide 2G service in June 1996 and began offering 2G service in October 1997. In June 2009, KTF merged into KT Corporation, with KT Corporation surviving the merger, with the objective of maximizing management efficiencies of our fixed-line and mobile telecommunications operations as well as more effectively responding to the convergence trends in the telecommunications industry. We currently offer HSDPA-basedIMT-2000 services, which are third-generation, high-capacity wireless Internet and video multimedia communications services based onW-CDMA wireless network standards. Several wireless carriers in the United States, Europe and Asia commenced LTE services in recent years and LTE technology is currently widely accepted as the standard 4G technology. LTE technology enables data to be transmitted faster thanW-CDMA, generally providing a downloading speed of 75 Mbps per 10 MHz. In January 2012, we also began offering 4G LTE services in the Seoul metropolitan area
following the termination of our 2G services. We in January 2012, and we completed the expansion of our 4G LTE service coverage nationwide in October 2012 and commenced2012. 4G LTE technology enables data to be transmitted faster than 3GW-CDMA technology, generally providing widebanda downloading speed of approximately 50 Mbps per 10 MHz. Since our launch of 4G LTE services, in September 2013, and commercialized WidebandLTE-A services in March 2014. We began offering “WidebandLTE-A X4” services in January 2015 and also launched “GiGA LTE” services which links “WidebandLTE-A X4” and our wireless LAN service (“WiFi”) signalswe have acquired additional bandwidth licenses that have enabled us to provide a faster WiFi connection in June 2015. In addition, our use of 20 MHz of bandwidth in the 1.8 GHZ spectrum, acquired in May 2016, further enhancesenhance the quality of our LTE services through intra-band carrier aggregation technology. services.
We believe that the faster data transmission speed of the LTE network allows us to offer significantly improved wireless data transmission services with faster wireless access to multimedia content. Accordingly, we have made extensive efforts to continually develop advanced technologies as well as to provide a variety of new mobile services with enhanced speed, latency and connectivity. We commercially launched our next generation 5G mobile services with transmission speed of up to 1 Gbps in April 2019 in the Seoul metropolitan area, six additional metropolitan cities, high-traffic commercial areas and university campuses as well as major transportation infrastructure such as highways, railways and airports. We plan to gradually expand the coverage nationwide and increase the transmission speed of our 5G services thereafter. We believe that the faster data transmission speed and lower latency of the 5G network enables us to offer significantly enhanced wireless data transmission with faster access to multimedia contents.
Revenues
Revenue related to mobile service accounted for 30.2%29.1% of our operating revenuesrevenue in 2017. In addition, our goods sold, which are primarily from mobile handset sales, accounted for 14.8% of our operating revenues in 2017.The2018. The following table shows selected information concerning the usage of our network during the periods indicated and the number of our mobile subscribers as of the end of such periods:
As of or for the Year Ended December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
Average Monthly Revenue per Subscriber(1) | ₩ | 35,308 | ₩ | 35,524 | ₩ | 34,444 | ||||||
Number of Subscribers (in thousands)(2) | 18,038 | 18,892 | 20,015 |
As of or for the Year Ended December 31, | ||||||||||||
2016 | 2017 | 2018 | ||||||||||
Average monthly revenue per subscriber(1) | ₩ | 35,524 | ₩ | 34,444 | ₩ | 32,021 | ||||||
Number of mobile subscribers (in thousands) | 18,892 | 20,015 | 21,120 | |||||||||
LTE subscribers | 14,262 | 15,462 | 16,971 | |||||||||
W-CDMA subscribers | 4,639 | 4,554 | 4,149 |
(1) | The average monthly revenue per subscriber is computed by dividing total monthly fees, usage charges, interconnection fees and value-added service fees for the period by the weighted average number of subscribers (other than MVNO subscribers) and dividing the quotient by the number of months in the period. |
We compete with SK Telecom, a mobile service provider that has a longer operating history than us, and LG U+ which began its service at around the same time as KTF. As of December 31, 2017,2018, we had approximately 2021.1 million subscribers, or a market share of 31.4%31.8%, which was the second largest among the three mobile service providers.
We market our mobile services primarily through independent exclusive dealers located throughout Korea. As of December 31, 2017,2018, there were approximately 2,6002,550 shops managed by our independent exclusive dealers. In addition to assisting new subscribers to activate mobile service and purchase handsets, authorized dealers are connected to our database and are able to assist customers with their account information.account. Although most of these dealers sell exclusively our products and services,sub-dealers hired by exclusive dealers may sell products and services offered by other mobile telecommunications service providers. Authorized dealers are entitled to a commission for each new subscriber registered, as well as ongoing commissions for the first five years based primarily on the subscriber’s monthly fee, usage charges and length of subscription. The handsets sold by us to the dealers cannot be returned to us unless they are defective. If a handset is defective, it may be exchanged for a new one within 14 days from the date of purchase. On October 1, 2014, the Handset Distribution Reform Act, which regulates the sale and subsidies of mobile telecommunication devices, went into effect but was phased out in September 2017. See “—Regulation—Rates”.
In response to the diversification of our customers’ demands and their increasing sophistication, we have also selectively engaged in opportunities to expand our internal sales channels in recent years. In 2007,As of December 31, 2018, we established a wholly-owned subsidiary, KT M&S Co., Ltd., that operatesoperated approximately 260200 customer plazas that engage in mobile service sales activities as well as provide aone-stop shop for a wide range of other services and products that we offer. We also operate a website to promote and advertise our products and services to the general public and in particular to younger customers who are more familiar with the Internet.
We conduct the screening process for new subscribers with great caution. A potential subscriber must meet all minimum credit criteria before receiving mobile service. The procedure includes checking the history ofnon-payment and credit information from banks and credit agencies such as the National Information and Credit Evaluation Corporation. Applicants who do not meet the minimum criteria can only subscribe to the mobile service by using apre-paid card.
Fixed-line Services
We provide a variety of fixed-line communication services, including various telephone services, broadband and other Internet servicesaccess and data communication services.
Fixed-line and VoIP Telephone Services
We utilize our extensive nationwide telephone network to provide fixed-line telephone services, which consist of local, domestic long-distance, international long-distance services andland-to-mobile
interconnection services. These Ourfixed-line telephone services accounted for 7.8% of our operating revenues in 2017. Our telephone network includes exchanges, long-distance transmission equipment and fiber optic and copper cables. The following table gives some basic measures of the developmentWe also provide VoIP telephone services that enable VoIP phone devices with broadband connection to make domestic and international calls. These fixed-line and VoIP telephone services accounted for 7.3% of our telephone system.operating revenue in 2018. In recent years, the proliferation of mobile phones, as well as the availability of increasingly lower wireless pricing plans, some of which include unlimited voice minutes, has led to significant decreases in our domestic long-distance call minutes and local call pulses. The following table shows selected information concerning our fixed-line telephone network and the number of PSTN and VoIP subscribers as of the end of the periods indicated as well as their engagement levels during such periods.
As of or for the Year Ended December 31, | ||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||
Total Korean population (thousands)(1) | 51,141 | 51,328 | 51,529 | 51,696 | 50,977 | |||||||||||||||
Lines installed (thousands)(2) | 24,264 | 23,930 | 23,607 | 24,858 | 24,343 | |||||||||||||||
Lines in service (thousands)(2) | 14,032 | 13,713 | 12,440 | 11,871 | 11,220 | |||||||||||||||
Lines in service per 100 inhabitants(3) | 27.4 | 26.7 | 24.6 | 23.0 | 21.7 | |||||||||||||||
Fiber optic cable (kilometers) | 636,347 | 673,783 | 695,546 | 732,873 | 764,802 | |||||||||||||||
Number of public telephones installed (thousands) | 94 | 88 | 83 | 74 | 71 | |||||||||||||||
Domestic long-distance call minutes (millions)(4) | 3,803 | 2,743 | 2,113 | 1,507 | 1,126 | |||||||||||||||
Local call pulses (millions)(4) | 5,765 | 4,038 | 3,034 | 2,161 | 1,611 |
As of or for the Year Ended December 31, | ||||||||||||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||
Total Korean population (thousands)(1) | 51,328 | 51,529 | 51,696 | 51,799 | 51,826 | |||||||||||||||
PSTN and VoIP lines in service (thousands) | 17,259 | 16,682 | 16,266 | 15,610 | 14,992 | |||||||||||||||
PSTN lines in service | 13,849 | 13,268 | 12,791 | 12,201 | 11,637 | |||||||||||||||
Local lines in service | 12,948 | 12,409 | 11,869 | 11,222 | 10,654 | |||||||||||||||
Group lines in service | 900 | 859 | 921 | 979 | 983 | |||||||||||||||
VoIP lines in service | 3,411 | 3,413 | 3,436 | 3,409 | 3,355 | |||||||||||||||
Fiber optic cable (kilometers) | 673,783 | 695,546 | 732,873 | 764,802 | 784,088 | |||||||||||||||
Domestic long-distance call minutes (millions)(2) | 2,743 | 2,113 | 1,507 | 1,126 | 892 | |||||||||||||||
Local call pulses (millions)(2) | 4,038 | 3,034 | 2,161 | 1,285 | 974 |
(1) | Based on the number of registered residents as published by the Ministry of the Interior and Safety of Korea. |
(2) |
Excluding calls placed from public telephones. |
Our domestic long-distance cable network is entirely made up of fiber optic cable and can carry both voice and data transmissions. Compared to conventional materials such as coaxial cable, fiber optic cable provides significantly greater transmission capacity with less signal fading, thus requiring less frequent amplification. All of our lines are connected to exchanges capable of handling digital signal technology. A principal limitation of the older analog technology is that applications other than voice communications, such as the transmission of text and computer data, require either separate networks or conversion equipment. Digital systems permit a range of voice, text and data applications to be transmitted simultaneously on the same network.
Japan, China and the United States accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2018. In recent years, the volume of our incoming calls has exceeded the volume of our outgoing calls. The agreed settlement rate is applied to the call minutes to determine the applicable net settlement payment. The following table shows the number of minutes of international long-distance calls recorded by us and specific service providers utilizing our international long-distance network in each specified category for each year in the five-year period ended December 31, 2017:2018:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2017 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||||||||||||||||||||||||
(In millions of billed minutes) | (In millions of billed minutes) | |||||||||||||||||||||||||||||||||||||||
Incoming international long-distance calls | 628.4 | 549.4 | 390.5 | 352.3 | 286.4 | 549.4 | 390.5 | 352.3 | 286.4 | 221.1 | ||||||||||||||||||||||||||||||
Outgoing international long-distance calls | 244.2 | 212.2 | 179.0 | 155.1 | 125.9 | 212.2 | 179.0 | 155.1 | 125.9 | 101.1 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total | 872.6 | 761.6 | 569.5 | 507.4 | 412.3 | 761.6 | 569.5 | 507.4 | 412.3 | 322.2 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Japan (33.0%), China (21.5%) and the United States (9.2%) accounted for the greatest percentage of our international long-distance call traffic measured in minutes in 2017. In recent years, the volume of our incoming calls has exceeded the volume of our outgoing calls. The agreed settlement rate is applied to the call minutes to determine the applicable net settlement payment.
Interconnection. Under the Telecommunications Business Act, we are required to permit other service providers to interconnect to our fixed-line network. Currently, the principal users of this interconnection capacity include affiliates of SK BroadbandTelecom and LG U+ (offering local, domestic long-distance and international long-distance services, and transmitting calls to and from their mobile networks), Sejong and SK Telink (offering international and domestic long-distance services), and SK Telecom.. We recognize as
land-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as an expense the amount of interconnection charge paid to the mobile service provider.
Internet Phone Services. The volume of calls made through Internet phone services has significantly increased since Internet phone service was first introduced in Korea in 1998. We provide Internet phone services that enable VoIP phone devices with broadband connection to make domestic and international calls. In order to differentiate our Internet phone services from our competitors’ services, we provide value-added services such as video communication, short message service, phone banking and a variety of traffic and local news information. As of December 31, 2017, we had approximately 3.4 million subscribers.
Internet Services
Broadband Internet Access Service. Services
Leveraging on our nationwide network of approximately 764,800784,088 kilometers of fiber optic cable network,cables, we have achieved a leading market position in the broadband Internet access market in Korea. We believe we have a competitive advantage over other broadband Internet access service providers because, unlike our competitors, we can utilize our existing networks nationwide to provide broadband Internet access service. Our broadband Internet access service accounted for 8.8% of our operating revenues in 2017.Our principal Internet access services include:
As of December 31, 2018, we had approximately 8.7 million broadband Internet subscribers, to access theincluding approximately 4.9 million KT GiGA Internet at a speedservice subscribers with enhanced data transmission speeds of up to 1.31.0 Gbps. In addition, we had approximately 4.0 million KT WiFi subscribers as of such date. We also sponsored approximately 107,000hot-spot zones nationwide for wireless connection as of December 31, 2017; and
We had approximately 8.8 million broadband Internet subscribers and approximately 2.8 million ollehWiFi service subscribers as of December 31, 2017. In March 2005, we commercially launched our WiBro service in June 2006. We completed the upgrade of our 4G WiBro network and expanded our WiBro service coverage to 84 cities nationwide and major highways in March 2011, which we believe allows us to provide WiBro services at speeds that are approximately three times faster than our previous 3G network at a lower cost. The number of our WiBro subscribers decreased from approximately 934,000 subscribers as of December 31, 2013 to approximately 289,000 subscribers as of December 31, 2017, as more WiBro subscribers chose to access the Internet using our 4G LTE network rather than WiBro following the proliferation of 4G LTE services since 2013. Furthermore, we focused our subscriber retention efforts on our mobile subscribers rather than our WiBro subscribers. The term of our license to 30 MHz of bandwidth in the 2.3 GHz spectrum for the WiBro services shall expire as of March 2019. We launched our olleh GiGA Internet Service, which provides transmission speed of up to 1 Gbps, and had approximately 3.9 million subscribers as of December 31, 2017.2018.
Our ollehKT Internet service utilizesservices primarily utilize ADSL technology, which is a technology that converts existing copper twisted-pair telephone lines into access paths for multimedia and high-speed data communications. ADSL transforms the existing public telephone network from one limited to voice, text andlow-resolution graphics to a system capable of bringing multimedia to subscriber premises without new cabling. The asymmetric design optimizes the bandwidth by maximizing the downstream speed for downloading information from the Internet. While ADSL technology was commercially introduced afterHFC-based technology, it has surpassed HFC to become the prevalent access platform in Korea. VDSL, ADSL-based technology with enhanced downstream speed, became commercialized in July 2002. We are continually upgrading our broadband network to enable better FTTH connection, which further enhances data transmission speed of up to 1 Gbps and connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth, such as IPTV, and other digital media contentcontents with higher stability.
TheData Communication Services
Our data communication services involve offering exclusive lines that allowpoint-to-point connection for voice and data traffic between two or more geographically separate points. As of December 31, 2018, we leased 267,535 lines to domestic and international businesses. We provide dedicated and secure broadband Internet connection service to institutional customers under the “Kornet” brand name. We provide high-speed downstream rates can reach upconnection to 100 Mbps for VDSL and 1 Gbps for FTTH. In October 2016, we commercialized GiGA Wire 2.0our Internet service solutions on copper wires to provide data transmission speed of up to 1 Gbps. We are making efforts to offer data transmission speed of up to 10 Gbps, by the end of 2018. Downstream rates depend on a number of factors. For a constant wire gauge, the data rate decreases as the length of the copper wire increases. Generally, if the separation between the telephone office and the subscriber is greater than four kilometers, line attenuation is so severe that broadband speeds can no longer be achieved. Fiber optic cable used by FTTH, on the other hand, uses laser light to carry signals that travel long distances inside fiber optic cable without degradation.
Other Internet-related Services. Our other Internet-related services focus primarily on providing infrastructure and solutions for business enterprises,backbone network, as well as IPTVrent to our customers and network portal services. Our other Internet-relatedinstall necessary routers to ensure reliable Internet connection and enhanced security. We provide discount rates to qualified customers, including small- andmedium-sized enterprises, businesses engaging in Internet access services and government agencies.Data communication services accounted for 9.1%4.5% of our operating revenuesrevenue in 2017.2018.
Through our wholly owned subsidiary KT Sat Co., Ltd., we also provide transponder leasing, broadcasting, video distribution and data communication services through satellites periodically launched by us. We operate 12 data centers located throughout Korea and provide a wide range of computingalso lease satellite capacity from other satellite operators to offer satellite services to companies which need servers, storageboth domestic and leased lines. Data centers are facilities used to house, protect and maintain network server computers that store and deliver Internet and otherinternational customers.
networkMedia and Content Services
We offer a variety of media and content such as web pages, applicationsservices, including IPTV, satellite TV, TV home shopping, digital content distribution, ICT platform consulting, digital music streaming and data. Our data centers are designed to meet international standards,downloading and are equipped with temperatureonline advertising. Media and humidity control systems, regulated and reliable power supplies, mechanical equipment, fire detection and suppression equipment, security monitoring and wide-bandwidth connections to the Internet. Data centers allow corporations to outsource their application and server hardware management.
Our data centers offer network outsourcingcontent services server operation services and system support services. Our network outsourcing services includeco-location, which is the installationaccounted for 13.6% of our customers’ network equipment at our data centers.Co-location is designed to increase customers’ Internet connection speed and reduce connection time and costs by directly connecting the customers’ server to the Internet backbone switch at our data centers. Our server operation services include optimal server management service and technical support service we provide with respect to the leased servers that are linked directly to our Internet backbone switch. We also lease servers and network equipment for a fixed monthly fee. Our system support services include providing system resources for a wide range of Internet computing services, such as application transfer, network storage, video streaming and application download, as well as sending short text messages and messages containing multimedia objects, such as images, audio and video.operating revenue in 2018.
IPTV
We also offer a service called Bizmeka to develop and commercializebusiness-to-business solutions targeting small- andmedium-sized business enterprises in Korea. Bizmeka is an applied application service provider which provides industry standard and specialized business solutions, including integrated business administration solutions and intranet collaboration solutions.
We also offer high definitionvideo-on-demand and real-time broadcasting IPTV services under the brand name “olleh TV,” and began offeringTV” as well as ultra-high-definition (“UHD”) IPTV services, which offer resolutions up to four times those offered under high-definition television services under the brand name “olleh GiGA UHD TV” starting in September 2014.TV.” Our IPTV service offers access to an array of digital media contents, including movies, sports, news, educational programs and TV replay, for a fixed monthly fee or on apay-per-view basis. Through a digitalset-top box that we rent to our customers, our customers are able to browse the catalogue of digital media contents and view selected media streams on their television. Aset-top box providestwo-way communications on an IP network and decodes video streaming data. We had approximately 7.57.9 million ollehIPTV subscribers as of December 31, 2018.
Satellite TV
We offer satellite TV services with features similar to our IPTV services through KT Skylife, in which we own a 49.99% interest. We had approximately 4.3 million satellite TV subscribers as of December 31, 2017.2018.
KTH
We offer TV home shopping, digital content distribution and information and communication technology platform consulting services through KTH Co., Ltd., in which we hold a 67.10% interest. We offer a variety of consumer products and food items on our IPTV and satellite TV platforms. We also secure rights to digital entertainment contents such as movies, animations and TV series and distribute such contents to other media platforms. In December 2015, amendmentsaddition, we provide a wide range of consulting services related to the Internet Multimedia Broadcasting Services Act were promulgated. Under such amendments, a single broadcasting operator, together with its affiliates, may not have more thanone-thirdbuild-out of the market share of all paid broadcasting subscribers in Korea. The market share restriction will be in effect until June 27, 2018, subject to the Government’s decision to renew the market share restriction or phase out the restriction as originally planned. The proposed amendment to the Internet Multimedia Broadcasting Services Act that aims to preserve the restriction on market share is currently pending at the National Assembly.information and communication technology platforms.
Data CommunicationDigital Music Services
Our data communicationWe operate Genie, our platform for music contents as well as subscription-based access to online music streaming and downloading services, involve offering exclusive lines that allowpoint-to-point connection for voice and data traffic between two or more geographically separate points.through our subsidiary Genie Music Corporation, in which we hold a 35.97% interest. As of December 31, 2017, we leased over 249,817 lines to domestic2018, Genie was the second-largest music streaming and downloading service provider in Korea in terms of number of subscribers.Genie offers a broad selection of Korean and international businesses. The data communication service accountedmusic, both in streaming and download formats, as well as a variety of features designed to enhance the experience of users. We offer Genie services in various formats that are specifically designed for 4.5% of our operating revenues in 2017.mobile and other connected devices, PCs and TVs.
Online Advertising Consulting
We provide dedicated and secure broadband Internet connection service to institutional customers understrategic advertising consulting services for the “Kornet” brand name.online advertising industry through our subsidiary Nasmedia, Co., Ltd. (“Nasmedia”), in which we hold a 42.75% interest. We provide high-speed connection upa variety of services for advertising agencies, online media companies and their clients, ranging from market studies to 10.0 Gbps connected to our Internet backbone network with capacity of 9.0 Tbps,advertising campaign planning as well as rentanalysis of such campaign’s effectiveness. Our proprietary data analysis tools enable us to our customers and install necessary routersdefine specific advertising targets for the clients as well as to ensure reliable Internet connection and enhanced security. Weevaluate the effectiveness of various marketing channels to provide an optimal advertising campaign strategy.
discount rates to qualified customers, including small- andmedium-sized enterprises, businesses engaging in Internet access services and government agencies.
Financial Services
Our financial services accounted for 15.4%As part of our operating revenuesoverall strategy, we selectively pursue new business opportunities in 2017. To further diversifythe financial sector that complement our business and to create synergies through utilization of our mobile telecommunications network in financial services,business. In October 2011, we through our former subsidiary KT Capital Co., Ltd., acquired 1,622,520 additional shares of common stock of BC Card Co., Ltd. from Woori Bank, Busan Bank and Shinhan Card for approximately₩252 billion in October 2011. As we were deemed to have control over BC Card Co., Ltd., it became our consolidated subsidiary starting in October 2011. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately₩287 billion, and owned a 69.5%controlling interest in BC Card, Co., Ltd. asa leading credit card solutions provider in Korea in which we hold a 69.54% interest. We also acquired 10.00% of December 31, 2017.the common shares of K Bank, an Internet-only bank that began its commercial operations in April 2017, which interest is accounted for using the equity method of accounting. Revenue from our financial services, which consist primarily of revenue from BC Card, Co., Ltd. offersaccounted for 14.7% of our operating revenue in 2018.
BC Card
Through BC Card, we offer various credit card processing and related financial services. We operate the largest merchant payment network in Korea as measured by transaction volume. We also provide outsourcing services to a wide range of financial institutions for their credit card and check card business operations, including production and delivery of new credit cards, the preparation of monthly statements, management of merchants and other ancillary services. In recent years, we have made efforts to expand our services in select countries in Asia, including China, Indonesia and Vietnam.
A minority interest in BC Card Co., Ltd. had consolidated operating revenuesis owned by various financial institutions in Korea, many of which are member companies that enter into₩co-branding3,629 billion agreements with us and net incomeissue credit cards and check cards under the “BC Card” brand. Our member companies that issueco-branded credit or check cards include Woori Card, NH Card, Industrial Bank of Korea and KB Kookmin Card. We engage in joint marketing efforts to promote cards issued pursuant to our₩co-branding156 billion for agreements. However, we typically do not assume credit risks related to the year ended December 31, 2017 and consolidated assetsinability of₩4,048 billion and liabilities of₩2,955 billion as cardholders to make payments on their card usage, which are typically assumed by the member companies. As of December 31, 2017.2018, we had approximately 19.9 million credit cards and approximately 34.0 million check cards issued by our member companies under the “BC Card” brand.We also provide ancillary outsourcing services to various other banks, securities companies and financial institutions that do not issueco-branded cards with us.
We charge commissions for merchant fees paid by merchants to credit card companies for processing transactions. Merchant fees vary depending on the type of merchant and the total transaction amounts generated by the merchant. In March 2014,addition to merchant fees, we receive commissions related to nominal interchange fees for international card transactions, as well as service fees from financial institutions that outsource their credit card business operations.
K Bank
We own 10.00% of the investment business division of KT Capital Co., Ltd., including 3,059,560 common shares of BC Card Co., Ltd. that KT Capital Co., Ltd. held, was spun offK Bank, which is one of two Internet-only banks in Korea. Internet-only banks generally operate without branches and merged into KT Corporation,conduct their operations primarily through electronic means, which enable them to further strengthen the synergy between telecommunicationminimize costs and finance operations within the KT group and increase shareholder value. To focusoffer customers higher interest rates on our core telecommunications business, we and our consolidated subsidiary, KT Hitel Co., Ltd., disposeddeposits as well as lower lending rates. As of the entire 100% stake in KT Capital Co., Ltd. in August 2015 for aDecember 31, 2018, K Bank had approximately 0.86 million holders of deposit accounts, with total deposits of₩2991,862 billion and outstanding loans of₩1,264 billion.
In November 2015, the Government announced plans to introduce Internet-only banks and granted preliminary approval to two consortiums, K bank consortium and Kakao Bank consortium. The K bank consortium, over which we own a minority interest as one of 20 shareholding companieshas 22 shareholders including Woori Bank, NH Investment & Securities, Co., Ltd., GS Retail Co., Ltd. and, Hanwha Life Insurance Co., Ltd., received and us.
Pursuant to the finalAct on Special Cases Concerning the Establishment and Operation of Internet-only Banks, starting in January 2019, a company with its ICT assets comprising more than 50% of its total assets (such as us) may obtain up to a 34.0% interest in an Internet-only bank, and is required to obtain approval from the GovernmentFSC in order to operate the first Internet-only bank in Korea in December 2016. The Kakao Bank consortium, K bank’s competitor, received the final approval from the Government in April 2017 and beganbecome its operation in July 2017. K bank began its operation in April 2017 as a virtual bank whose operation is primarily based on its mobile application and the Internet, while promoting greater user accessibility through the convenience stores of one of our other consortium members. K bank also makes efforts to differentiate itself from other conventional banks by utilizing big data and offering competitive products and interest rates. As of December 31, 2017, K bank had deposits of₩1,089 billion while Kakao Bank had deposits of₩5,048 billion. As of December 31, 2017, K bank provided loans of₩856 billion while Kakao Bank provided loans of₩4,622 billion.largest shareholder.
Under the current Korean law, as anon-financial institution, we are not allowed to own in excess of 4% voting interest in K bank, and our combined voting andnon-voting interest may not exceed 10%. In 2016, the National Assembly did not adopt a pending bill which would have allowednon-financial institutions to own more than 4% interest in Internet banks.
Other Businesses
We also engage in various business activities that extend beyond telephonetelecommunications and financial services, and data communication services, including satellite services, information technology and network services, real estate development and satellite TV services, with the consolidation of KT Skylife starting in January 2011, and media contents business with the establishment of KT Media Hub Co., Ltd. in December 2012. We merged KT Media Hub Co., Ltd. into KT Corporation in March 2015, to enhance shareholder value by increasing management efficiency and promoting synergy among our existing businesses.services. Our other businesses accounted for 9.3%7.8% of our operating revenues for 2017.
We provide transponder leasing, broadcasting, video distributionInformation Technology and data communication services through Koreasat 5A, Koreasat 6, Koreasat 7 and Koreasat 8 (also known asABS-2). We also lease satellite capacity from other satellite operators to offer satellite services to both domestic and international customers.
In August 2006, we launched Koreasat 5, a combined civil and governmental communications satellite with a design life of 15 years, to replace Koreasat 2 (launched in 1996 with a design life of ten years). In December 2010, we launched Koreasat 6, with a design life of 15 years, to replace Koreasat 3 (originally launched in 1999, with a design life of 12 years). Koreasat 6 began its commercial operation in February 2011 and carries transponders that are mainly used fordirect-to-home satellite broadcasting, video distributions and data communication services. Most of thedirect-to-home satellite broadcasting transponders are utilized by KT Skylife. In August 2010, we procured from Asia Broadcast Satellite Holdings, Ltd. (“ABS”), a Hong Kong-based satellite operator, four transponders onABS-1 satellite and eight additional transponders onABS-2 satellite in order to provide satellite services with a broader global scope. In the second half of 2014, we exchanged our ownership rights of four transponders onABS-1 with ownership rights of four transponders onABS-2 satellite. As a result, we own 12 transponders onABS-2 satellite (also called Koreasat 8). In May 2017, we launched Koreasat 7, a civil communications satellite with a design life of 17 years. In October 2017, we launched Koreasat 5A, a civil communications satellite with a design life of 17 years which replaced Koreasat 5.
We entered into an agreement with ABS to sell Koreasat 3 to ABS, as Koreasat 3 was expected to reach the end of its design life. In December 2013, the MSIP declared the sales contract regarding Koreasat 3 null and void on the ground that the said contract was made without prior government approval. Shortly after, ABS filed a request for arbitration against us and KT SAT and we, together with KT SAT have been involved in the International Chamber of Commerce arbitration against ABS. In July 2017, the International Chamber of Commerce concluded that ABS has title to Koreasat 3 (such decision, “Partial Award”). In October 2017, we and KT SAT petitioned the U.S. District Court for the Southern District of New York to vacate the Partial Award. In March 2018, the International Chamber of Commerce issued an award of US$748,564 in damages, US$287,673.2 inpre-award interest and post-award interest of 9 percent per year to ABS (“Final Award”). We and KT SAT plan to petition the New York federal court to vacate the Final Award. With regard to the Partial Award, on April 10, 2018, the court dismissed the petition filed by KT SAT and us to vacate the Partial Award. We and KT SAT plan to file an appeal of the foregoing decision. In December 2012, we spun off our satellite service business by establishing KT SAT in an effort to enhance operational specialization and to foster management efficiency, enabling us to respond more promptly to the changing market environments and increasing competitiveness.Network Services
We offer a broad array of integrated information technology and network services to our business customers. Our range of services includes consulting, designing, building and maintaining systems and communication networks that satisfy the individual needs of our customers in the public and private sectors. We also operate data centers located throughout Korea and provide a wide range of computing services to companies that need servers, storage and leased lines. Data centers are facilities used to house, protect and maintain network server computers that store and deliver Internet and other network contents. Our data centers are designed to meet international standards, and are equipped with temperature and humidity control systems, regulated and reliable power supplies, mechanical equipment, fire detection and suppression equipment, security monitoring and wide-bandwidth connections to the Internet. Our data centers offer network outsourcing services, server operation services and system support services to our corporate customers.
Real Estate Development
We own land and real estate in various locations nationwide.throughout Korea. Technological developments have enhanced the coverage area of individual telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. In recent years,Through our wholly-owned subsidiary KT Estate, we have engagedengage in the planning and development of residential complexes and commercial and office buildings and condominiums on our unused sites, as well as in the leasing of buildings we own. Under the “Remark VILL” brand, we also lease units in residential complexes developed by us in urban areas such as Seoul and Busan.
Sale of Goods
We established KT Estate in August 2010recognize revenue related to oversee the planning, development and operationsale of goods, primarily handsets sold to subscribers of our mobile services as well as miscellaneous telecommunications equipment sold to vendors and other telecommunications companies and sale of residential units and commercial real estate assets,developed by KT Estate. We purchase handsets primarily from Samsung Electronics, Apple and established KT AMC Co., Ltd.,LG Electronics. Sale of goods accounted for 14.0% of our operating revenue in 2018.
Our Rates
We offer various service plans for our mobile, fixed-line and media and content services. For our individual customers, we offer rate plans targeting specific customer segments that aim to address their individual needs. We also offer bundled rate plans that provide discounts for subscribing to a combination of our services, as well as family plans that provide discounts for multiple line subscriptions under one household. For many of our services, we provide additional discounts for customers who commit to extended subscription periods. We provide an asset management company, in September 2011 asonline tool designed to help our customers select a subsidiaryplan that is customized to their needs. Our service rates are typically charged on a monthly basis and are due at the end of KT Estatethe month. Our customers are also assessed a 10.0% VAT.
Our rates for business customers are tailored to create additional synergies with our real estate assets. We made a contributionin-kindthe specific needs of₩1,254 billion to KT Estate in December 2012 to further strengthen KT Estate’s competitiveness and to better utilize our assets. KT the business customers.
Estate currently provides over 2,000 rental units in its 4 apartment complexes, under the “Remarkville” brand, located in Seoul and Busan, Korea. The complexes are managed by KD Living Inc., 51% of whose equity interest is owned by us and the rest by a third-party rental management company, Daiwa Living Co. Revenues from lease of rental units are recognized as revenues from our other businesses. KT Estate also engages in the business of developing and selling residential and commercial units. In 2017, KT Estate developed and sold several residential and commercial units in various metropolitan areas in Korea and such revenues are recognized as revenues from goods sold.
To respond to the trend of convergence in the telecommunications and broadcasting industries, and to seek additional synergies with our existing operations, we acquired 5,600,000 shares of redeemable convertible preferred stock with voting rights and convertible bonds that were convertible into 5,600,000 shares of common stock of KT Skylife from Dutch Savings Holdings B.V. in January 2011 for approximately₩246 billion. We exercised the conversion rights on the redeemable convertible preferred stock and the convertible bonds in March 2011, and owned a 50.3% interest in KT Skylife as of December 31, 2017. KT Skylife offers satellite TV services, which may also be packaged with our IPTV services as further described below.
Revenues and Rates
The table below shows the percentage of our revenues derived from each category of services for each of the years from 2015 to 2017:
Year Ended December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
Mobile services | 32.0 | % | 31.9 | % | 30.2 | % | ||||||
Fixed-line services | 29.8 | 29.9 | 30.2 | |||||||||
Fixed-line telephone services: | ||||||||||||
Monthly basic charges | 2.9 | 2.7 | 3.0 | |||||||||
Monthly usage charges | 4.5 | 3.7 | 3.3 | |||||||||
Others | 2.8 | 2.5 | 1.5 | |||||||||
|
|
|
|
|
| |||||||
Sub-total | 10.2 | 8.9 | 7.8 | |||||||||
|
|
|
|
|
| |||||||
Internet services: | ||||||||||||
Broadband Internet access service | 8.3 | 8.8 | 8.8 | |||||||||
Other Internet-related services(1) | 6.5 | 7.8 | 9.1 | |||||||||
|
|
|
|
|
| |||||||
Sub-total | 14.8 | 16.6 | 17.9 | |||||||||
|
|
|
|
|
| |||||||
Data communication services(2) | 4.7 | 4.4 | 4.5 | |||||||||
Goods sold(3) | 12.1 | 12.1 | 14.8 | |||||||||
Financial services | 15.3 | 15.4 | 15.4 | |||||||||
Other businesses(4) | 10.8 | 10.6 | 9.3 | |||||||||
|
|
|
|
|
| |||||||
Operating revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
|
|
|
|
|
Mobile Services
We derive revenues from mobile services principally from:
We offer various rate plans, including those that offer a specified amountwide range of freemobile service plans that vary depending, among others, on mobile technology (5G, LTE orW-CDMA), mobile device (mobile phone, tablet or other WiFi device) and age category, under which we offer plans based on usage volume for voice calling, data transmission per month in return for higher monthly feesand text messaging as well as plans that are geared toward business customers. We completely abolished our activation fee in March 2015.
We introduced rate plans specifically for smartphone users starting in September 2009. We also introduced new rate plans specifically for LTE phone users in connection with the rolloutaddition of our 4G LTE services in January 2012. In June 2013, we introduced the Everyone olleh rate plan, which permits users to makevalue-added services. Our premium packages offer unlimited voice calls within our wireless network, and the Fixed-Line and Wireless Unlimited rate plan, which permits users to make unlimited voice calls within both our fixed-line and wireless networks. We began offering LTE unlimited data plans in March 2014, which allows unlimited LTE data usage within certain transmission speeds after the monthly quota at the highest LTE data transmission speed has been exhausted. Starting from November 2014, we began offering our major smartphone plans at discounted rates which were previously offered only to subscribers who signed on for mandatory subscription periods ranging from one to two years, thereby eliminating the need to sign on for any mandatory subscription period to benefit from our discounted plans and removing any early termination penalties. We believe such changes allow our subscribers a wider flexibility in choosing mobile plans based on their needs. In May 2015, we began offering the LTE data choice plan, through which users choose a 300MB to unlimited monthly quota forcalling, data transmission and enjoy unlimited voice calls and messages. With the LTE data choice plan, we also introduced the“Push-and-Pull” service, which allows users to carry over unused data to the following month or pull uptext messaging as well as additional data from the following month’s allotment. In March 2016, we began offering the Y24 plans for customers under the age of 24. Many of the Y24 plans offer free data transmission for three hours a day and additional data service at discounted rates.
The following table summarizes the charges associated with our representative LTE smartphone service plans:
Free Airtime Minutes | ||||||||||||||
Voice Calls | Video Calls and Voice Calls to Special Numbers | Free Data Transmission (1) | Additional Service | Monthly Fee | ||||||||||
LTE data choice 299 | Unlimited | 50 | 300MB | mobile TV | ₩29,900 | |||||||||
LTE data choice 349 | 50 | 1GB | mobile TV | 34,900 | ||||||||||
LTE data choice 399 | 50 | 2GB | mobile TV | 39,900 | ||||||||||
LTE data choice 449 | 50 | 3GB | mobile TV | 44,900 | ||||||||||
LTE data choice 499 | 50 | 6GB | mobile TV | 49,900 | ||||||||||
LTE data choice 599 | 200 | mobile TV | 59,900 | |||||||||||
LTE data choice 699 | 200 | mobile TV | 69,900 | |||||||||||
LTE data choice 799 | 200 | VIP membership | 79,900 | |||||||||||
LTE data choice 999 | 200 | Unlimited (2) | Device insurance(3) | 99,900 | ||||||||||
Fee discounts for one additional device(4) |
media content. We also provide plans specially designed for elderly andpre-teen young subscribers as well as special discounts to subscribers with physical disabilities. On December 22, 2017,disabilities or on welfare programs. We do not charge an activation fee for our mobile services.
For mobile service plans that offer unlimited data transmission, we started providing special discountstypically decelerate data transmission speeds after a subscriber reaches a set data usage threshold. For usage-based data transmission plans, our subscribers are typically charged additional data transmission fees if usage exceeds the applicable quota. However, for many of our plans, we provide our subscribers the ability to subscribers on Government welfare. For details, see “—Regulation—Rates”. Plans specialized for feature phone users such as a standard rate plan are provided as well. Underbank unused data transmission quota of the standard rate plan, we charge acurrent month to the following month, or borrow quota allocated to the following month if the current monthly fee of₩11,000, a voice calling usage charge of₩1.8 per second and a video calling usage charge of₩3 per second, without any free voice or video call airtime minutes.quota have been exhausted.
We also subsidize the purchase of new handsets by our qualifying subscribers who agree to use our service for a predetermined service period and purchase handsets on an installment basis. Under the Handset Distribution Reform Act, everyone, regardless of their status, is entitled to receive either a handset subsidy related to the purchase of a recently released mobile phone, or a discount on the mobile service subscription rate. The ceiling on handset subsidies previously imposed was phased out in October 2017, but the MSIT announced policy guidelines to promote additional discounts on mobile service subscription rates. Following such policy guidelines, we increased the maximum discount rate applicable to mobile subscribers who elect not to receive handset subsidies from 20.0% to 25.0% starting in September 2017.
The following table summarizes the terms of our representative LTE mobile service plans that we currently offer:
Plan | Monthly Rate | Voice Calls | Video Calls | Data Transmission | Additional Features | |||||
Data On Premium | ₩89,000 | Unlimited | 300 min. | Unlimited | • Handset insurance using reward points • Additional device free • Media package offering music, video, webtoon and movie content. | |||||
Data On Video | ₩69,000 | Unlimited | 300 min. | Unlimited, but decelerate to 5 Mbps after 100 GB | • Mobile TV package offering live broadcast and VOD contents of up to 2 GB per day | |||||
Data On Talk | ₩49,000 | Unlimited | 300 min. | Unlimited, but decelerate to 1 Mbps after 3 GB | • Mobile TV package offering live broadcast and VOD contents of up to 2 GB per day | |||||
LTE Data Choice | ₩32,890 to ₩109,890 | Unlimited | 30 min. to 200 min. | 300 MB to unlimited, but decelerate to 5 Mbps after 30 GB | • Media package for plans with monthly rates greater than₩87,890 • Mobile TV package for plans with monthly rates between₩54,890 to₩76,890 | |||||
LTE Basic | ₩33,000 | Unlimited | 50 min. | 1 GB | ||||||
LTE Voice | ₩18,700 | 100 min. | None | None |
In addition to our mobile service plans, we offer plansvalue-added services for new devicesadditional monthly fees that can be added to the subscription such as tablets and wearable devices. Since 2010, we have been offering a specialized plan for tablets which provides a 1.6GB to unlimited monthly quota ofmedia packages, mobile TV packages, additional data transmission for a monthly fee of₩18,000 to₩99,900. In November 2014, we began offering a specialized plan for wearable devices,packages, caller ID, music service packages and ring tone services and usage reporting services. We also offer fixed-rate international roaming plans that provide data roaming services in various countries around the world, which may be scheduled or automatically activated upon access from an overseas location.
Our mobile services also generate interconnection charges a fixed monthly fee of₩8,000 for a 100MB monthly quota of data transmission and 50 minutes of voice calls. For other new devices, we also provide a data sharing service that allows users to share data provided as part of their smartphone plans with other devices.
Mobile-to-mobile Interconnection.expenses. For a call initiated by a mobile subscriber of one of our competitorcompetitors to our mobile subscriber, the mobile service providercompetitor collects from its subscriber its normal rate and remits to us amobile-to-mobile interconnection charge. In addition, for a call initiated by our mobile subscriber to a mobile subscriber of one of our competitor,competitors, we collect from our subscriber our normal rate and remit to the mobile service providercompetitor amobile-to-mobile interconnection charge.
The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes)VAT) to mobile operators,our competitors, and the charges received per minute (exclusive of value-added taxes)VAT) from mobile operators for mobile to mobile calls:
Effective Starting | ||||||||||||
January 1, 2015 | January 1, 2016 | January 1, 2017 | ||||||||||
SK Telecom | ₩ | 19.5 | ₩ | 17.1 | ₩ | 14.6 | ||||||
LG U+ | 20.0 | 17.0 | 14.6 | |||||||||
KT | 19.9 | 17.2 | 14.6 |
We recognize asmobile-to-mobile interconnection revenue the entire amount of the usage charge collected from the mobile user and recognize as expense the amount of interconnection charge paid to the mobile service provider.
Effective Starting | ||||||||||||
January 1, 2016 | January 1, 2017 | January 1, 2018 | ||||||||||
KT | ₩ | 17.1 | ₩ | 14.6 | ₩ | 13.1 | ||||||
SK Telecom | 17.0 | 14.6 | 13.1 | |||||||||
LG U+ | 17.2 | 14.6 | 13.1 |
Fixed-line Services
Fixed-line Telephone Services
Local Telephone Serviceand Domestic Long-distance. Our revenues from localstandard usage-based fixed-line telephone service consist primarily of:
national holidays. The rates we charge for local calls are currently subject to approval by the MSIT after consultation with the Ministry of Strategy and Finance. The ratesMOEF. For our subscribers who are identical for residential and commercial customers. All calls are currently measured by call pulses. Each pulse is determined by the duration of the call and the time of the day at which the call is made. Our current local usage rates, which have been in effect since May 2002, are₩39 per pulse for regular service and₩70 per pulse for public telephones. For local calls, a pulse is triggered at the beginning of each local call and every three minutes thereafter from 8:00 a.m. to 9:00 p.m. on weekdays and every 258 seconds thereafter on weekends, holidays and from 9:00 p.m. to 8:00 a.m. on weekdays.
We alsoinitiating fixed-line telephone services, we charge a monthly basic charge ranging from₩3,000 to₩5,200, depending on location, and anon-refundableone-time service initiationnonrefundable activation fee of₩60,000, to new subscribers. Thenon-refundable service initiation feewhich is waived with a three-year subscription commitment.
We also offer a flat rate fixed-line telephone service plan with a base monthly rate of₩12,100 (or₩8,470 for a three year subscription commitment) that includes 50 hours of local and domestic long-distance calls and calls to VoIP phones. Calls to mobile phones are not included in the newfree 50 hours, and we charge₩15.95 per ten second increment for such calls. For a premium plan with a base monthly fee of₩16,500 (or₩11,550 for a three year subscription commitment), calls to KT mobile subscribers who subscribe to our local service through our online application process. are included as part of the free 50 hours.
Until April 2001, we chargedcollected refundable service initiationactivation deposits for our fixed-line telephone services, which were refunded upon termination of service. As of December 31, 2017,2018, we had₩342316 billion in refundable service initiationactivation deposits outstanding and 1.61.4 million subscribers who are enrolled under the mandatory deposit plan, andeach of whom are eligible to switch to the no depositano-deposit plan and receive a refund of their service initiationactivation deposit, back (lessless thenon-refundable service initiation fees).activation fee.
DomesticInternational Long-distance Telephone Service. Our revenues from domesticFor our international long-distance service consist of chargesservices, fees for calls placed, charged for the duration, time of day and day of the week a call is placed, and the distance covered by the call. We are able to set our own rates for domestic long-distance service without approval from the MSIT.
Our current basic domestic long-distance rates, which have been in effect since November 2001, are₩39 per three minutes for distances of up to 30 kilometers and₩14.5 per ten seconds (equivalent to₩261 per three minutes) for distances in excess of 30 kilometers. For domestic long-distance calls for distances of up to 30 kilometers, a pulse is triggered at the beginning of each call and every three minutes thereafter. For domestic long-distance calls for distances in excess of 30 kilometers, a pulse is triggered at the beginning of each call and every 10 seconds thereafter. Rates for domestic long-distance calls for distances up to 30 kilometers are currently discounted by an adjustment in the period between pulses, by approximately 11% (utilizing a pulse rate of 200 seconds) from 6:00 a.m. to midnight on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 43% (utilizing a pulse rate of 258 seconds) from midnight to 6:00 a.m. every day. Rates for domestic long-distance calls for distances in excess of 30 kilometers are currently discounted by approximately 10% (utilizing a rate of₩13.1 per ten seconds) from 6:00 a.m. to midnight on holidays and from 6:00 a.m. to 8:00 a.m. on weekdays, and by approximately 30% (utilizing a rate of₩10.2 per ten seconds) from midnight to 6:00 a.m. every day.
In recent years, we have begun to offer optional flat rate plans, discount plans and bundled product plans in order to mitigate the impact from lower usage of local and domestic long-distance calls and stabilize our revenues from fixed-line telephone services. For a discussion of our bundled products, see “—Bundled Products.” Some of our flat rate and discount plans that we currently offer include the following:
long-distance services plan, which can be customized based on the typestype of calls the subscriber wishes to make,telecommunication device (mobile or fixed-line), destination countries and other customer preferences. Usage is able to use 3,000 minutes per month of local, domestic long-distance,land-to-VoIP andland-to-KT mobile calls.
International Long-distance Service. Our revenues from international long-distance service consist of:
We bill outgoing calls made by customers in Korea (and calls made to Korea from foreign countries under our home country direct-dial service) in accordance with our international long-distance rate schedule for the country called. These rates vary depending on the time of day at which a call is placed. We bill outgoing international calls on the basis ofone-second increments. We are ablepay a settlement fee to set our own ratesthe relevant foreign carrier for international long-distance service without approval fromsuch calls under a bilateral agreement with the MSIT.
foreign carrier. For incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial service)services), we receive settlement payments from the relevant foreign carrier at the applicable settlement rate specified under the agreement with the foreign carrier. We have entered into numerousrelevant bilateral agreements with foreign carriers. We negotiate the settlement rates under these agreements with each foreign carrier, subject to the MSIT’s approval. It is the practice among international carriers for the carrier in the country in which the call is billed to collect payments due in respect of the use of overseas networks. Although we record the gross amounts due to and from us in our financial statements, we make settlements with most carriers monthly or quarterly on a net basis.agreement.
Land-to-mobile Interconnection. We provide other telecommunications service providers, including mobile operators and other fixed-line operators, interconnection to our fixed-line network. For a call initiated by a landline user to a mobile service subscriber, we collect from the landline user theland-to-mobile usage charge and remit to the mobile service provider aland-to-mobile interconnection charge. We recognize asland-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider. The MSIT periodically issues orders setting the interconnection charge calculation method applicable to interconnections with mobile service providers. The MSIT determines the land to mobile interconnection charge by calculating the long run incremental cost of mobile service providers, taking into consideration technology development and future expected costs.
The following table shows the interconnection charges we paid per minute (exclusive of value-added taxes)VAT) to mobile operators for landline to mobile calls:
Effective Starting | ||||||||||||
January 1, 2015 | January 1, 2016 | January 1, 2017 | ||||||||||
SK Telecom | ₩ | 19.5 | ₩ | 17.0 | ₩ | 14.6 | ||||||
LG U+ | 20.0 | 17.2 | 14.6 |
Since September 2004, the usage charges per minute collected from a landline user for a call initiated by a landline user to a mobile service subscriber are₩87.0 during weekdays,₩82.0 during
weekends and₩77.2 during evenings (defined as 12:00 a.m. to 6:00 a.m. every day). We recognize asland-to-mobile interconnection revenue the entire amount of the usage charge collected from the landline user and recognize as expense the amount of interconnection charge paid to the mobile service provider.
Effective Starting | ||||||||||||
January 1, 2016 | January 1, 2017 | January 1, 2018 | ||||||||||
SK Telecom | ₩ | 17.0 | ₩ | 14.6 | ₩ | 13.1 | ||||||
LG U+ | 17.2 | 14.6 | 13.1 |
Land-to-land andMobile-to-land Interconnection. For a call initiated by a landline subscriber of our competitor to our fixed-line user, the landline service provider collects from its subscriber its normal rate and remits to us aland-to-land interconnection charge. In addition, for a call initiated by a mobile service subscriber to our landline user, the mobile service provider collects from its subscriber its normal rate and remits to us amobile-to-land interconnection charge.
The following table shows such interconnection charge per minute collected for a call depending on the type of call, as determined by the MSIT:
Effective Starting | Effective Starting | |||||||||||||||||||||||
January 1, 2015 | January 1, 2016 | January 1, 2017 | January 1, 2016 | January 1, 2017 | January 1, 2018 | |||||||||||||||||||
Local access(1) | ₩ | 11.9 | ₩ | 10.9 | ₩ | 9.7 | ₩ | 10.9 | ₩ | 9.7 | ₩ | 8.7 | ||||||||||||
Single toll access(2) | 13.4 | 12.0 | 10.9 | 12.0 | 10.9 | 10.0 | ||||||||||||||||||
Double toll access(3) | 16.0 | 15.5 | 14.8 | 15.5 | 14.8 | 12.7 |
Source: The MSIT.
(1) | Interconnection between local switching center and local access line. |
(2) | Interconnection involving access to single long-distance switching center. |
(3) | Interconnection involving access to two long-distance switching centers. |
InternetVoIP Telephone Services
Our VoIP telephone services offer rate plans that charge generally lower base monthly rates and usage-based fees compared to our fixed-line telephone services. For our subscribers who are initiating VoIP telephone services, we charge aone-time nonrefundable activation fee of₩10,000, which is waived with aone-year subscription commitment.
Broadband Internet Access Service. Services
We offer various broadband Internet access service that primarily uses existing telephone lines to provide both voiceplans based on data transmission speed and data transmission.usage thresholds and offer discounts based on length of commitment that are applied for periods of up to four years. Most of our plans also include WiFi routers that enable our subscribers to create a WiFi environment in their residences. We charge monthly fixed fees to customers of broadband Internet service. In addition, we chargeour customers aone-time installation fee per site of₩20,000 and27,500. We also charge a modem rental fee of upranging from₩4,400 to₩8,00022,000 per year that varies depending on a monthly basis. Our fixed-linethe type of model required for the service plan, which is also subject to discounts and waivers based on length of subscription commitment period.
The following table summarizes the terms of our representative broadband internetInternet access service plans range from₩30,000 to₩50,000 per monththat we currently offer:
Plan | Monthly Rate | Rate with 3 Year Term | Maximum Speed | Max Speed Daily Limit (1) | Additional Features | |||||||||
10 GiGA Max 10G | ₩ | 110,000 | ₩ | 88,000 | 10 Gbps | 1000 GB | 2 WiFi routers included. | |||||||
10 GiGA Max 5G | ₩ | 82,500 | ₩ | 60,500 | 5 Gbps | 500 GB | 2 WiFi routers included. | |||||||
10 GiGA Max 2.5G | ₩ | 60,500 | ₩ | 44,000 | 2.5 Gbps | 250 GB | Discount on 1 WiFi router rental. | |||||||
GiGA Internet Max 1G | ₩ | 55,000 | ₩ | 38,500 | 1.0 Gbps | 150 GB | ||||||||
GiGA Internet Max 100M | ₩ | 39,600 | ₩ | 22,000 | 100 Mbps | None |
(1) | Data transmission speed is reduced to 100Mbps if data usage exceeds the specified maximum speed daily limit. |
Media and our wireless broadband InternetContent Services
Our IPTV and satellite TV service plans range from₩10,000vary based on the package of media channels provided, availability of UHD channels and the inclusion of other value-added services. In addition to₩30,000 per month.
olleh TV Services. We monthly rates for subscription, we charge our subscribers anaone-time installation fee per site of₩24,000, which is waived with27,500 perset-top box and a three-year contract, adigitalset-top box rental fee ranging from₩2,0002,200 to₩9,000 on a monthly basis and a monthly subscription fee. The rates we charge for olleh TV services are subject to approval by the MSIT. Our olleh TV service plans range from₩15,000 to₩50,0009,900 per month.
Data Communication Services
We charge customers of domestic leased-lines on a monthly fixed-cost basis, based on the distance of the leased line, the capacity of the line measured in bits per second, the type of the line provided and whether the service site is local or long-distance. In addition, we charge customers aone-time installation fee per line, ranging from₩56,000 to₩40 million,year that varies depending on the capacitytype ofset-top box required for the line.
Bundled Products
service plan, which is also subject to discounts and waivers based on length of subscription commitment period. We utilize our extensive customer relationshipsalso offer variousvideo-on-demand contents for streaming and market knowledgedownloading for a fee. In addition to expand our revenue base by cross-selling our telecommunications products and services. In order to attract additional subscribers to our new services,offering service plans that enable TV viewing at home as well as access on mobile devices, we bundle our services, such as our broadband Internet access
service with IPTV, Internet phone, fixed-line telephone service andprovide separate mobile services,TV plans at a discount. In July 2016, we lowered our early termination feelower rates that are specifically designed for our broadband Internet access service, Internet phone or IPTV or such products bundled with our fixed-line telephone service.mobile devices.
The following table summarizes the terms of our various basic bundled packagesrepresentative IPTV and satellite TV service plans that we currently offer. The packages require subscribersoffer:
| Monthly Rate | Rate with 3 Year Term | Channels (UHD) | Additional Features | ||||||||||
Olleh TV Live | ||||||||||||||
TV Movie Plus | ₩ | 55,000 | ₩ | 44,000 | 261 | (6) | • Prime movie package that provides access to more than 20,000video-on-demand contents. • Catch-on & Plus channel dedicated to latest popular movies and dramas. • Discounts on online TV home shopping purchases. | |||||||
TV Slim | ₩ | 16,500 | ₩ | 13,200 | 228 | (3) | ||||||||
Olleh TV Skylife | ||||||||||||||
TV Entertainment | ₩ | 31,020 | ₩ | 24,816 | 216 | (5) | • Monthly coupon of₩10,000 forvideo-on-demand. | |||||||
TV Slim | ₩ | 16,500 | ₩ | 13,200 | 199 | (5) |
Bundled Rate Plans
In order to agreeprovide our customers with additional value and further promote our marketing efforts to cross sell our various services, we provide our customers with various bundled rate plans that provide discounts for subscribing to a subscription periodcombination of three years:
| ||||||
| ||||||
| ||||||
| ||||||
|
We believe that subscribers who sign up for bundled products are less likely to cancel our services, thanas well as family plans that provide discounts for multiple line subscriptions under one household. As of December 31, 2018, the majority of our subscribers participated in our bundled rate plans.
Fixed-line Packages
We offer substantial discounts to customers who subscribe to individualtwo or more of our fixed-line and TV services consisting of fixed-line telephone, VoIP telephone, broadband Internet access, IPTV and satellite TV services. Subscription fees paid forpayments collected pursuant to our bundled productsrate plans are allocated to each serviceservice.
Mobile Packages
For our mobile services, we offer family plans that provide discounts of up to₩11,000 per mobile phone subscription. Up to five members of a household may participate in proportionour family plans.
Fixed-line and Mobile Combination Packages
We also offer various bundled rate plans that combine our fixed-line and TV services with mobile services, for both households and single subscribers. For households that subscribe to their fair value and the allocated amount is recognizedbroadband Internet access as revenue accordingwell as mobile services, our premium family plan provides discounts of approximately 50% for broadband Internet access subscription as well as for mobile services of each additional family member (up to the revenue recognition policy for each service.four additional members).
Competition
CompetitionWe face significant competition in each of our principal business areas. In the telecommunications sector in Korea is intense. Business combinationsmarkets for mobile services, fixed-line services and media and content services, we compete primarily with SK Telecom and LG U+ (including their affiliates). In the past two decades, considerable consolidation in the telecommunications industry have significantly changedhas occurred, resulting in the current competitive landscape comprising three network service providers that offer a wide range of telecommunications and data communications services. In early 2019, each of our primary competitors announced plans to acquire a leading cable TV operator in Korea to significantly increase their market shares in the Korean telecommunications industry.pay TV market, which we expect will further intensify competition. In particular,January 2019, LG U+ announced its plan to acquire a controlling interest in CJ HelloVision. In February 2019, SK Telecom acquiredannounced its plan to merge witht-broad. To a controlling stake in Hanarotelecom Incorporated in 2008, which was renamed SK Broadband. The acquisition enabled SK Telecom to provide fixed-line telecommunications, broadband Internet accesslesser extent, we also compete with various value-added service providers and IPTV services together with its mobile telecommunications services. In January 2010, LG Dacom and LG Powercom merged into LG Telecom Co., Ltd., which subsequently changed its name to LG U+. The merger enabled LG U+ to provide a similar range of servicesspecific service providers as SK Telecom and us. Furthermore, telecommunications providers including us are competing to be the first to introduce innovative services such as those based on 5G technologies.
Underclassified under the Framework Act on Telecommunications and the Telecommunications Business Act, telecommunicationsincluding MVNOs that lease mobile networks and offer mobile services, VoIP service providers that offer Internet telephone services, cable TV operators, text messaging service providers (particularly Kakao) and voice resellers, many of which offer competing services at lower prices.
We compete primarily based on our service performance, quality and reliability, ability to accurately identify and respond to evolving consumer demand, and pricing. With the launch of the next generation 5G mobile services in Korea are currently classified intoApril 2019, we expect competition to further intensify among the three network service providers, value-addedwhich may result in an increase in marketing expenses, as well as additional capital expenditures related to implementing 5G mobile services. Mobile service providers also grant subsidies or subscription discount rates to subscribers who purchase new handsets and specific service providers. See “—Regulation.”
Network Service Providers
All network service providers in Korea are permittedagree to set the rates for international or domestic long-distance services on their own without the MSIT’s approval. Many of our competitors have set their rates lower than ours. Currently, we can compete freely with other providers on the basis of rates in all services except for rates we charge for local calls, which require advance approval from the MSIT. In all service areas,a minimum subscription period and we compete by endeavoring to provide superior customer service and superior technical quality, taking advantage of our broad customer base and our ability to provide various telecommunication services.
also based on such amounts. We and SK Telecom have been designated as market-dominating business entities in the local telephone service and cellular servicemobile markets, respectively, under the Telecommunications Business Act. Under this Act, a market-dominating business entity may not engage in any act of abuse, such as
unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers. In addition, changes in our local telephone rates and mobile rates of SK Telecom require prior approval from the MSIT. The KCC has also issued guidelines on fair competition of the telecommunications companies. If any telecommunications
In the financial services market, our credit and check cards issued under the “BC Card” brand pursuant toco-brand agreements with member companies compete principally with cards issued by other leading credit card companies in Korea with their own merchant payment networks, such as Shinhan Card, Hyundai Card and Samsung Card. Our member companies that issueco-branded credit or check cards include Woori Card, NH Card, Industrial Bank of Korea and KB Kookmin Card. We also compete with service provider breaches the guidelines, the KCC may take necessary corrective measures against it after a hearing at which the service provider may defend its action.
Mobile Service.providers that provide outsourcing services related to business operations of credit card companies. Competition in the mobile telecommunications industrycredit card and check card businesses has increased substantially as existing credit card companies, consumer finance companies and other financial institutions in Korea is intense among SK Telecom, LG U+have made significant investments and us. Such competition has intensifiedengaged in recent years due to the implementation of mobile number portability, which enabled mobile subscribers to switchaggressive marketing campaigns and promotions for their service provider while retaining the same mobile phone number,credit and check cards, as well as payments of handset subsidies to purchasers of new handsets who agree to minimum subscription periods andinvesting in operational infrastructure that may reduce the recent rollout of 4G mobile services based on LTE technology by SK Telecom, LG U+ and us. The price competition through handset subsidies became less prevalent since the enactment of the Handset Distribution Reform Act in October 2014, which limited the maximum amount of handset subsidies until September 2017. However, such maximum amount of handset subsidies phased out on October 1, 2017 and the price competition through handset subsidies may intensify.need for our outsourcing services.
The following table showstables show the market shares in the mobile telecommunications market (including market sharesour principal markets in terms of miscellaneous telecommunications services)subscribers as of the dates indicated:
Mobile Services
Market Share (%) | ||||||||||||
KT Corporation | SK Telecom | LG U+ | ||||||||||
December 31, 2015 | 30.6 | 49.1 | 20.3 | |||||||||
December 31, 2016 | 30.8 | 48.8 | 20.4 | |||||||||
December 31, 2017 | 31.4 | 47.9 | 20.7 |
Market Share (%)(1) | ||||||||||||
KT Corporation | SK Telecom | LG U+ | ||||||||||
December 31, 2016 | 30.8 | 48.8 | 20.4 | |||||||||
December 31, 2017 | 31.4 | 47.9 | 20.7 | |||||||||
December 31, 2018 | 31.8 | 46.9 | 21.3 |
Source: The MSIT.
We offer various rate plans, including those that offer a specified number of free airtime minutes per month in return for a higher monthly fee and those that are geared toward business customers. Our competitors also offer similar plans at competitive rates.
Includes subscribers of MVNOs that lease mobile networks of the respective mobile service provider.
Local Telephone Service. We compete with SK Broadband and LG U+ in the local telephone service business. SK Broadband began providing local telephone service in 1999, followed by LG U+ in 2004. In addition, the services provided by mobile service providers have had a material adverse effect on us in terms of our revenues from fixed-line telephone services. We expect this trend to continue.
The following table shows the market shares in the local telephone service market as of the dates indicated:
Market Share (%) | ||||||||||||
KT Corporation | SK Broadband | LG U+ | ||||||||||
December 31, 2015 | 80.6 | 16.3 | 3.1 | |||||||||
December 31, 2016 | 80.6 | 16.2 | 3.2 | |||||||||
December 31, 2017 | 80.5 | 16.1 | 3.4 |
Although the local usage charge of our competitors and us is the same at₩39 per pulse (generally three minutes), our competitors’non-refundable telephone service initiation charges are lower than ours. Our customers pay anon-refundable telephone service initiation charge of₩60,000
while customers of our competitors pay anon-refundable telephone service initiation charge of₩30,000. Also, the basic monthly charge of our competitors is₩4,500 compared to our basic charge of₩5,200.
Domestic Long-distance Telephone Service. We compete with SK Broadband, LG U+, Sejong and SK Telink in the domestic long-distance market. LG U+ began offering domestic long-distance service in 1996, followed by Sejong in 1999 and SK Broadband and SK Telink in 2004. The following table shows the market shares in the domestic long-distance market as of the dates indicated:
Market Share (%) | ||||||||||||||||||||
KT Corporation | SK Broadband | LG U+ | Sejong | SK Telink | ||||||||||||||||
December 31, 2015 | 78.9 | 15.0 | 2.7 | 0.9 | 2.6 | |||||||||||||||
December 31, 2016 | 78.9 | 15.0 | 2.7 | 0.8 | 2.6 | |||||||||||||||
December 31, 2017 | 79.8 | 14.5 | 2.6 | 0.8 | 2.4 |
Our competitors and we charge₩39 per three minutes for domestic long-distance calls up to 30 kilometers. For domestic long-distance calls greater than 30 kilometers, our competitors typically charge between 3% to 5% less than us. The following table is a comparison of our standard long-distance usage charges per 10 seconds with the standard rates of our competitors as of December 31, 2017:
KT Corporation | SK Broadband | LG U+ | Sejong | SK Telink | ||||||||||||||||
30 kilometers or longer | ₩ | 14.5 | ₩ | 13.9 | ₩ | 14.1 | ₩ | 13.8 | ₩ | 13.8 |
International Long-DistanceFixed-line Local Telephone Serviceand VoIP Services. Four companies, SK Broadband, LG U+, Sejong and SK Telink, directly compete with us in the international long-distance market. LG U+ began offering international long-distance service in 1991, followed by Sejong in 1997 and SK Broadband in 2004. SK Telink, which only provides Internet phone service, entered the international long-distance market in 2003 and offers its services at rates lower than those for network-based international long-distance telephone services. The entry of Internet phone service providers and other telecommunications service providers, such as voice resellers, that can offer telecommunications services at rates lower than ours has increased competition in the international long-distance market and adversely affected our revenues and profitability from international long-distance services. See “—Specific Service Providers.”
Our competitors generally charge less than us for international long-distance calls. The following table is a comparison of our standard long-distance usage charges per one minute with the standard rates of our competitors as of December 31, 2017:
KT Corporation | SK Broadband | LG U+ | Sejong | SK Telink | ||||||||||||||||
United States | ₩ | 282 | ₩ | 276 | ₩ | 288 | ₩ | 276 | ₩ | 180 | ||||||||||
Japan | 696 | 672 | 678 | 672 | 612 | |||||||||||||||
China | 990 | 984 | 996 | 984 | 990 | |||||||||||||||
Australia | 1,086 | 1,044 | 1,086 | 1,044 | 810 | |||||||||||||||
Great Britain | 1,008 | 966 | 996 | 966 | 900 | |||||||||||||||
Germany | 948 | 912 | 942 | 912 | 900 |
Market Share (%) | ||||||||||||
KT Corporation | SK Broadband | LG U+ | ||||||||||
December 31, 2016 | 64.9 | 15.1 | 12.4 | |||||||||
December 31, 2017 | 65.2 | 15.1 | 12.5 | |||||||||
December 31, 2018 | 65.1 | 14.8 | 12.6 |
Source: Korea Telecommunications Operators Association.
Broadband Internet Access ServiceServices. The Korean broadband Internet access market has experienced significant growth in the past decade. SK Broadband entered the broadband market in 1999 offering both HFC and ADSL services, and we entered the market with our ADSL services in 1999, followed by Dreamline, Sejong and LG U+. In addition, the entry of cable television providers that offerHFC-based broadband Internet access services at rates lower than ours has increased competition in the broadband Internet access market. We expect industry consolidation among our competitors in the near future, and smaller competitors in the broadband market today may become larger competitors.
The following table shows the market share in the broadband Internet access market as of the dates indicated:
Market Share (%) | Market Share (%) | |||||||||||||||||||||||||||||||
KT Corporation | SK Broadband | LG U+ | Others | KT Corporation | SK Broadband | LG U+ | Others | |||||||||||||||||||||||||
December 31, 2015 | 41.6 | 25.1 | 17.4 | 15.9 | ||||||||||||||||||||||||||||
December 31, 2016 | 41.4 | 25.3 | 17.6 | 15.7 | 41.4 | 25.3 | 17.6 | 15.7 | ||||||||||||||||||||||||
December 31, 2017 | 41.3 | 25.7 | 18.0 | 15.0 | 41.4 | 25.7 | 18.0 | 14.9 | ||||||||||||||||||||||||
December 31, 2018 | 41.0 | 25.4 | 18.9 | 14.7 |
Source: The MSIT. |
Our competitors generally charge less than us for broadband Internet access service. The following table is a comparison of fees for our olleh Internet Lite service with three year mandatory subscription period with fees of our competitors for comparable services as of December 31, 2017:
KT Corporation | SK Broadband | LG U+ | Cable Providers (1) | |||||||||||||
Monthly subscription fee | ₩ | 22,000 | ₩ | 22,000 | ₩ | 22,000 | ₩ | 20,000 | ||||||||
Monthly modem rental fee | None | None | None | 1,000 | ||||||||||||
Additional installation fee upon moving | 27,500 | 11,000 | 22,000 | 20,000 |
Data Communication Service.
In recent years, the data communications services market has become more competitive with limited growth during the past decade, and we primarily compete with SK Broadband and LG U+.
Value-Added Service Providers
Value-added service providers may commence operations following filing of a report to the MSIT. The scope of business of a value-added service provider includes specific value-added telecommunications activities (other than services reserved for network service providers), such as data communications utilizing telecommunications facilities leased from network service providers.
Specific Service Providers
Specific service providers, such as Internet phone service providers and voice resellers, started operations in Korea in 1998. We began providing Internet phone service for international long-distance calls in May 1998. Our Internet phone service also competes with international long-distance services provided by voice resellers who have also seen sharp increases in demand for their services.
Internet-only BankingPay TV Services
In November 2015, the Government announced plans to introduce Internet-only banks and granted preliminary approval to two consortiums, K bank consortium and Kakao Bank consortium. The K bank consortium, over which we own a minority interest as one of 20 shareholding companies including Woori Bank, NH Investment & Securities, Co., Ltd., GS Retail Co., Ltd. and Hanwha Life Insurance Co., Ltd., received the final approval from the Government to operate the first Internet-only bank in
Market Share (%) | ||||||||||||
KT Corporation (1) | SK Broadband | LG U+ | ||||||||||
December 31, 2016 | 30.5 | 12.9 | 9.5 | |||||||||
December 31, 2017 | 30.8 | 13.5 | 10.9 | |||||||||
December 31, 2018 | 31.2 | 14.1 | 12.0 |
Source: Korea in December 2016 and began its operation in April 2017. The Kakao Bank consortium, K bank’s competitor, received the final approval from the Government in April 2017 and began its operation in July, 2017. As of December 31, 2017, K bank had deposits of₩1,089 billion while Kakao Bank had deposits of₩5,048 billion. As of December 31, 2017, K bank provided loans of₩856 billion while Kakao Bank provided loans of₩4,622 billion.Telecommunications Operators Association.
(1) | Including market share of KT Skylife. |
Regulation
With the establishment of the MSIP in March 2013, many of the regulatory responsibilities formerly handled by the KCC have been transferred to the MSIP. On July 26, 2017, the MSIP was renamed as the Ministry of Science and ICT. Under the Framework Act on Telecommunications and the Telecommunications Business Act, the MSIT continues to have comprehensive regulatory authority over the telecommunications industry and all network service providers.
Since the establishment of its predecessor, the MSIP, the MSIT has assumed primary policy and regulatory responsibility for matters such as: (i) licensing of network service providers (the MSIT authorizes the licensing of IPTV service providers and, with the consent of the KCC, authorizes the licensing of satellite broadcasting companies); (ii) regulation of mergers and acquisitions, as well as license suspension and termination of network service providers; (iii) providing oversight on foreign ownership ratios in network service providers; and (iv) reviewing telecommunication matters as they relate to the public interest and approving ancillary telecommunication business activities. Additionally, the MSIT is responsible for a broad range of other policy and regulatory matters, including the administration and supervision of regulatory reporting by telecommunications companies, examination and analysis of accounting and business management practices in the industry, establishment and administration of policies governing telecommunications service fees, value-added service providers and specific service providers, as well as supervision of reporting requirements of standard telecommunications service/user contracts.
Under the supervisory framework, a network service provider must be licensed by the MSIT. Our license as a network service provider permits us to engage in a wide range of telecommunications services. However, starting on June 25, 2019, network service providers will be subject to a registration process, which will eliminate the distinction between network service providers and specific service providers that utilize leased facilities and are subject to a registration process. Such amendment will result in the integration of specific service providers into the broadened category of network service providers, and enable specific service providers to engage in a wider range of telecommunications services previously restricted to network service providers.
The KCC’s overall policy role is to play a key role in regulatory activities aimed at protecting service users in the broadcast and telecommunications market and it continues to be responsible for investigations and sanctions regarding violations by telecommunications companies, as well as for mediating disputes between service providers and users. The KCC is established under the direct jurisdiction of the President of Korea and is comprised of five standing commissioners. Commissioners of the KCC are appointed by the President, and the appointment of the Chairperson must be approved at a confirmation hearing at the National Assembly.
Under the Act on Promotion of Information and Communications Network Utilization and Information Protection, etc., telecommunications service providers are also required to protect personal information of their customers. Generally, when a telecommunications service provider intends to
collect or use its customer’s personal information, such telecommunications service provider, with certain exceptions, must notify and receive the customers’ consent in relation to the purpose of
collection, the use of the collected personal information, types of personal information collected and period during which the personal information will be possessed and used. Korean telecommunications providers may not use their customers’ personal information for any purpose other than the purpose their customers have consented to. In addition, there are various internal processes that the telecommunications providers are mandated to install in order to collect and handle personal information of their customers.
The MSIT also has the authority to regulate the IP mediapay TV market, including IPTV services. We began offering IPTV services with real-time high definition broadcasting in November 2008. Under the Internet Multimedia Broadcasting Services Act, anyone intending to engage in the IP mediaInternet multimedia broadcasting business must obtain a license from the MSIT. The ownership of the shares of an IP mediaInternet multimedia broadcasting company by a newspaper, a news agency or a foreigner is limited. In March 2015, amendments toFurthermore, under the Internet Multimedia Broadcasting Services Act, were promulgated. Under such amendments, a single broadcasting operatoran IPTV service provider, together with theirits affiliates may not haveproviding IPTV services, is restricted from having more thanone-third of the market share of all paid broadcasting subscribers in Korea. The restriction on market share will be in effect until June 27, 2018. The proposed amendment to the Internet Multimedia Broadcasting Services Act that aims to preserve the restriction on market share is currently pending at the National Assembly.Korea (consisting of IPTV, cable TV and satellite TV subscribers).
Rates
Under current regulations implementing the Telecommunications Business Act, a network service provider may set its rates at its discretion, although it must report to the MSIT the rates and the general terms and conditions for each type of network service provided by it. There is, however, one exception to this general rule:However, if a network service provider has the largest market share for a specified type of service and its revenue from that service for the previous year exceeds a specific revenue amount set by the MSIT, it must obtain prior approval from the MSIT for the rates and the general terms for that service. Each year the MSIT designates the service providers and the types of services for which the rates and the general terms must be approved by the MSIT. In 1997, the MSIP designated us for local telephone service and SK Telecom for mobile service, which currently remains in effect. The MSIT, in consultation with the Ministry of Strategy and Finance,MOEF, is required to approve the rates proposed by a network service provider if (1) the proposed rates are appropriate, fair and reasonable and (2) the calculation method for the rates are appropriate and transparent. The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers must also be reported to the MSIT.
On October 1, 2014,The Government has also imposed regulations to restrict the Handset Distribution Reform Act, which seeks to lower the cost of communication for the general public and reduce handset factory prices by establishing fair and transparent order in the distribution of mobile telecommunication devices, went into effect. The Handset Distribution Reform Act regulates, among other matters, the sale and subsidies of mobile devices such as smartphones, with one of its purposes being to induce telecommunication operators to compete in lowering the costs of communications and encourage the manufacturers to reduce handset factory prices, while improving service quality. Under the Handset Distribution Reform Act, consumers may not be discriminated in terms of subsidies based on their age, place of residence or monthly subscription plan when using their existing mobile phones, buying a new phone or switching their mobile carriers. Furthermore, everyone, regardless of their status, is entitled to receive either a handset subsidy for the purchase of mobile phone models that were launched within the last 15 months, or a tariff discount (with the current discount rate set at 25%, effective since September 15, 2017). Prior to October 1, 2017, the maximum amount of handset subsidy that telecommunications operators and handset manufacturers may offer was determined by Korean telecommunication regulators (such limit to be determined between₩250,000 and₩350,000, and may be adjusted every six months, with the limit set at₩330,000, effective since April 8, 2015 until September 14, 2017). The
maximum amount of the handset subsidy was phased out on October 1, 2017 as initially scheduled under the Handset Distribution Reform Act. On September 15, 2017, in compliance with the policy initiatives announced by the MSIT, we, SK Telecom, and LG U+ increased the maximum tariff discount to 25% from the prior 20% (which was in effective since April 24, 2015). According to the Government, excessive handset subsidies, which may cause mobile subscribers to subscribe to more expensive monthly plans in return for greater handset subsidies or may cause handset vendors to provide discriminatory subsidies based on consumers’ age, residence and subscription plan, among others. Itplan. In October 2014, the Handset Distribution Reform Act was reported thatimplemented, with the Government plansprimary objectives of reducing overall mobile service expenses to introduce measuresconsumers, encouraging handset manufacturers to curb excessive competition for handset subsidies such as guidelines on subsidies for online handset salesreduce retail prices and requirement for public disclosurerestricting discriminatory subsidy practices. Under the Handset Distribution Reform Act, everyone, regardless of the portion or amount of handset subsidies provided by each party involved in handset sales. Telecommunications operators are also requiredtheir status, is entitled to publicly announce the amount ofreceive either a handset subsidy that they offer, which may not be readjusted within one week after such announcement. In addition, telecommunications operators are prohibited from using misleadingrelated to the purchase of a recently released mobile phone, or exaggerated advertisements, such as advertisements that mobile phones are free without adequately explaining that it is preconditioneda discount on signing up for high-priced monthly subscription plans.
On May 10, 2017,Mr. Jae-in Moon was inaugurated as the 19th President of Korea. In connection with the campaign promises of President Moon to reduce the mobile service fees paid by individuals,subscription rate. The ceiling on handset subsidies previously imposed was phased out in October 2017, but the MSIT announced policy guidelines to promote additional discounts on mobile service subscription rates. Following such policy guidelines, mobile service providers increased the maximum discount rate applicable to subscribers who elect not to receive handset subsidies from 20.0% to 25.0% starting in September 2017,2017. The MSIT may periodically announce additional policy guidelines that telecommunications companies are recommended to take into consideration.In recent years, the MSIT confirmed itshas announced policy directives to provide additional tariffguidelines with objectives of reducing telecommunications service rates and promoting transparency in the decision making of telecommunications service providers. Specific policy guidelines include monthly rate reductions of₩11,000 per monthapplicable to certainlow-income mobile subscribers, on Government welfare. On December 22, 2017, the network service providers including us started to provide additional tariff reductions of₩11,000 per month to individuals on Government welfare. As of December 31, 2017, we provided such additional tariff reductions to approximately 0.8 million subscribers of our services.
Furthermore, on July 21, 2017, the MSIT announced its plan to adopt “universal” mobile subscription fees sometime in 2018 in connection with the Government’s efforts to reduce mobile service fees and rates. According to the current draft of the proposed revision to the Telecommunications Business Act, subject to approvalwhich was implemented by the National Assembly, the dominant network service provider (which is SK Telecom) shall be required to provide a mobile subscription plan priced at₩20,000 per month (at a significant discount to the rates for currently available mobile subscription plans) which allows data use of between 1 and 1.4 GB and 200 call minutes. On November 10, 2017, the MSIT formed a policy discussion group, the Committee on the Household Telecommunications Expenditure (the “Telecom Policy Committee”), with approximately 20 committee members, including industry experts from us, SK Telecom, LG U+, customer representatives, researchers and government officials. The Telecom Policy Committee held discussion sessions twice per month until February 2018 to review and discuss the Government’s plan to adopt “universal” mobile subscription fees and other policy ideas of the Government to reduce mobile service fees paid by individuals (such as providing additional tariff discount to the elderly, lowering the entry barriers to new telecommunications service providers and introduction of the “Terminal Self-Sufficiency System” under which mobile subscribers can purchase unlocked smartphones that are not tied to mobile service providers from manufacturers or vendors). In March 2018, the Telecom Policy Committee submitted the summary of its discussions to the MSIT and the National Assembly.
On April 12, 2018, in a lawsuit brought by a social interest group in efforts to lower consumers’ telecommunication bills, the Supreme Court of Korea affirmed a lower court decision which requires the MSIT to make public disclosure of previouslynon-public information submitted by network service providers, including us, to the MSIT, detailing cost of sales for 2G and 3G mobile services. As a result, it is expected that, in May 2018, the MSIT will make public disclosure of regulatory financial reports and other supporting and evaluation materials for determining tariffs for various 2G and 3G mobile subscription plans for asix-year period ending in May 2011.December 2017.
Other Activities
A network service provider, such as us, must obtain the permission of the MSIT in order to:
modify its licenses;
transfer or acquire all or a part of the business of another network service provider; or
enter into a merger with another network service provider.
By submitting a report to the MSIT, a network service provider may enter into arrangements for services to be furnished to its customers by a different telecommunications service provider and, in connection therewith, may provide its telecommunications services to, or authorize the use of all or a portion of its telecommunications facilities by, such other telecommunications service provider. The MSIT can revoke our licenses or order the suspension of any of our businesses if we do not comply with the regulations of the MSIT under the Telecommunications Business Act.
The responsibilities of the MSIT include:
drafting and implementing plans for developing telecommunications technology;
fostering and providing guidance to institutions and entities that conduct research relating to telecommunications; and
recommending to network service providers that they invest in research and development or that they contribute to telecommunications research institutes in Korea.
In addition, all network service providers (other than regional paging service providers) are obligated to contribute toward the supply of “universal” telecommunications services in Korea. Telecommunications service providers designated as “universal service providers” by the MSIT are required to provide universal telecommunications services such as local services, local public telephone services, discount services for persons with disabilities and for certainlow-income persons, telecommunications services for remote islands and wireless communication services for ships. We have been designated as a universal service provider. The costs and losses recognized by universal service providers in connection with providing these universal telecommunications services, except for discount services for persons with disabilities and for certainlow-income persons, will be shared on an annual basis by all network service providers (other than regional paging service providers), including us, on a pro rata basis based on their respective net annual revenue calculated pursuant to a formula set by the MSIT. As for the costs and losses recognized by a universal service provider in connection with providing discount services for persons with disabilities and for certainlow-income persons, such costs and losses will be borne by such universal service provider.
Prior to April 2018, in accordance with the MSIT’s determination that we possessed essential infrastructure, we were required us to permit other fixed-line communications service providers toco-use our fixed-line telecommunication infrastructure, upon the request of such other fixed-line telecommunications service providers. On April 10, 2018, to facilitate expedient establishment of 5G
mobile services infrastructure, the Government announced its initiatives to amend theco-use system, as follows: (i) we should permit not only fixed-line telecommunicationtelecommunications service providers, but also mobile service providers such as SK Telecom and LG U+ toco-use our telecommunications infrastructure necessary for provision of 5G mobile services, (ii) the Government determined that we,
SK Telecom, SK Broadband and LG U+ possessed essential infrastructure with respect to the interval between the cable entry at a building and the initial occurrence of connection within the building and required that the three companies share such infrastructure throughout buildings in Korea with each other, and (iii) fixed-line telecommunications service providers and mobile service providers are required to participate in joint efforts to construct additional fixed-line and mobile network architecture. For more information on our mobile network architecture, see “Item 4.D. Property, PlantsPlant and Equipment—Mobile Networks.”
In addition, we are required to lease to other companies our fixed-lines that connect subscribers to our network. This system, which is called local loop unbundling, is intended to prevent excessive investment in local loops. This system requires us to lease the portion of our copper lines that represent our excess capacity to other companies upon their request at rates that are determined by the MSIT based on our cost, and taking into consideration an appropriate rate of return, to enable them to provide voice and broadband services. RevenuesRevenue from local loop unbundling, if any, are recognized as revenuesrevenue from other businesses.
Foreign Investment
The Telecommunications Business Act restricts the ownership and control of network service providers by foreign shareholders. Foreigners, foreign governments and “foreign invested companies” may not in the aggregate own more than 49.0% of the issued shares with voting rights of a network service provider, including us, and a foreign shareholder may not become our largest shareholder if such shareholder holds 15.0% or more of our shares.us. For purposes of the Telecommunications Business Act, the term “foreign invested company” means a company in which foreigners and foreign governments hold 15.0% or more shares with voting rights in the aggregate and a foreigner or a foreign government is the largest shareholder and holds 15.0% or more of the company’s shares with voting rights, provided, however, that such company will not be counted as a foreign shareholder for the purposes of the above-referenced 49.0% limit if (1) it holds less than 1.0% of our total issued and outstanding shares with voting rights or (2) if the largest shareholder of such company is a government or foreign entity of a country that is a counterparty to a free trade agreement with Korea, as publicly announced by the MSIT, and the MSIT determines that the fact that such foreign government or entity holds a 15.0% or greater shareholding in such company does not present a risk of harm to the public interest. (However,However, the calculation of the above-referenced 49% ceiling will apply to: (x) any foreign entities that have entered into anya major management-related agreement with a network service provider or the shareholder(s) thereof; and (y) foreign entities that have entered into anyan agreement pertaining to the settlement of fees relating to the handling of international electronic telecommunications services).services. As of December 31, 2017,2018, 48.5% of our common shares were owned by foreign investors. Ininvestors.In the event that a network service provider violates the shareholding restrictions, its foreign shareholders cannot exercise voting rights for their shares in excess of such limitation, and the MSIT may require corrective measures be taken to comply with the ownership restrictions. There is no restriction on foreign ownership for specific service providers and value-added service providers.
Individual Shareholding Limit
UnderIn addition to the 49.0% limit referenced above, under the Telecommunications Business Act, a foreign shareholder who holds 15.0%5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 15.0%5.0% or more of our total shares and was our largest shareholder on or prior to May 9, 2004 is exempt from the regulations, provided that such foreign shareholder may not acquire any more of our shares. In addition, under the Telecommunications Business Act, the MSIT may, if it deems it necessary to preserve substantial public interests, prohibit a foreign shareholder from being
our largest shareholder. In the event that any foreigner or foreign government acquires our shares in violation of the above provisions, the Telecommunications Business Act restricts such foreign shareholder from exercising his or her voting rights with respect to common shares exceeding such threshold. The MSIT may also order us or the foreign shareholder to take corrective measures in respect of the excess shares within a period of up to six months.
Customers and Customer Billing
We typically charge residential subscribers and business subscribers similar rates for services provided. On acase-by-case basis, we also provide discount rates for some of our high-volume business subscribers. We bill all of our customers on a monthly basis. Our customers may make payment at either payment points such as local post offices, banks or our service offices, through a direct-debit service that automatically deducts the monthly payment from a subscriber’s designated bank account, or through a direct-charge service that automatically charges the monthly payment to a subscriber’s designated credit card account. Approximately 84.6%86.3% of our subscribers as of December 31, 20172018 pay through the direct-debit service. Accounts of subscribers who fail to pay our invoice are transferred to a collection agency, which sends out a notice of payment. If such charges are not paid after notice, we cease to provide outgoing service to such subscribers after a period of time determined by the type of subscribed service. If charges are still not paid two to three months after outgoing service is cut off, we cease all services to such subscribers. After service is ceased, the overdue charges that are not collected by the collection agency are written off.
Credit Card Business
Through BC Card in which we hold a 69.54% interest, we offer various credit card processing and related financial services. BC Card is regulated and supervised as a Specialized Credit Financial Business (“SCFB”), as defined under the Specialized Credit Financial Businesses Act of Korea (“SCFBA”). The SCFBA subjects SCFB companies to licensing (for credit card businesses) and registration (for leasing, installment finance or new technology finance businesses) requirements and provides guidance and restrictions regarding capital adequacy, liquidity ratios, loans to major shareholders, reporting and other matters relating to the supervision of SCFB companies. The SCFBA delegates regulatory authority over SCFB companies to the FSC and FSS. The FSC has the authority to suspend the operations of an SCFB company for up to six months fornon-compliance with certain regulations under the SCFBA and issue certain administrative orders. The FSC is also entitled to cancel a license or registration if an SCFB company fails to comply with certain SCFBA regulations or FSC administrative orders, including a suspension order.
The SCFBA and the regulations thereunder require an SCFB company to satisfy a minimumpaid-in capital amount of (i) Won 20 billion, where the SCFB company engages in no more than two kinds of core businesses and (ii) Won 40 billion, where the SCFB company, such as BC Card, engages in three or more kinds of core businesses. An SCFB engaging in a credit card business must maintain a total Tier I and Tier II capital adequacy ratio (adjusted equity capital divided by adjusted total assets) of 8% or more. In addition, an SCFB company must maintain aone-month-or-longer delinquent claim ratio (delinquent claims divided by total claims) of less than 10%.
Under the SCFBA and the regulations thereunder, an SCFB company is required to maintain a Won liquidity ratio(Won-denominated current assets divided byWon-denominated current liabilities) of 100% or more. In addition, if an SCFB company is registered as a foreign exchange business institution with the MOEF, such SCFB company is required to maintain (1) a foreign-currency liquidity ratio (foreign currency liquid assets due within three months divided by foreign-currency liabilities due within three months) of not less than 80%, (2) a ratio of foreign currency liquid assets due within seven days less foreign currency liabilities due within seven days, divided by total foreign-currency assets, of not less than 0%, and (3) a ratio of foreign currency liquid assets due within a month less foreign currency liabilities due within a month, divided by total foreign-currency assets, of not less than negative 10%.
Under the SCFBA and the regulations thereunder, an SCFB company may not provide loans in the aggregate exceeding 50% of its equity capital to its major shareholders (including their specially related persons).
Pursuant to the SCFBA and the regulations thereunder, an SCFB company is required to submit business reports to the FSC regarding, among others, financial statements, actual results of management and soundness of assets. An SCFB company is also required to provide information regarding specific matters, including: (i) the amount of loans provided to major shareholders as of the end of each quarter; (ii) changes in the aggregate amount of such loans and the terms and conditions of the credit extension transactions for each quarter; (iii) the amount of stocks acquired by major shareholders as of the end of each quarter; and (iv) changes in the aggregate amount of stocks held and the acquisition price of such stocks for each quarter, in each case within one month of the end of each quarter. In addition, an SCFB company is required to file a report to the FSC upon the occurrence of certain events, including (i) changes to its name; (ii) changes to the largest shareholder; or (iii) changes of 1% or more in the ownership of stocks with voting rights held by a major shareholder and such major shareholder’s specially related persons, in each case within seven days from the date of its occurrence.
Insurance
We carry insurance against loss or damage to all significant buildings and automobiles. Except for our insurance coverage of our satellites and data centers, we do not carry insurance covering losses to outside plants or to equipment because we believe the cost of such insurance is excessive and the risk of material loss or damage is insignificant. We do not have any provisions or reserves against such loss or damage. We do not carry any business interruption insurance.
We provideco-location and a variety of value-added services including server-hosting services to a number of corporations whose business largely depends on critical data operated on our servers or on their servers located at our data centers. Any disruptions, interruptions, physical or electronic data loss, delays or slowdowns in communication connections could expose us to potential liabilities for losses relating to the disrupted businesses of our customers relying on our services.
Information Technology and Operational Systems
Enhancement of our information technology and operational systems and efficient utilization of such systems are important in effectively promoting our core strategies. We are committed to continually investing in and enhancing our information technology systems, which provide support to many aspects of our businesses. In order to respond more effectively to a changing business environment, an enterprise resource planning system (the “ERP System”) was implemented in July 2012. We are committed to continually investing in and enhancing our information technology systems, which provide support to many aspects of our businesses. In June 2017, a new business support system, called KT One System (“KOS”), was completed and implemented. KOS is our wired/wireless system integration program that unified wired/wireless workflows, structures and systems that had been separated previously.
KOS has contributed to enhancing various aspects of our business processes and control systems, and we are establishing various plans to effectively utilize the KOS and to stabilize our business control processes in connection with the KOS.systems.
Patents and Licensed Technology
The ability to obtain and protect intellectual property rights to the latest telecommunications technology is important for our business. We own or have licenses to various patents and trademarks in Korea and overseas, and have applications for patents pending in Korea and other select countries such as the United States, Europe, China and Japan. A majority of our patents registered in Korea and overseas relate to our wireless and fixed-line telecommunications, media and IoT technologies. In addition, we operate several research and development (“R&D”) laboratories to develop latest technology and additional platforms, as described in “Item 5.C. Research and Development, Patents and Licenses, Etc.” We license our intellectual property rights to third parties in return for periodic royal payments. We currently do not license any material technologies or patents from third parties.
Seasonality of the Business
Our main business generally does not experience significant seasonality.
Item 4.C. Organizational Structure
These matters are discussed under Item 4.B. where relevant.
Item 4.D. Property, PlantsPlant and Equipment
Our principal fixed asset is our integrated telecommunications networks. In addition, we own buildings and real estate throughout Korea. As of December 31, 2017,2018, the net book value of our property, plant and equipment was₩13,56213,068 billion, of which₩3,2813,289 billion is accounted for the net book value of our land, buildings and structures. As of December 31, 2017,2018, the net book value of our investment property,properties, which is accounted for separately from our property and equipment was₩1,1901,091 billion. Other than as may be described in this annual report, no significant amount of our properties is leased. There are no material encumbrances on our properties including the fixed assets below.
Our fixed-line equipment vendors and mobile equipment suppliers include well-known international and local suppliers such as Samsung Electronics, LG Electronics,Ericsson, Nokia and Cisco Systems and Apple Inc.Systems.
Mobile Networks
Our mobile network architecture includes the following components:
cell sites, which are physical locations equipped with base transceiver stations consisting of transmitters, receivers and other equipment used to communicate through radio channels with subscribers’ mobile telephone handsets within the range of a cell;
base station controllers, which connect to and control, the base transceiver stations;
mobile switching centers, which in turn control the base station controllers and the routing of telephone calls; and
transmission lines, which connect the mobile switching centers, base station controllers, base transceiver stations and the public switched telephone network.
One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth allocated to a service provider. We have acquired a license to use 40 MHznumber of bandwidth in the 2.1 GHz spectrum,licenses to secure additional bandwidth capacity to provide our broad range of services, for which 20 MHZ is used to provideIMT-2000 services based onW-CDMA wireless network standards and the remaining
20 MHZ for our 4G LTE services. Such license was renewed in December 2016, and we are required totypically make an initial payment as well as pay approximately₩569 billion for use of such bandwidthusage fees during the license periodperiod. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Overview—Acquisition of 5 years. In April 2010, the KCC announced its decision to allocate 20 MHz of bandwidth in the 900 MHz spectrum to us, which became effective in July 2011, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 900 MHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation. In June 2011, our right to use 40 MHz of bandwidth in the 1.8 GHz spectrum expired,New Bandwidth Licenses and the KCC allocated back to us the right to use 20 MHz of such bandwidth in the 1.8 GHz spectrum upon expiration pursuant to our application, for which we are required to pay a portion of the actual sales generated from using the bandwidth in the 1.8 GHz spectrum during the license period of 10 years as a usage fee for the bandwidth, as well as a portion of expected sales that was determined by the KCC at the time of allocation. We began using the 20 MHz of bandwidth in the 1.8 GHz spectrum, which became available upon termination of our 2G services, to provide our 4G LTE services starting in January 2012.Usage Fees.”
In August 2011, the KCC auctioned the right to use the remaining 20 MHz of bandwidth in the 1.8 GHz spectrum that we relinquished, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. We acquired the right to use the 10 MHz of bandwidth in the 800 MHz spectrum, for a total usage fee of₩261 billion to be paid during the license period of 10 years, SK Telecom acquired the right to use the 20 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use the 20 MHz of bandwidth in the 2.1 GHz spectrum. We have not utilized 10 MHz of bandwidth in the 800 MHz spectrum due to the unavailability of requisite technologies and have recorded impairment loss of₩185 billion for thenon-usage in 2015. Due to suchnon-usage, in January 2018, the MSIT decided to shorten the licensing period from 10 years to 8 years. In March 2012, our right to use 30 MHz of bandwidth in the 2.3 GHz spectrum that we had been using to provide WiBro services was renewed with the licensing period of 7 years for the license to expire in March 2019.
In August 2013, MSIP further auctioned 50 MHz of bandwidth in the 1.8 GHz spectrum, which had been used by governmental entities such as the military, and 80 MHz of bandwidth in the 2.6 GHz spectrum, which had been used for digital multimedia broadcasting services. We acquired the right to use 15 MHz of bandwidth in the 1.8 GHz spectrum, for which we are required to pay a total usage fee of approximately₩900 billion during a license period of eight years. SK Telecom acquired the right to use 35 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum. Acquiring the right to use additional bandwidth in the 1.8 GHz spectrum has enabled us to provide wideband LTE services beginning in September 2013, as 15 MHz of the newly acquired bandwidth in the 1.8 GHz spectrum was adjacent to our existing 20 MHz of bandwidth in the 1.8 GHz spectrum.
In May 2016, the MSIP auctioned 40 MHz of bandwidth in the 700 MHz spectrum, 20 MHz of bandwidth in the 1.8 GHz spectrum, 20 MHz of bandwidth in the 2.1 GHz spectrum, 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum. We acquired the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum for which we are required to pay a total usage fee of approximately₩470 billion during a license period of 10 years. SK Telecom acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum and LG U+ acquired the right to use 20 MHz of bandwidth in the 2.1 GHz spectrum. The right to use 40 MHz of bandwidth in the 700 MHz spectrum was not purchased by any company. We currently use 20 MHz of bandwidth in the 1.8 GHz spectrum to provide WidebandLTE-A services.
In December 2017, the MSIT made an announcement that it plans to auction additional bandwidth in 2018 to enable provision of 5G services by telecommunications companies.
Exchanges
Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had 25approximately 23.6 million lines connected to local exchanges and 2.12.2 million lines connected to toll exchanges as of December 31, 2017.2018.
All of our exchanges are fully automatic. We completed replacement of all electromechanical analog exchanges with digital exchanges in June 2003and automatic in order to provide higher speed and larger volume services. Starting in 2006, we also began conversion of our exchanges to be compatible to IP platform in preparation for building our next generation broadband convergence network by 2021. As of December 31, 2017, 100%In addition, all of our lines connected to toll exchanges are compatible to IP platform.
Internet Backbone
Our Internet backbone network, called KORNET, has the capacity to handle aggregate traffic of our broadband Internet access subscribers, data centers and Internet exchange system at any given moment of up to 10.615.7 Tbps as of December 31, 2017.2018. We have set up contingent plans to prepare against various incidents that could affect reliable Internet access service. Starting in 2005, we have also begun deploying ourOur IP premium network that enables us to more reliably support olleh TV, WiBro, Internet Phone, upgradedIPTV, VoIP services and other IPIP-related services. As of December 31, 2017,2018, our IP premium network had 2,8083,112 lines installed to provide 3G and LTE mobile data services, 1,2581,556 lines installed to provide IPTV services and a total capacity to handle up to 3.13.2 Tbps of IPTV, voice, mobile data and virtual private network (VPN) and WiBro(“VPN”) service traffic.
Access Lines
As of December 31, 2017,2018, we had 21.421.9 million access lines installed, which allow us to reach virtually all homes and businesses in Korea. As part of our broadband deployment strategy, we have upgraded many of our access lines by equipping them with broadband capability using xDSLADSL and FTTH technology. As of December 31, 2017,2018, we had approximately 2121.4 million broadband lines with speed of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia contentcontents to our customers.
Transmission NetworkNetworks
Our domestic fiber optic cable network consisted of approximately 764,800784,088 kilometers of fiber optic cables as of December 31, 20172018 of which approximately 118,800119,468 kilometers of fiber optic cables are used to connect our backbone network and approximately 645,970664,620 kilometers are used to connect the backbone network to our subscribers. Our backbone network utilizes 64 Tbp Long-haul Reconfigurable Optical Add Drop Multiplexer (“ROADM”) technology for connecting cities. ROADM technology improves bandwidth efficiency by enabling data to be transmitted from multiple signals across one fiber strand in a cable and carrying each signal on a separate wavelength. We enhanced ourOur transmission backbone network connecting six major cities in Korea by implementing anutilize optical cross-connector (OXC)cross-connectors (“OXC”), and we access such network by implementingthrough multi-service provisioning platform (MSPP) architecture in 2008. During 2013, we completed the construction of our next generation broadband convergence network by installing carrier ethernet(“MSPP”) architecture.
Our extensive domestic long-distance network is supplemented by our fully digital domestic microwave network, which consisted of 55 relay sites as of December 31, 2017.2018.
International NetworkNetworks
Our international network infrastructure consists of both submarine cables and satellite transmission systems, including two submarine cable-landing stations in Busan and Keoje and two
satellite teleports in Kumsan and Boeun. International traffic is handled by submarine cables and telecommunications satellites. Because of the high cost of laying a submarine cable, the usual practice is for multiple carriers to jointly commission a new cable and share the costs and the capacity. We own interests in several international fiber optic submarine cable networks. We also operate satellites periodically launched by us, as well as lease satellite capacity from other satellite operators. Data services such as international private lease circuits, IP and very small aperture terminals are provided through submarine cables and satellite transmission. In order to guarantee high quality services to our end customers, our submarine cables and satellite transmission systems are linked to variouspoints-of-presence in the United States, Asia and Europe. In addition, as of December 31, 2018, our international telecommunications networks arewere directly linked to approximately 210228 telecommunications service providers in various international destinations and are routed through our three international switching centers in Seoul, Daejeon and Busan.
Our
As of December 31, 2018, our international Internet backbone with capacity of 1,088approximately 1,500 Gbps is connected to approximately 200280 Internet service providers through our two Internet gateways in Hyehwa and Guro. In addition, we operate a video backbone with capacity of 1.5 Gbps to transmit video signals from Korea to the rest of the world.
Satellites
Koreasat 6 (launched in 2010), Koreasat 8 (launched in 2014 and of which we own 12 transponders), Koreasat 7 (launched in May 2017) and Koreasat 5A (launched in October 2017) are all in operation, providing broadcasting, video distribution and broadband data services in selected areas. The rights and interests regarding Koreasat 3 are currently subject to an International Chamber of Commerce arbitration and a proceeding in the U.S. district court in New York. See “—Item 4.B. Business Overview—Our Services—Other Businesses” and “Item 8. Financial Information—Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”
International Submarine Cable Networks
International traffic is handled by telecommunications satellites and submarine cables. Because of the high cost of laying a submarine cable, the usual practice is for multiple carriers to jointly commission a new cable and share the costs and the capacity. We own interests in several international fiber optic submarine cable networks, including:
We have also invested in four other international fiber optic submarine cables around the world.
Item 4A. Unresolved Staff Comments
We do not have any unresolved comments from the Securities and Exchange Commission staff regarding our periodic reports under the Exchange Act of 1934.
Item 5. Operating and Financial Review and Prospects
The following discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB.
Overview
We are an integrated provider of telecommunications services. Our principal telecommunications and Internet-related services include mobile servicevoice and data telecommunications services, fixed-line services including(consisting of fixed-line telephone, services,VoIP telephone, broadband Internet access service and data communication service.services) and media and content services (including IPTV and satellite TV). The principal factors affecting our revenuesrevenue from these services have been our rates for, and the usage volume of, these services, as well as the number of subscribers. For information on rates we charge for our services, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues andOur Rates.” In addition, we derive revenuesrevenue from handset salescredit card processing andnon-telecommunications other financial services, sale of goods (primarily handsets related to our mobile services and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed KT Estate), and miscellaneous business activities including financialinformation technology and network services, real estate development and satellite services.
Since 2016, ourOur operating segments for financial reporting purposes have beenare organized as the following:
the Customer/Marketing Group,marketing/customer segment, which engages in providing various telecommunicationtelecommunications services to individual/home/corporateindividual and household customers and the convergence business,business;
the Finance Group,corporate customer businesses group, which engages in providing various integrated telecommunications and network services to corporate customers;
the finance segment, which engages in providing various financial services such as credit card services,services;
the Satellitesatellite TV Group,segment, which engages in satellite TV services,services; and
the Others Group,others segment, which includes (i) security services, (ii) satellite service, (iii) information technology and network services, (iv) global business services that providesprovide global network services to multinational or domestic corporate customers and telecommunications companies, (v) sale of handsets and (vi) real property development and leasing services and other services provided by our subsidiaries.
Prior to 2016, we had three operating segments: (i) Customer/Marketing Group, (ii) Finance Group and (iii) Others Group. In 2016, our satellite TV services was classified as a new segment, the Satellite TV Group, in accordance with the requirements of IFRS 8 (Operating Segments). The segment results for 2015, 2016 and 2017 are reported in accordance with the current segment classification of four operating segments. See Note 33 to the Consolidated Financial Statements.
We disposed of our interests in two of our subsidiaries, KT Rental Co., Ltd. and KT Capital Co., Ltd., in June 2015 and August 2015, respectively. The profit and loss on the related operations of KT Rental Co., Ltd. and KT Capital Co., Ltd. are presented as discontinued operations.
One of the major factors contributing to our historical performance was the growth of the Korean economy, and our future performance will depend at least in part on Korea’s general economic
growth and prospects. For a description of recent developments that have had and may continue to have an adverse effect on our results of operations and financial condition, see “Item 3. Key Information—Item 3.D. Risk Factors—If economic conditions in Korea is our most important market, anddeteriorate, our current business and future growth could be materially and adversely affected if economic or political conditions in Korea deteriorate.affected.” A number of other developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:
acquisition of new bandwidthsbandwidth licenses and usage fees for such bandwidths;fees;
researching and implementing technology upgrades and additional telecommunicationtelecommunications services such as 5G technologies;
changes in the rate structure for our telecommunications services;
acquisitions and disposals of interests in subsidiaries and joint ventures; and
marketing activities.
As a result of these factors, our financial results in the past may not be indicative of future results or trends in those results.
Acquisition of New Bandwidth Licenses and Usage Fees for Such Bandwidths
One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth spectrum allocated to a service provider. The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have been significant factors in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. The current trend of increasing data transmission use and the increasing sophistication of multimedia content iscontents are likely to put additional strain on the bandwidth capacity of mobile service providers. We have acquired variousa number of licenses in recent years to secure additional bandwidth capacity to provide our broad range of services, for which we typically make an initial payment as well as pay a portion of the actual sales generated from using the bandwidthusage fees during the license period as a usage fee, as well as a portion of expected sales as determined by the MSIT at the time of allocation.period.
In August 2011, the KCC auctioned the rights to use the 20 MHz ofWe made bandwidth in the 1.8 GHz spectrum that we relinquished in June 2011, 10 MHz of additional bandwidth in the 800 MHz spectrum and 20 MHz of additional bandwidth in the 2.1 GHz spectrum. We acquired the right to use the 10 MHz of bandwidth in the 800 MHz spectrum, for a total usage feelicense payments of₩261416 billion to be paid during the license period of 10 years. We have not utilized 10 MHz of bandwidth in the 800 MHz spectrum due to the unavailability of requisite technologies and have recorded impairment loss of2016,₩185271 billion for thenon-usagein 2015. Due to suchnon-usage, in January 2018, the MSIT decided to shorten the license period from 10 years to 8 years. In March 2012, our right to use 30 MHz of bandwidth in the 2.3 GHz spectrum that we had been using to provide WiBro services was renewed with the licensing period of 7 years for the license to expire in March 2019.
In August 2013, the MSIP further auctioned 50 MHz of bandwidth in the 1.8 GHz spectrum, which had been used by governmental entities such as the military,2017 and 80 MHz of bandwidth in the 2.6 GHz spectrum, which had been used for digital multimedia broadcasting services. We acquired the right to use 15 MHz of bandwidth in the 1.8 GHz spectrum, for which we are required to pay a total
usage fee of approximately₩900573 billion during a license periodin 2018. The following table sets forth our outstanding payment obligations relating to our bandwidth licenses as of eight years. SK Telecom acquired the right to use 35 MHz of bandwidth in the 1.8 GHz spectrum and LG U+ acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum. In September 2013, we commenced providing wideband LTE services, which utilizes our adjoining 20 MHz of bandwidth in the 1.8 GHz spectrum to provide transmission speed of up to 150 Mbps, twice faster than those offered under standard LTE services. SK Telecom also began providing its wideband LTE services in September 2013 and LG U+ commenced providing its wideband LTE services in January 2014. In March 2014, our wideband LTE services covered five metropolitan cities in Korea, and we expanded our wideband LTE services to all of Korea in July 2014. Furthermore, in March 2014, we commercialized WidebandLTE-A services, which interconnects our 20 MHz of bandwidth in the 1.8 GHz spectrum used to offer wideband LTE services with the 10 MHz of bandwidth in the 900 MHz spectrum used to offer standard LTE services by utilizing inter-band carrier aggregation technology to support transmission speed of up to 225 Mbps, and began additionally interconnecting 10 MHz of bandwidth in the 2.1 GHz spectrum in January 2015 to support transmission speed of up to 300 Mbps under the “WidebandLTE-A X4” service.December 31, 2018.
In May 2016, the MSIP auctioned 40 MHz of bandwidth in the 700 MHz spectrum, 20 MHz of bandwidth in the 1.8 GHz spectrum, 20 MHz of bandwidth in the 2.1 GHz spectrum, 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum. We acquired the right to use 20 MHz of bandwidth in the 1.8 GHz spectrum for which we are required to pay a total usage fee of approximately₩470 billion during a license period of 10 years. SK Telecom acquired the right to use 40 MHz of bandwidth in the 2.6 GHz spectrum and 20 MHz of bandwidth in the 2.6 GHz spectrum and LG U+ acquired the right to use 20 MHz of bandwidth in the 2.1 GHz spectrum. The right to use 40 MHz of bandwidth in the 700 MHz spectrum was not purchased by any company. We currently use 20 MHz of bandwidth in the 1.8 GHz spectrum to provide WidebandLTE-A services.
In December 2017, the MSIT made an announcement that it plans to auction additional bandwidth in June 2018 to enable provision of 5G services by telecommunications companies.
Spectrum | Bandwidth | License Acquisition | Total Payable Amount (in billions of Won) | Initial Payment Amount (in billions of Won) | Initial Payment Year | Annual Usage Fee (in billions of Won) | Annual Fee Payment | |||||||||||||||
800 MHz | 10 MHz | July 1, 2012 | ₩ | 261 | ₩ | 65 | 2012 | ₩ | 33 | 2012 to 2020 | ||||||||||||
900 MHz | 20 MHz | July 1, 2011 | ₩ | 251 | ₩ | 126 | 2011 | ₩ | 17 | 2011 to 2021 | ||||||||||||
1.8 GHz | 20 MHz | July 1, 2011 | ₩ | 194 | ₩ | 97 | 2011 | ₩ | 17 | 2011 to 2021 | ||||||||||||
1.8 GHz | 15 MHz | September 10, 2013 | ₩ | 878 | ₩ | 219 | 2013 | ₩ | 82 | 2013 to 2021 | ||||||||||||
1.8 GHz | 20 MHz | August 4, 2016 | ₩ | 470 | ₩ | 117 | 2016 | ₩ | 35 | 2016 to 2026 | ||||||||||||
2.1 GHz | 40 MHz | December 4, 2016 | ₩ | 569 | ₩ | 142 | 2016 | ₩ | 85 | 2016 to 2021 | ||||||||||||
2.3 GHz | 30 MHz | March 30, 2012 | ₩ | 19 | ₩ | 10 | 2012 | ₩ | 2 | 2012 to 2019 | ||||||||||||
3.5 GHz | 100 MHz | December 1, 2018 | ₩ | 968 | ₩ | 242 | 2018 | ₩ | 73 | 2018 to 2028 | ||||||||||||
28 GHz | 800 MHz | December 1, 2018 | ₩ | 208 | ₩ | 52 | 2018 | ₩ | 31 | 2018 to 2023 |
Researching and Implementing Technology Upgrades and Additional TelecommunicationTelecommunications Services such as 5G Technologies
The telecommunications industry is characterized by continual advances and improvements in telecommunications technology, and we have been continually researching and implementing technology network
upgrades and launching additional telecommunicationtelecommunications services to maintain our competitiveness. For example,In recent years, we arehave made extensive efforts to continually upgradingdevelop mobile services with enhanced speed, latency and connectivity that enable us to offer significantly improved wireless data transmission with faster access to multimedia content. We commercially launched our next generation 5G mobile services with transmission speed of up to 1 Gbps in April 2019 in the Seoul metropolitan area, six additional metropolitan cities, high-traffic commercial areas and university campuses as well as major transportation infrastructure such as highways, railways and airports. We plan to gradually expand the coverage nationwide and increase the transmission speed of our 5G services thereafter.
We also make investments to continually upgrade our broadband network to enable better FTTH connection, which providesfurther enhances data transmission speed of up to 1 Gbps and better connection quality. FTTH is a telecommunication architecture in which a communication path is provided over optical fiber cables extending from the telecommunications operator’s switching equipment to the boundary of home or office. FTTH uses fiber optic cable, which is able to carry a high-bandwidth signal for longer distances without degradation. FTTH enables us to deliver enhanced products and services that require high bandwidth with stability, such as IPTV and other digital media content with stronger stability.
In addition, we have been building more advanced mobilecontent. The MSIT has the authority to recommend to network service providers that they provide funds for national research and development of telecommunications networks based on LTE technology, generally referred to as “4G” technology and commenced providing commercial 4G LTE servicesrelated projects. Including such contributions, total expenditures (which include capitalized expenses) on research and development were₩215 billion in the Seoul metropolitan area2016,₩435 billion in January 2012. We completed the expansion of our 4G LTE service coverage nationwide2017 and₩273 billion in October 2012. We commenced providing wideband LTE services in September 2013, which we expanded nationwide in July 2014, and commercialized WidebandLTE-A services in March 2014, and began additionally interconnecting 10 MHz of bandwidth in the 2.1 GHz spectrum in January 2015 to support transmission speed of up to 300 Mbps under the “WidebandLTE-A X4” service, as discussed above. Furthermore, we are continuing our efforts to develop the fifth generation, “5G” technology, to carry out our2018.We plan to commercialize the 5G services by the end of 2019, one year ahead of our initial plan. In this effort, we unveiled the world’s first 5G trial
services at the PyeongChang 2018 Winter Olympics. In October 2017, “5G Network Slice Orchestration” technology, independently developed by us, was approved by the International Telecommunication Union, a specialized Information & Communication Technology agency of the United Nations,continue to invest in researching and implementing network upgrades, which will entail additional operating expenses as part of the 5G standard technology.well as capital expenditures.
Changes in the Rate Structure and Fee Discounts for Our Telecommunications Services
Periodically, we adjust our rate structure for our services. For example, we completely abolished our mobile activation fee in March 2015 in line with government policy objectives. In order to mitigate the impact from lower usage charges of local and domestic long-distance calls, we have increased our basic monthly charges and offer various optional flat rate plans for our fixed-line subscribers. Such adjustments in the rate structure have increased the portion of fixed income and stabilized our cash flow. In addition, because the growing use of mobile telecommunications services has decreased the usage of our fixed-line telephone services, we believe we are able to maximize our revenuesrevenue from fixed-line telephone services by adjusting the rate structure so as to increase our basic monthly charges. We also provide bundled packages of our various services at a discount in order to attract additional subscribers to our new services. We currently bundleoffer discounts to customers who subscribe to two or more of our fixed-line and TV services consisting of fixed-line telephone, VoIP telephone, broadband Internet access, service with IPTV Internet phone, fixed-line telephone service, and satellite TV services. For our mobile services, at a discount. In July 2016, we lowered our early termination fee for our broadband Internet access service, Internetoffer family plans that provide discounts of up to₩11,000 per mobile phone or IPTV or such productssubscription. We also offer various bundled withrate plans that combine our fixed-line telephone service.and TV services with mobile services, for both households and single subscribers. See “Item 4. Information on the Company—Item 4.B. Business Overview—Our Rates.”
The MSIT, in consultation with the Ministry of Strategy and Finance,MOEF, currently approves rates charged by us for local telephone service. The form of our standard agreement for providing local network service and each agreement for interconnection with other service providers must also be reported to the MSIT. In addition,Although we compete freely with other network service providers in terms of rate plans for our principal telecommunications and Internet-related services except for rates we charge for local calls, the MSIT currently does not regulate our domestic long-distance, international long-distance, broadband Internet access andmay periodically announce policy guidelines that we may be recommended to take into consideration.In recent years, the MSIT has announced policy guidelines with the objectives of reducing mobile service rates but it periodically announces publicand promoting transparency in the decision making of telecommunications service providers. Specific policy guidelines or suggestionsinclude monthly rate reductions applicable to certainlow-income subscribers as well as subscription rate discounts in lieu of handset subsidies. Starting in December 2017, we began providing rate discounts of up to₩11,000 per month to ourlow-income mobile subscribers on tariffs forgovernment welfare programs. We also increased the maximum discount rate
applicable to mobile subscribers who elect not to receive handset subsidies from 20.0% to 25.0% starting in September 2017. Such discounts have contributed to a decrease in the average monthly revenue per subscriber of our mobile services fromnon-regulated₩ services,34,444 in 2017 to₩32,021 in 2018.
The Government may pursue additional measures to regulate the markets in which we have followedcompete. For example, according to a proposed amendment to the Telecommunications Business Act, which is currently pending at the National Assembly, the market-dominating mobile network service provider (SK Telecom) is required to provide a “universal” mobile subscription plan at a significant discount to the rates currently available. The current proposal contemplates that the plan be priced at₩20,000 per month (including VAT) for up to 200 call minutes and data usage of 1 GB. If adopted as proposed, we may offer similar rate plans to compete more effectively with SK Telecom. There can be no assurance that we will not adopt additional measures that reduce rates charged to our subscribers as well as adjustments to our handset subsidies and other measures in the past.future to comply with regulatory requirements or the Government’s policy guidelines. For a discussion of adjustments in our rate structure, see “Item 4. Information on the Company—Item 4.B. Business Overview—Revenues andOur Rates.”
After the inauguration of the new President of Korea,Mr. Jae-in Moon, the Government announced plans to reduce telecommunication service fees and rates. On July 21, 2017, the MSIT announced its plan to require provision of “universal” mobile subscription plans sometime in 2018. According to the current draft of the proposed revision to the Telecommunications Business Act, subject to approval by the National Assembly, the dominant network service provider (which is SK Telecom) shall be required to provide a mobile subscription plan priced at₩20,000 per month (at a significant discount to the rates for currently available mobile subscription plans) which allows data use of between 1 and 1.4 GB and 200 call minutes. On November 10, 2017, the MSIT formed a policy discussion group, the Telecom Policy Committee, with approximately 20 committee members, including industry experts from us, SK Telecom, LG U+, customer representatives, researchers and government officials. The Telecom Policy Committee held discussion sessions twice per month until February 2018 to review and discuss the Government’s plan to adopt “universal” mobile subscription fees and other policy ideas of the Government to reduce mobile service fees paid by individuals (such as providing additional tariff discount to the elderly, lowering the entry barriers to new telecommunications service providers and introduction of the “Terminal Self-Sufficiency System” under which mobile subscribers can purchase unlocked smartphones that are not tied to mobile service providers from manufacturers or vendors). In March 2018, the Telecom Policy Committee submitted the summary of its discussions to the MSIT and the National Assembly. In addition, in September 2017, the MSIT confirmed its policy directives to increase the maximum tariff discount to 25% from the prior 20% (see “—Handset Subsidies”) and to provide additional tariff reductions of₩11,000 per month to certainlow-income subscribers on Government welfare. In response to the policy directives, we increased the maximum tariff discount to 25% on September 15, 2017 and started to provide
additional tariff reductions of₩11,000 per month to the subscribers on Government welfare on December 22, 2017. As of December 31, 2017, we provided the additional tariff reductions to approximately 0.8 million subscribers on Government welfare.
Acquisitions and Disposals of Interests in Subsidiaries and Joint Ventures
One key aspect of our overall business strategy calls for acquisitions of businesses and entering into joint ventures that complement or diversify our current business, as well as disposal or termination of such businesses from time to time. The following summarizes our recent acquisitions and disposals:
accounting. Our financial condition and results of operations may be affected as a result of such acquisitions, disposals or consolidation. Furthermore, pursuing acquisitions, joint venture and certain investment transactions also requires significant capital, and as we pursue further growth opportunities for the future, we may need to raise additional capital by incurring loans or through the issuances of bonds or other securities in the international capital markets, which may lead to increased levels of debt and debt servicing costs in the future.
Handset SubsidiesMarketing Activities
In March 2008, the Government removed a prohibition on the provision of handset subsidiesWe engage in marketing activities to promote our new, as well as existing, products and allowed mobile service providersservices and to subsidize the purchase of new handsets by certain qualifying customers. We began providing such handset subsidies, which increased, and may in the future increase,further strengthen our marketing expenses. We provide handset subsidiesefforts through our network of independent exclusive dealers and other third-party dealers. Our marketing expenses, consisting of sales commissions and advertising expenses, amounted to₩2,154 billion in 2016,₩2,399 billion in 2017 and₩2,101 billion in 2018. Sales commissions primarily consist of sales commissions to third-party dealers related to procurement of mobile subscribers who agree to use our service for a predetermined service period and purchase handsets on an installment basis. Generally, handset subsidies may be provided to any subscriber that uses our service and purchases handsets either directly from us or through third parties. Since we do not recognize revenues from sales of handsets by third parties, the trends between ourmobile handset sales, and our provision for handset subsidies are not necessarily correlated. The amount recognized as a provision for handset subsidies is our best estimate of the expenditure required to settle current obligations to relevant subscribers at the end of the reporting period. This subsidy amount is the sum of the present values of the monthly balances for handset subsidies over the relevant service periods, taking into account the customer retention rate for relevant subscribers. In May 2010, the KCC announced a guideline recommending that telecommunication service providers limit their marketingadvertising expenses to 22.0% of their annual sales, and the limit was subsequently lowered to 20.0% of their annual sales for the years 2013, 2012 and 2011. Such marketing expenses included initial commissions, monthly commissions and retention commissions paidrelate primarily to our authorized dealersutilization of television commercials and subscribers, including handset subsidies, but did not includeInternet and mobile advertising expenses. While the guideline was not binding, we, as well as promotional events.
While we believe that our competitors, nonetheless tried to adhere to such guideline when feasible. Furthermore, failure to comply with rules, regulations and corrective orders may lead to suspensionlarge subscriber base as well as the brand power of our business or impositionproducts and services will remain key drivers of monetary penalties.
For example,our growth, we expect to continue to invest significantly in December 2013, the KCC imposed a combined fine of approximately₩106 billion on SK Telecom, LG U+ and us (our fine being approximately₩30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. In March 2014, the MSIP imposed a45-day suspension on each of us, SK Telecom and LG U+ from accepting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies. In August 2014, the KCC imposed a combined fine of approximately₩58 billion on SK Telecom, LG U+ and us (our fine being approximately₩11 billion) for providing excessive handset subsidies, and also imposed temporary suspensions on accepting new subscribers for seven days on SK Telecom and LG U+. In December 2014, the KCC imposed a fine of approximately₩8 billion on each of SK Telecom, LG U+ and us for providing excessive handset subsidies. In March 2015, the KCC also imposed a combined fine of approximately₩34 billion on SK Telecom, LG U+ and us (our fine being approximately₩9 billion) for violation of regulations relating to handset sales,marketing activities, particularly in connection with a used handset buyback program that welaunching of new products and the other telecommunications operators were promoting. On March 12, 2015, the KCC imposed a fine of₩870 million for violation of restrictions on handset subsidies relatingservices such as our next generation 5G mobile services launched in April 2019. Our marketing expenses may not directly correspond to our compensation program for used handsets. Any further suspension of our business or imposition of monetary penalties by the Government could have a material adverse effect on our business.
Furthermore, on October 1, 2014, the Handset Distribution Reform Act, which seeks to lower the cost of communication for the general public and reduce handset factory prices by establishing fair and transparent orderrevenue in the distribution of mobile telecommunication devices, went into effect. The Handset Distribution Reform Act regulates, among other matters,same period, and our quarterly marketing expenses have fluctuated in the salepast and subsidies of mobile devices such as smartphones, with one of its purposes beingare expected to induce telecommunication operatorscontinue to competefluctuate in lowering the costs of communications and encourage the manufacturers to reduce handset factory prices, while improving service quality. Under the Handset Distribution Reform Act, consumers may not be discriminated in terms of subsidies based on their age, place of residence or monthly subscription plan when using their existing mobile phones, buying a new phone or switching their mobile carriers. Furthermore, everyone, regardless of their status, is entitled to receive either afuture.
handset subsidy for the purchase of mobile phone models that were launched within the last 15 months, or a tariff discount (with the current discount rate set at 25%, effective since September 15, 2017). Prior to October 1, 2017, the maximum amount of handset subsidy that telecommunications operators and handset manufacturers may offer was determined by Korean telecommunication regulators (such limit to be determined between₩250,000 and₩350,000, and may be adjusted every six months, with the limit set at₩330,000, effective since April 8, 2015). The maximum amount of the handset subsidy was phased out as of October 1, 2017 as initially scheduled under the Handset Distribution Reform Act. On September 15, 2017, in compliance with the policy initiatives announced by the MSIT, we increased the maximum tariff discount to 25% from the prior 20% (which was in effective since April 24, 2015). According to the Government, excessive handset subsidies may cause mobile subscribers to subscribe to more expensive monthly plans in return for greater handset subsidies or may cause handset vendors to provide discriminatory subsidies based on consumers’ age, residence and subscription plan, among others. It was reported that the Government plans to introduce measures to curb excessive competition for handset subsidies such as guidelines on subsidies for online handset sales and requirement for public disclosure of the portion or amount of handset subsidies provided by each party involved in handset sales. Telecommunications operators are also required to publicly announce the amount of handset subsidy that they offer, which may not be readjusted within one week after such announcement. In addition, telecommunications operators are prohibited from using misleading or exaggerated advertisements, such as advertisements that mobile phones are free without adequately explaining that it is preconditioned on signing up for high-priced monthly subscription plans.
Critical Accounting Policies
We have prepared our consolidated financial statements in accordance with IFRS as issued by the IASB. These accounting principles require our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenuesrevenue and expenses during the years reported. We based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. On anon-going basis, management evaluates its estimates. Actual results may differ from those estimates under different assumptions and conditions.
The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, our management has identified “critical accounting estimates.” These estimates have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.
These critical accounting estimates include:
allowances for doubtful accounts;
useful lives of property, equipment, intangible assets and investment property;
impairment of long-lived assets, including goodwill;
valuation and impairment of investment securities;financial assets;
income taxes;
post-employment benefit liabilities; and
provisions.
Allowances for Doubtful Accounts
Allowance for doubtful accounts is our best estimate of the amount of impairment losses incurred on our existing notes and accounts receivable. We determineapply the allowance for doubtful notes and accounts receivable based on an aging analysissimplified approach, which requires expected lifetime credit losses to be recognized from the initial recognition of balances, historicalwrite-off experience, customer’s or counterparty’s credit ratings and changes in payment terms.the receivable. Account balances are charged off against the allowance when all means of collection have been exhausted and the potential for recovery is considered remote. Our past experience shows that the possibility of collection is remote after three years of collection effort.
Changes in the allowances for doubtful accounts for our trade and other receivables in the three-year period ended December 31, 20172018 are summarized as follows:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2015 | 2016 | 2017 | 2016 | 2017 | 2018 | |||||||||||||||||||
(In millions of Won) | (In millions of Won) | |||||||||||||||||||||||
Balance at beginning of year | ₩ | 838,699 | ₩ | 719,583 | ₩ | 612,487 | ₩ | 719,583 | ₩ | 612,487 | ₩ | 523,799 | ||||||||||||
Provision | 141,555 | 92,711 | 44,697 | 92,711 | 44,697 | 113,065 | ||||||||||||||||||
Reversal orwritten-off | (168,663 | ) | (189,156 | ) | (131,341 | ) | (189,156 | ) | (131,341 | ) | (185,117 | ) | ||||||||||||
Changes in the scope of consolidation | (86,484 | ) | 271 | (142 | ) | 271 | (142 | ) | — | |||||||||||||||
Others | (5,524 | ) | (10,922 | ) | (1,902 | ) | (10,922 | ) | (1,902 | ) | 1,999 | |||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Balance at end of year | ₩ | 719,583 | ₩ | 612,487 | ₩ | 523,799 | ₩ | 612,487 | ₩ | 523,799 | ₩ | 453,746 | ||||||||||||
|
|
|
|
|
|
If economic or specific industry trends change, we would adjust our allowances for doubtful accounts by recording additional expense or benefit. See Note 6 of the Consolidated Financial Statements.
Useful Lives of Property, Equipment, Intangible Assets and Investment Property
Property and equipment, intangible assets and investment properties (excluding land, condominium memberships, golf club memberships and broadcasting concession) are depreciated using the straight-line method over their useful lives as disclosed in Note 3.8 to the Consolidated Financial Statements. An asset’s residual value and useful lives are reviewed and adjusted at the end of each financial reporting period, and are based on historical experience with similar assets as well as taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation expense in future periods. A decrease of remaining estimated useful life by one year of our property and equipment would result in an increase of depreciation expense of approximately₩200 billion in 2017.
Impairment of Long-Lived Assets, including Goodwill
Long-lived assets generally consist of property and equipment and intangible assets, including goodwill. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, we evaluate our long-lived assets for impairment each year as part of our annual forecasting process. An impairment loss would be recognized when the asset’s recoverable amount is less than its carrying amount. The recoverable amount of a long-lived asset is the greater of an asset’s fair value less costs to sell and its
value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amounts of cash-generating units are based on their value in use calculated by applying the annual discount rate ranging from 8.95%6.24% to 14.62%24.30% (depending on the segment) to the estimated future cash flows based on financial budgets for the next five years. An annual growth rate of 0.0% to 1.0% was applied for the cash flows expected to be incurred after five years. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated recovery value. For example, in 2015, we recognized₩185 billion of impairment loss in connection with thenon-usage of 10 MHz of bandwidth in the 800 MHz spectrum. We also recognized₩78 billion of impairment loss on goodwill allocated to our Satellite TV segment and₩29 billion on indefinite-lived intangible assets which resulted from increasing competition among providers of Internet, IPTV, cable TV services.
Goodwill represents the excess of purchase price paid over the fair value assigned to the identifiable net assets of acquired businesses. The determination of the fair values of goodwill is based on management’s judgment on the expected cash flows of the cash-generating units to which the goodwill is allocated, taking market demand, competition and other economic factors into consideration. The determination of impairments of goodwill involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, a decline in our expected future cash flows, changes in the future availability of financing, technological obsolescence, discontinuance of services, current replacement costs and prices paid in comparable transactions. For example, in 2017, we recognized impairment losses of₩78 billion on goodwill allocated to KT Skylife primarily due to a decrease in the expected recoverable amount resulting from a decrease in KT Skylife’s market value in 2017. See Note 1213 of the Consolidated Financial Statements.
Valuation and Impairment of Financial Assets
The fair value of financial instruments, including derivative instruments, which are not traded in an active market, is determined by using valuation techniques. Our management uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period.
We record rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. Gains and losses that result from a change in the fair value of derivative instruments are recognized in current earnings. However, for derivative instruments that qualify for cash flow hedge accounting, the effective portion of the gain or loss on the derivative instruments are recorded as gain or loss on valuation of derivatives foris recognized in the cash flow hedge included in accumulated other comprehensivereserve within equity, and recognized as finance income (costs) for the periods when the corresponding transactions affect profit or loss, as applicable.loss.
For financial assets, including assets carried at amortized cost and those classified asavailable-for-sale, we make an annual assessment at the end of each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. For financial assetsequity investments, we make all subsequent measurements at fair value. For debt instruments carried at amortized cost andavailable-for-sale debt assets, such asset is considered impaired at fair value through other comprehensive income, we assess on a forward-looking basis the expected credit losses, using methods that depend on whether there has been a significant increase in credit risk. For trade receivables and impairmentlease receivables, we apply the simplified approach, which requires the expected lifetime credit losses are incurred only if there is objective evidence of impairment as a result of one or more events (a “loss event”) that occurred afterto be recognized from the initial recognition of the receivable.
The provision for impairment for financial asset, which had an impact on the estimated future cash flows of the financial asset that can reliably be estimated. For equity investments classified asavailable-for-sale, a significant or prolonged decline in the fair value of the security below its cost, in addition to circumstances described below, may be considered as evidence that the asset is impaired.
For assets carried at amortized cost, the amount of impairment is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the asset’s original effective interest rate, and the carrying amount of the asset is reduced and the amount of loss is recognized in the statement of income. Loss on such asset may also be measuredare based on observable market price if there is an active market for the asset. For assets classified asavailable-for-sale, the cumulativeassumptions about risk of default and expected loss measured as the difference between the acquisition cost and the current fair value and recognized as accumulated other comprehensive income, less any impairment loss on such financial asset previously recognized in profit or loss, is removed from equity and recognized in the statement of income.
rates. Significant management judgment is involved in evaluating whether a loss event has occurred. Themaking these assumptions and selecting the inputs to the impairment calculation based on our past history, existing market conditions as well as forward looking estimates at the end of each reporting period. Such assumptions and assumptions used by management to evaluate whether a loss event has occurredestimates can be impacted by many factors, such as the financial condition, earnings capacity and near-term prospects of the company in which we have invested, breach of contract such as default or delinquency in payments, disappearance of an active market for the financial asset and other adverse changes in the payment status of borrowers in the portfolio. The evaluation of these investments is also subject to the overall condition of the economy and its impact on the capital markets.
Income Taxes
We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the tax impact. Actual income taxes could vary from these estimates due to future changes in income tax law or unpredicted results from the final determination of each year’s liability by taxing authorities.
We believe that the accounting estimate related to assessing the realizability of deferred tax assets is a “critical accounting estimate” because: (1) it requires management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities, and (2) the impact that changes in actual performance versus these estimates could have on the realization of tax benefits as reported in our results of operations could be material. Management’s assumptions require significant judgment because actual performance has fluctuated in the past and may continue to do so.
Deferred Revenue relating to Service Installation Fees and Initial Subscription Fees
We charge service installation fees and initial subscription fees related to activation of many of our services, which are deferred and recognized as revenue over the expected terms of customer relationships. Our estimate of expected terms of customer relationship is based on the historical rate, which may differ in the future. If the management’s estimation is amended, it may cause significant differences in the timing of revenue recognition and amount recognized.
Post-employment Benefit Liabilities
Our accounting of post-employment benefits, which mainly consist of a defined benefit plan (we began offering a defined contribution plan in December 2012), involves judgments about uncertain events including discount rates, life expectancy and future pay inflation. Any changes in these assumptions will impact the carrying amount of the defined benefit liability. The discount rates used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit liability, are determined at the end of each reporting period by reference to the yield at
the reporting date on high-quality corporate bonds that have maturity dates approximating the terms of
our benefits obligations and that are denominated in the same currency in which the benefits are expected to be paid. Other key assumptions for defined benefit liability are based in part on current market conditions. For defined contribution plans, we pay contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis, and we have no further payment obligations once the contributions have been paid.
Provisions
We recognize provisions at the end of the reporting period when we have a present legal or constructive obligation, such as litigation or assets retirement obligations, as a result of past events and an outflow of resources required to settle the obligation is probable and can be reliably estimated. We measure provisions at the present value of the expenditures expected to be required to settle the obligation, which are estimated based on factors such as historical experience. We do not recognize provisions for future operating losses and recognize as interest expense any increase in the provisions due to passage of time. See Notes 2.22, 3.7 and 1617 to the Consolidated Financial Statements.
Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS
In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance withK-IFRS, which we are required to file with the Financial Services Commission and the Korea Exchange under the FSCMA.
In relation to presentation of operating profit,K-IFRS differs in certain accounts or transactions which are included in operating income or expenses underrespects from IFRS as issued by the IASB are excluded fromin the presentation of operating income or expenses underK-IFRS.profit. Additionally, underK-IFRS, revenue from the development and sale of real estate is recognized using the percentage of completion method. However, under IFRS as issued by the IASB, revenue from the development and sale of real estate is recognized when an individual unit of residential real estate is delivered to the buyer. As a result, the presentation of operating results inPrimarily due to such differences, our consolidated statements of operationscomprehensive income and our consolidated statements of financial position prepared in accordance with IFRS as issued by the IASB included in this annual report differsdiffer from the presentation of operating results in our consolidated statements of operationscomprehensive income and consolidated statements of financial position prepared in accordance withK-IFRS.
The table below sets forth a reconciliation of our operating profit and net income or loss as presented in our consolidated statements of operations prepared in accordance with IFRS as issued by the IASB for each of the years ended December 31, 2015, 2016, 2017 and 20172018 to our operating profit and net income or loss in our consolidated statements of operations prepared in accordance withK-IFRS, for each of the corresponding years, taking into account such differences:
For the Year Ended December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(In millions of Won) | ||||||||||||
Operating profit (loss) under IFRS as issued by the IASB | ₩ | 1,077,068 | ₩ | 1,339,780 | ₩ | 1,069,092 | ||||||
Effect of changes in operating income presentation | 207,165 | 96,602 | 286,161 | |||||||||
Revenue recognition of development and sale of real estate | 8,711 | 3,597 | 20,033 | |||||||||
|
|
|
|
|
| |||||||
Operating profit (loss) underK-IFRS | ₩ | 1,292,944 | ₩ | 1,439,979 | ₩ | 1,375,286 | ||||||
|
|
|
|
|
|
For the Year Ended December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(In millions of Won) | ||||||||||||
Net income (loss) under IFRS as issued by the IASB | ₩ | 624,685 | ₩ | 795,117 | ₩ | 546,341 | ||||||
Profit before income tax | ||||||||||||
Revenue recognition of development and sale of real estate | 8,711 | 3,597 | 20,033 | |||||||||
Income tax | (2,108 | ) | (870 | ) | (4,848 | ) | ||||||
|
|
|
|
|
| |||||||
Net income (loss) underK-IFRS | ₩ | 631,288 | ₩ | 797,844 | ₩ | 561,526 | ||||||
|
|
|
|
|
|
For the Year Ended December 31, | ||||||||||||
2016 | 2017 | 2018 | ||||||||||
(In millions of Won) | ||||||||||||
Operating profit under IFRS as issued by the IASB | ₩ | 1,383,104 | ₩ | 1,069,092 | ₩ | 1,100,860 | ||||||
Effect of changes in operating income presentation | 96,602 | 286,161 | 103,897 | |||||||||
Revenue recognition of development and sale of real estate | 3,597 | 20,033 | 56,765 | |||||||||
Operating profit underK-IFRS | ₩ | 1,483,303 | ₩ | 1,375,286 | ₩ | 1,261,522 | ||||||
|
|
|
|
|
|
For the Year Ended December 31, | ||||||||||||
2016 | 2017 | 2018 | ||||||||||
(In millions of Won) | ||||||||||||
Net income under IFRS as issued by the IASB | ₩ | 831,845 | ₩ | 546,341 | ₩ | 719,412 | ||||||
Profit before income tax | ||||||||||||
Revenue recognition of development and sale of real estate | 3,597 | 20,033 | 56,765 | |||||||||
Income tax | (870 | ) | (4,848 | ) | (13,872 | ) | ||||||
Net income underK-IFRS | ₩ | 834,572 | ₩ | 561,526 | ₩ | 762,305 | ||||||
|
|
|
|
|
|
Adoption of IFRS 15
The IASB issued IFRS 15Revenue from Contracts with Customers (“IFRS 15”) for recognizing revenue. IFRS 15 establishes a five-step model that applies to operating revenue earned from a contract with a customer, regardless of the type of revenue transaction or the industry with limited exceptions. We mainly provide telecommunications services and sell handsets, and revenue from such services provided is recognized over time and revenue from such sale of goods is recognized at a point in time. We have adopted IFRS 15 from January 1, 2018 and applied the modified retrospective approach, and recognized the cumulative impact of initially applying the revenue standard as an adjustment to retained earnings as of January 1, 2018, the period of initial application. Accordingly, the financial information related to periods prior to January 1, 2018 have not been restated for the adoption of IFRS 15 and continue to be presented under IAS 18 Revenue and other standards (collectively, “IAS 18 and Other Standards”).
The adjustments made to line items presented in the consolidated statements of comprehensive income for the year ended December 31, 2018 due to the change from IAS 18 and Other Standards applied previously to IFRS 15 are as follows:
For the year ended December 31, | ||||||||||||
2018 (under IFRS 15) | Adjustments | 2018 (under IAS 18 and Other Standards) | ||||||||||
(In billions of Won) | ||||||||||||
Operating revenue | ₩ | 23,436 | ₩ | 268 | ₩ | 23,704 | ||||||
Operating expenses | 22,335 | 316 | 22,651 | |||||||||
Operating profit | 1,101 | (48 | ) | 1,053 | ||||||||
Financial income | 374 | (4 | ) | 370 | ||||||||
Financial costs | 436 | 17 | 453 | |||||||||
Share of net losses of associates and joint venture | (5 | ) | — | (5 | ) | |||||||
Profit before income tax | 1,034 | (69 | ) | 965 | ||||||||
Income tax expense | 315 | (18 | ) | 297 | ||||||||
|
|
|
|
|
| |||||||
Profit for the year | ₩ | 719 | ₩ | (51 | ) | ₩ | 668 | |||||
|
|
|
|
|
|
For a discussion of the adoption of IFRS 15 and the adjustments made to line items presented in the consolidated interim financial statements due to the change from IAS 18 and Other Standards applied previously to IFRS 15, including the impact on the line items in the consolidated statements of financial position and consolidated statement of comprehensive income, see Notes 2.2 and 41(1) of the notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements under IFRS
For a summary of new standards, amendments and interpretations issued under IFRS as issued by the IASB but not effective for 2017,2018, and which have not been adopted early by us, see Note 2.2 to the Consolidated Financial Statements.
Operating RevenuesRevenue and Operating Expenses
Operating RevenuesRevenue
Our operating revenuesrevenue primarily consistconsists of:
fees related to our mobile services, including monthly fees, usage charges for outgoing calls, usage charges for wireless data transmission, contents download fees,mobile-to-mobile interconnection revenuesrevenue and value-added monthly service fees;
fees from our fixed-line services, including:
Ø | fees from our fixed-line and VoIP telephone services, which include: |
Ø | monthly basic charges, which areone-time or monthly fixed charges primarily consisting of(i) non-refundable |
Ø | monthly usage charges, which are usage fees based on the amount of services used, primarily consisting of (i) monthly usage charges for local telephone and domestic long distance services; (ii) international long-distance service |
Ø | other |
Ø |
broadband Internet access service |
Ø |
data communication service |
financial service revenues,revenue, primarily consisting of fees from credit card services provided by BC Card, Co., Ltd., our consolidated subsidiary; andsubsidiary in which we hold a 69.54% interest;
revenue from our miscellaneous business activities that are primarily derived fromextend beyond telecommunications and financial services, including information technology and network services satellite services, securityand rental of real estate; and
revenue from sale of goods, primarily handsets related to our mobile services and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate leasing services.developed by KT Estate.
Operating Expenses
Our operating expenses primarily include:
salaries and wages, including post-employment benefits, termination benefits (including severance benefits for voluntary and special early retirements) and share-based payments;
card service costs, primarily consisting of costs in connection with credit and cash card services provided by BC Card, Co., Ltd., including fees paid to member credit card companies in our network for marketing expenses and for costs associated with the present value and default risks of installment card charges which are borne by such member companies;expenses;
depreciation expenses incurred primarily in connection with our telecommunications network facilities;
sales commissions, primarily consisting of sales commissions to third-party dealers related to procurement of mobile subscribers and mobile handset sales;
service cost, primarily consisting of payments to IPTV and satellite TV content providers;
commissions, primarily consisting of commission-based payments for certain third-party outsourcing services, including commissions to the outsourced call center staff;
amortization expenses incurred primarily consisting of payments for certain third-party outsourcing services, including payments for software developmentin connection with our intangible assets; and design, data analysis and processing, and installment and maintenance of IT and satellite equipment; and
interconnection charges, which are interconnection payments to telecommunication service providers for calls from landline users and our mobile subscribers to our competitors’ subscribers.
Operating Results—2017 Compared to 2018
The following table presents selected income statement data and changes therein for 2017 and 2018:
For the Year Ended December 31, | Changes | |||||||||||||||
2017 vs. 2018 | ||||||||||||||||
2017 | 2018 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Operating revenue | ₩ | 23,547 | ₩ | 23,436 | ₩ | (111 | ) | (0.5 | )% | |||||||
Operating expenses | 22,478 | 22,335 | (143 | ) | (0.6 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Operating profit | 1,069 | 1,101 | 32 | 3.0 | ||||||||||||
Finance income | 406 | 374 | (32 | ) | (7.9 | ) | ||||||||||
Finance costs | 645 | 436 | (209 | ) | (32.4 | ) | ||||||||||
Share of net profits of associates and joint venture | (14 | ) | (5 | ) | 8 | (60.6 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Profit before income tax | 817 | 1,034 | 217 | 26.6 | ||||||||||||
Income tax expense | 271 | 315 | 44 | 16.2 | ||||||||||||
|
|
|
|
|
| |||||||||||
Profit for the year | ₩ | 546 | ₩ | 719 | ₩ | 173 | 31.7 | % | ||||||||
|
|
|
|
|
|
Operating Revenue
The following table presents a breakdown of our operating revenue and changes therein for 2017 and 2018:
For the Year Ended December 31, | Changes | |||||||||||||||
2017 vs. 2018 | ||||||||||||||||
Products and services | 2017 | 2018 | Amount | % | ||||||||||||
(In billions of Won) | ||||||||||||||||
Mobile services | ₩ | 7,122 | ₩ | 6,828 | ₩ | (294 | ) | (4.1 | )% | |||||||
Fixed-line services: | ||||||||||||||||
Fixed-line and VoIP telephone services | 1,834 | 1,708 | (126 | ) | (6.9 | ) | ||||||||||
Broadband Internet access services | 2,082 | 2,113 | 31 | 1.5 | ||||||||||||
Data communication services | 1,066 | 1,048 | (18 | ) | (1.7 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Sub-total | 4,982 | 4,869 | (113 | ) | (2.3 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Media and content | 2,814 | 3,182 | 368 | 13.1 | ||||||||||||
Financial services | 3,443 | 3,445 | 2 | 0.1 | ||||||||||||
Others | 1,825 | 1,823 | (2 | ) | (0.1 | ) | ||||||||||
Sale of goods(1) | 3,361 | 3,289 | (72 | ) | (2.1 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenue | ₩ | 23,547 | ₩ | 23,436 | ₩ | (111 | ) | (0.5 | )% | |||||||
|
|
|
|
|
|
(1) | Primarily related to sale of handsets for our mobile service and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Estate. |
Total operating revenue decreased by 0.5%, or₩111 billion, from₩23,547 billion in 2017 to₩23,436 billion in 2018, primarily due to decreases in revenue from mobile services, fixed-line services and sale of goods, which impacts were partially offset by an increase in revenue from media and content. Our operating revenue was also negatively impacted by our adoption of IFRS 15 starting on January 1, 2018 using the modified retrospective method. See “—Adoption of IFRS 15” and Note 41(1) of the notes to our consolidated financial statements. In 2018, our operating revenue was₩23,436 billion under IFRS 15, compared to₩23,704 billion under IAS 18 and Other Standards. Had we continued to apply the previous method of IAS 18 and Other Standards in 2018, our operating revenue would have increased by 0.7%, or₩157 billion, from₩23,547 billion in 2017 to₩23,704 billion in 2018.
Mobile Services
Our mobile services revenue decreased by 4.1%, or₩294 billion, from₩7,122 billion in 2017 to₩6,828 billion in 2018, primarily due to a decrease in our average revenue per user, which impact was partially offset by an increase in our mobile subscribers.
Our average revenue per user decreased from₩34,444 in 2017 to₩32,021 in 2018 mainly due to the increase in the maximum discount rate we provide to mobile subscribers who elect to receive subscription rate discounts in lieu of handset subsidies from 20.0% to 25.0%, a substantial portion of our new mobile subscribers having elected to receive such subscription rate discounts in lieu of handset subsidies, as well as less costly plans for their second devices and the impact of our adoption of IFRS 15 starting on January 1, 2018.
We recorded a 5.5% increase in our mobile subscribers from approximately 20.0 million as of December 31, 2017 to approximately 21.1 million as of December 31, 2018.
Fixed-line Services
Our fixed-line services revenue decreased by 2.3%, or₩113 billion, from₩4,982 billion in 2017 to₩4,869 billion in 2018, primarily due to decreases in our revenue from fixed-line and VoIP telephone services and data communication services, which impacts were partially offset by an increase in revenue from broadband Internet access services.
Fixed-line and VoIP Telephone Services. Our fixed-line and VoIP telephone services revenue decreased by 6.9%, or₩126 billion, from₩1,834 billion in 2017 to₩1,708 billion in 2018, primarily due to decreases in monthly usage charges and subscribers as well as a continued decrease in demand for such services, which were partially offset by an increase in monthly basic charges. Our domestic long-distance call minutes decreased from 1.1 billion in 2017 to 0.9 billion in 2018 and local call pulses from 1.3 billion in 2017 to 1.0 billion in 2018, while the number of PSTN and VoIP lines in service decreased from 15.6 million as of December 31, 2017 to 15.0 million as of December 31, 2018. Partially offsetting such trends, our monthly basic charges increased primarily due to an increase in subscribers of our unlimited fixed-line telephone service plan in 2018 which offers unlimited call minutes for fixed monthly basic charges.
Broadband Internet Access Services. Our broadband Internet access services revenue increased by 1.5%, or₩31 billion, from₩2,082 billion in 2017 to₩2,113 billion in 2018, primarily as a result of an increase in the number of subscribers to our premium services, which was partially offset by our adoption of IFRS 15 starting on January 1, 2018. The number of our KT GiGA Internet service subscribers increased from approximately 3.9 million as of December 31, 2017 to approximately 4.9 million as of December 31, 2018.
Data Communication Services. Our data communication services revenue decreased by 1.7%, or₩18 billion, from₩1,066 billion in 2017 to₩1,048 billion in 2018 primarily due to increases in market competition based on pricing as well as discounts provided to our long-term customers.
Media and Content
Our media and content revenue increased by 13.1%, or₩368 billion, from₩2,814 billion in 2017 to₩3,182 billion in 2018, primarily due to an increase in the number of IPTV subscribers from approximately 7.5 million as of December 31, 2017 to approximately 7.9 million as of December 31, 2018 as well as increases in revenues generated from Genie Music Corporation and KTH, which impacts were partially offset by a decrease in revenue from our joint ventures as well as the negative impact on media and content revenue from our adoption of IFRS 15 starting on January 1, 2018.
Financial Services
Financial services revenue remained stable and increased slightly by 0.1%, or₩2 billion, from₩3,443 billion in 2017 to₩3,445 billion in 2018.
Others
Other operating revenue remained stable and decreased slightly by 0.1%, or₩2 billion, from₩1,825 billion in 2017 to₩1,823 billion in 2018, reflecting decreases in revenue from our miscellaneous services, which impact was partially offset by an increase in revenue from our information technology and network services.
Sale of Goods
Revenue from sale of goods decreased by 2.1%, or₩72 billion, from₩3,361 billion in 2017 to₩3,289 billion in 2018, primarily due to the negative impact on sale of goods revenue from our adoption of IFRS 15 starting on January 1, 2018 as well as a decrease in revenue from sales of miscellaneous telecommunications equipment, which impacts were partially offset by an increase in revenue from sales of mobile handsets in 2018 compared to 2017. The sale of mobile handsets in 2018 increased largely due to increases in the number of handset units sold and, to a lesser extent, theper-unit price of premium handsets.
Operating Expenses
The following table presents a breakdown of our operating expenses and changes therein for 2017 and 2018:
For the Year Ended December 31, | Changes | |||||||||||||||
2017 vs. 2018 | ||||||||||||||||
2017 | 2018 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Salaries and wages | ₩ | 3,568 | ₩ | 3,846 | ₩ | 277 | 7.8 | % | ||||||||
Depreciation | 2,746 | 2,674 | (72 | ) | (2.6 | ) | ||||||||||
Amortization of intangible assets | 619 | 608 | (11 | ) | (1.8 | ) | ||||||||||
Commissions | 1,086 | 1,080 | (6 | ) | (0.5 | ) | ||||||||||
Interconnection charges | 641 | 580 | (61 | ) | (9.5 | ) | ||||||||||
International interconnection fee | 214 | 227 | 13 | 5.9 | ||||||||||||
Purchase of inventories | 4,054 | 4,414 | 360 | 8.9 | ||||||||||||
Changes of inventories | (187 | ) | (433 | ) | (246 | ) | 131.6 | |||||||||
Sales commission | 2,202 | 1,943 | (259 | ) | (11.8 | ) | ||||||||||
Service cost | 1,428 | 1,541 | 112 | 7.9 | ||||||||||||
Utilities | 323 | 323 | 0 | 0.0 | ||||||||||||
Taxes and dues | 280 | 285 | 6 | 2.0 | ||||||||||||
Rental | 449 | 460 | 12 | 2.6 | ||||||||||||
Insurance premium | 69 | 74 | 4 | 6.2 | ||||||||||||
Installation fee | 147 | 144 | (3 | ) | (2.1 | ) | ||||||||||
Advertising expenses | 197 | 158 | (39 | ) | (20.0 | ) | ||||||||||
Research and development expenses | 169 | 177 | 8 | 4.8 | ||||||||||||
Card service costs | 3,095 | 3,113 | 18 | 0.6 | ||||||||||||
Others | 1,379 | 1,123 | (257 | ) | (18.6 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | ₩ | 22,478 | ₩ | 22,335 | ₩ | (143 | ) | (0.6 | )% | |||||||
|
|
|
|
|
|
Total operating expenses decreased by 0.6%, or₩143 billion, from₩22,478 billion in 2017 to₩22,335 billion in 2018 primarily due to decreases in sales commissions, other expenses and changes of inventories, the impacts of which were partially offset by increases in purchase of inventories,
salaries and wages and service cost. Our operating expenses were also negatively impacted by our adoption of IFRS 15 starting on January 1, 2018 using the modified retrospective method. See “—Adoption of IFRS 15” and Note 41(1) of the notes to our consolidated financial statements. In 2018, our operating expenses were₩22,335 billion under IFRS 15, compared to₩22,651 billion under IAS 18 and Other Standards. Had we continued to apply the previous method of IAS 18 and Other Standards in 2018, our operating expenses would have increased by 0.8%, or₩174 billion, from₩22,478 billion in 2017 to₩22,651 billion in 2018. Specifically:
Sales commission decreased by 11.8%, or₩259 billion, from₩2,202 billion in 2017 to₩1,943 billion in 2018 primarily due to the impact of our adoption of IFRS 15 starting in 2018, which was partially offset by an increase in sales commissions that we paid to third-party dealers for procurement of mobile subscribers and handsets in 2018 compared to 2017.
Other expenses decreased by 18.6%, or₩257 billion, from₩1,379 billion in 2017 to₩1,123 billion in 2018 primarily due to a loss on disposal of certain telecommunications assets in 2017, which did not occur in 2018.
Changes of inventories, which reflect inventory changes during a period by calculating inventories at the beginning of the period minus those at the end of the period, increased by 131.6%, or₩246 billion, from₩(187) billion in 2017 to₩(433) billion in 2018, which indicates increases in inventories by₩187 billion in 2017 and an additional₩433 billion in 2018. This was primarily due to an increase in our purchase of mobile handsets in 2018 compared to 2017 as described below, which was partially offset by an increase in the sale of mobile handsets in 2018 compared to 2017.
These factors were partially offset by the following:
Our purchase of inventories increased by 8.9%, or₩360 billion, from₩4,054 billion in 2017 to₩4,414 billion in 2018 primarily due to an increase in purchase of mobile handsets (consisting of an increase in the total number of mobile handsets (mostly smartphones) purchased and an increase in theper-unit price of handsets).
Salaries and wages increased by 7.8%, or₩277 billion, from₩3,568 billion in 2017 to₩3,846 billion in 2018 primarily due to an increase in wages as well as payments of special incentive bonuses to our employees.
Service cost increased by 7.9%, or₩112 billion, from₩1,428 billion in 2017 to₩1,541 billion in 2018, primarily due to increases in content costs relating to our IPTV and satellite TV services.
Operating Profit
Due to the factors described above, our operating profit increased by 3.0%, or₩32 billion, from₩1,069 billion in 2017 to₩1,101 billion in 2018. Our operating margin, which is operating profit as a percentage of operating revenue, was 4.5% in 2017 and 4.7% in 2018.
Finance Income (Costs)
The following table presents a breakdown of our finance income and costs and changes therein for 2017 and 2018:
For the Year Ended December 31, | Changes | |||||||||||||||
2017 vs. 2018 | ||||||||||||||||
2017 | 2018 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Interest income | ₩ | 93 | ₩ | 245 | ₩ | 152 | 163.0 | % | ||||||||
Gain on foreign currency transactions | 80 | 17 | (62 | ) | (78.4 | ) | ||||||||||
Gain on foreign currency translation | 226 | 4 | (222 | ) | (98.4 | ) | ||||||||||
Gain on settlement of derivatives | — | 28 | 28 | N.A. | ||||||||||||
Gain on valuation of derivatives | 0 | 66 | 66 | N.M. | ||||||||||||
Others | 8 | 14 | 6 | 80.0 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total finance income | ₩ | 406 | ₩ | 374 | ₩ | (32 | ) | (7.9 | ) | |||||||
|
|
|
|
|
| |||||||||||
Interest expenses | ₩ | 302 | ₩ | 297 | ₩ | (6 | ) | (1.8 | )% | |||||||
Loss on foreign currency transactions | 40 | 49 | 9 | 22.0 | ||||||||||||
Loss on foreign currency translation | 12 | 73 | 60 | 493.5 | ||||||||||||
Loss on settlement of derivatives | 59 | — | (59 | ) | (100.0 | ) | ||||||||||
Loss on valuation of derivatives | 210 | 2 | (208 | ) | (99.0 | ) | ||||||||||
Loss on disposal of trade receivables | 20 | 14 | (7 | ) | (32.1 | ) | ||||||||||
Impairment loss onavailable-for-sale financial assets | 0 | — | (0 | ) | (100.0 | ) | ||||||||||
Others | 1 | 1 | 0 | 11.4 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total finance costs | ₩ | 645 | ₩ | 436 | ₩ | (209 | ) | (32.4 | ) | |||||||
|
|
|
|
|
|
N.A. means not applicable.
N.M. means not meaningful.
Our interest income increased by 163.0%, or₩152 billion, from₩93 billion in 2017 to₩245 billion in 2018. In 2018, we recognized interest income related to a delay in VAT refund, compared to no such income recognized in 2017. In addition, a general increase in interest rates in Korea in 2018 contributed to the increase in interest income in 2018 compared to 2017.
We recognized a net gain on foreign currency translation of₩214 billion in 2017 compared to a net loss of₩69 billion in 2018, and we recognized a net gain on foreign currency transactions of₩40 billion in 2017 compared to a net loss of₩32 billion in 2018, as the Won appreciated against the Dollar in 2017 but depreciated in 2018. In terms of the market average exchange rates announced by Seoul Money Brokerage Services, Ltd., the Won appreciated from₩1,208.5 to US$1.00 as of December 31, 2016 to₩1,071.4 to US$1.00 as of December 31, 2017 but depreciated to₩1,118.1 to US$1.00 as of December 31, 2018. Against such fluctuations, we recognized a net loss on valuation of derivatives of₩210 billion in 2017 compared to a net gain of₩64 billion in 2018 and recorded a net loss on transactions of derivatives of₩59 billion in 2017 compared to a net gain of₩28 billion in 2018.
Share of Net Profits (Losses) of Associates and Joint Venture
Our share of net losses of associates and joint ventures decreased by 60.6%, or₩8 billion, from₩14 billion in 2017 to₩5 billion in 2018. In 2017, our share of net losses of associates and joint ventures consisted primarily of our share of loss from K Bank of Won 17 billion. In 2018, our share of loss from K Bank increased to Won 20 billion, which was partially offset by our share of profit from Korea Information & Technology Fund of Won 15 billion.
Income Tax Expense
Income tax expense increased by 16.2%, or₩44 billion, from₩271 billion in 2017 to₩315 billion in 2018, primarily due to an increase in profit before income tax, which increased by
26.6%, or₩217 billion, from₩817 billion in 2017 to₩1,034 billion in 2018. See Note 29 to the Consolidated Financial Statements.
Profit for the Year
Due to the factors described above, our profit for the year increased by 31.7%, or₩173 billion, from₩546 billion in 2017 to₩719 billion in 2018. Our net profit margin, which is net profit for the year as a percentage of operating revenue, was 2.3% in 2017 and 3.1% in 2018.
Segment Results—Marketing/Customer
Our operating revenue for the marketing/customer segment, prior to adjusting for inter-segment transactions, decreased by 13.4%, or₩2,181 billion, from₩16,243 billion in 2017 to₩14,062 billion in 2018 primarily due to our decision to separate the marketing/customer segment into two separate reported segments of the marketing/customer segment and the corporate customer businesses segment starting in 2018 and, to a lesser extent, the impact of our adoption of IFRS 15 starting on January 1, 2018. In addition to such impacts, our operating revenue of the marketing/customer segment was negatively impacted by decreases in revenue from our mobile services and fixed-line services to individual and household customers, which were partially offset by an increase in revenue from our media and content services to individual and household customers, as described above.
Our operating income for the marketing/customer segment, prior to adjusting for inter-segment transactions, decreased by 13.0%, or₩132 billion, from₩1,019 billion in 2017 to₩887 billion in 2018, as the₩2,181 billion decrease in the segment’s operating revenue outpaced the₩2,049 billion decrease in operating expenses. For this segment, operating margin, which is operating income as a percentage of total operating revenue prior to adjusting for inter-segment transactions, remained constant at 6.3% in 2017 and 2018.
Our depreciation and amortization for the marketing/customer segment, prior to adjusting for inter-segment transactions, decreased by 20.8%, or₩602 billion, from₩2,896 billion in 2017 to₩2,294 billion in 2018.
Segment Results—Corporate Customer Businesses
Our operating revenue for the newly reported corporate customer businesses segment, prior to adjusting for inter-segment transactions, was₩2,510 billion in 2018. The segment’s operating income was₩209 billion in 2018, and its operating margin was 8.3% in 2018. The segment’s depreciation and amortization was₩547 billion in 2018.
Segment Results—Finance
Our operating revenue for the finance segment, prior to adjusting for inter-segment transactions, decreased by 2.1%, or₩78 billion, from₩3,638 billion in 2017 to₩3,560 billion in 2018 primarily due to the reasons described above.
Our operating income for the finance segment, prior to adjusting for inter-segment transactions, decreased by 29.3%, or₩60 billion, from₩206 billion in 2017 to₩145 billion in 2018, as the₩78 billion decrease in the segment’s operating revenue outpaced the₩17 billion decrease in operating expenses. For this segment, operating margin decreased from 5.7% in 2017 to 4.1% in 2018.
Depreciation and amortization for the finance segment, prior to adjusting for inter-segment transactions, decreased by 21.9%, or₩6 million, from₩29 billion in 2017 to₩23 billion in 2018.
Segment Results—Satellite TV
Our operating revenue for the satellite TV segment, prior to adjusting for inter-segment transactions, remained relatively unchanged, increasing by 0.7%, or₩5 billion, from₩686 billion in 2017 to₩691 billion in 2018.
Our operating income for the satellite TV segment, prior to adjusting for inter-segment transactions, decreased by 11.5%, or₩9 billion, from₩75 billion in 2017 to₩67 billion in 2018, as the₩14 billion increase in the segment’s operating expenses outpaced the₩5 billion increase in operating revenue. Operating margin for this segment decreased from 11.0% in 2017 to 9.7% in 2018.
Depreciation and amortization for the satellite TV segment, prior to adjusting for inter-segment transactions, decreased by 0.9%, or₩1 billion, from₩99 billion in 2017 to₩98 billion in 2018.
Segment Results—Others
Our operating revenue for the others segment, prior to adjusting for inter-segment transactions, decreased by 4.5%, or₩302 billion, from₩6,652 billion in 2017 to₩6,350 billion in 2018, primarily due to a decrease in revenue from sale of real estate developed by KT Estate, which was partially offset by an increase in revenue from sale of handsets.
Our operating loss for the others segment, prior to adjusting for inter-segment transactions, decreased by 17.6%, or₩33 billion, from₩187 billion in 2017 to₩154 billion in 2018, as the₩335 billion decrease in the segment’s operating expenses outpaced the₩302 billion decrease in operating revenue. Operating loss margin for this segment decreased from (2.8)% in 2017 to (2.4)% in 2018.
Depreciation and amortization for this segment, prior to adjusting for inter-segment transactions, decreased by 5.6%, or₩19 billion, from₩332 billion in 2017 to₩314 billion in 2018.
Operating Results—2016 Compared to 2017
The following table presents selected income statement data and changes therein for 2016 and 2017:
For the Year Ended December 31, | Changes | |||||||||||||||
2016 vs. 2017 | ||||||||||||||||
2016 | 2017 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Operating revenues | ₩ | 23,121 | ₩ | 23,547 | ₩ | 426 | 1.8 | % | ||||||||
Revenue | 22,755 | 23,260 | 505 | 2.2 | ||||||||||||
Others | 366 | 287 | (79 | ) | (21.6 | ) | ||||||||||
Operating expenses | 21,781 | 22,478 | 697 | 3.2 | ||||||||||||
|
|
|
|
|
| |||||||||||
Operating profit (loss) | 1,340 | 1,069 | (271 | ) | (20.2 | ) | ||||||||||
Finance income | 296 | 406 | 110 | 37.2 | ||||||||||||
Finance costs | (515 | ) | (645 | ) | (130 | ) | 25.2 | |||||||||
Income from joint ventures and associates | 3 | (14 | ) | (17 | ) | N.M. | ||||||||||
|
|
|
|
|
| |||||||||||
Profit (loss) from continuing operations before income tax | 1,123 | 817 | (306 | ) | (27.2 | ) | ||||||||||
Income tax expense (benefit) | 328 | 271 | (57 | ) | (17.4 | ) | ||||||||||
Profit (loss) for the period from continuing operations | 795 | 546 | (249 | ) | (31.3 | ) | ||||||||||
Profit from discontinued operations | — | — | — | — | ||||||||||||
|
|
|
|
|
| |||||||||||
Profit (Loss) for the period | ₩ | 795 | ₩ | 546 | ₩ | (249 | ) | (31.3 | ) | |||||||
|
|
|
|
|
|
For the Year Ended December 31, | Changes | |||||||||||||||
2016 vs. 2017 | ||||||||||||||||
2016 | 2017 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Operating revenue | ₩ | 23,164 | ₩ | 23,547 | ₩ | 383 | 1.7 | % | ||||||||
Operating expenses | 21,781 | 22,478 | 697 | 3.2 | ||||||||||||
|
|
|
|
|
| |||||||||||
Operating profit (loss) | 1,383 | 1,069 | (314 | ) | 22.7 | |||||||||||
Finance income | 296 | 406 | 110 | 37.2 | ||||||||||||
Finance costs | 515 | 645 | 130 | 25.2 | ||||||||||||
Share of net profits of associates and joint ventures | 3 | (14 | ) | (17 | ) | N.M. | ||||||||||
|
|
|
|
|
| |||||||||||
Profit (loss) from continuing operations before income tax | 1,167 | 817 | (350 | ) | (30.0 | ) | ||||||||||
Income tax expense (benefit) | 335 | 271 | (64 | ) | (19.2 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Profit for the year | ₩ | 832 | ₩ | 546 | ₩ | (286 | ) | (34.3 | )% | |||||||
|
|
|
|
|
|
N.M. means not meaningful.
Operating RevenuesRevenue
The following table presents a breakdown of our operating revenuesrevenue and changes therein for 2016 and 2017:
For the Year Ended December 31, | Changes | |||||||||||||||
2016 vs. 2017 | ||||||||||||||||
2016 | 2017 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Mobile services | ₩ | 7,366 | ₩ | 7,122 | ₩ | (244 | ) | (3.3 | )% | |||||||
Fixed-line services | 6,917 | 7,121 | 204 | 2.9 | ||||||||||||
Fixed-line telephone services: | ||||||||||||||||
Monthly Basic Charges | 616 | 705 | 89 | 14.4 | ||||||||||||
Monthly Usage Charges | 855 | 770 | (85 | ) | (9.9 | ) | ||||||||||
Others | 581 | 359 | (222 | ) | (38.2 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Sub-total | 2,053 | 1,834 | (219 | ) | (10.7 | ) | ||||||||||
Internet services: | ||||||||||||||||
Broadband Internet access service | 2,040 | 2,082 | 42 | 2.1 | ||||||||||||
Other Internet-related services | 1,799 | 2,139 | 340 | 18.9 | ||||||||||||
|
|
|
|
|
| |||||||||||
Sub-total | 3,839 | 4,221 | 392 | 10.2 | ||||||||||||
Data communication services | 1,025 | 1,066 | 41 | 4.0 | ||||||||||||
Sale of goods | 2,808 | 3,489 | 681 | 24.3 | ||||||||||||
Financial services | 3,568 | 3,629 | 61 | 1.7 | ||||||||||||
Other | 2,462 | 2,186 | (276 | ) | (11.2 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | ₩ | 23,121 | ₩ | 23,547 | ₩ | 426 | 1.8 | % | ||||||||
|
|
|
|
|
|
For the Year Ended December 31, | Changes | |||||||||||||||
2016 vs. 2017 | ||||||||||||||||
Products and services | 2016 | 2017 | Amount | % | ||||||||||||
(In billions of Won) | ||||||||||||||||
Mobile services | ₩ | 7,375 | ₩ | 7,122 | ₩ | (253 | ) | (3.4 | )% | |||||||
Fixed-line services: | ||||||||||||||||
Fixed-line and VoIP telephone services | 2,053 | 1,834 | (219 | ) | (10.7 | ) | ||||||||||
Internet services: | ||||||||||||||||
Broadband Internet access services | 2,040 | 2,082 | 42 | 2.1 | ||||||||||||
Other Internet-related services(1) | 1,799 | 2,139 | 340 | 18.9 | ||||||||||||
Data communication services | 1,025 | 1,066 | 41 | 4.0 | ||||||||||||
|
|
|
|
|
| |||||||||||
Sub-total | 6,917 | 7,121 | 204 | 2.9 | ||||||||||||
|
|
|
|
|
| |||||||||||
Financial services | 3,428 | 3,443 | 15 | 0.4 | ||||||||||||
Others | 2,592 | 2,500 | (92 | ) | (3.5 | ) | ||||||||||
Sale of goods(2) | 2,852 | 3,361 | 509 | 17.8 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenue | ₩ | 23,164 | ₩ | 23,547 | ₩ | 383 | 1.7 | % | ||||||||
|
|
|
|
|
|
(1) | Primarily related to revenue from IPTV services. |
(2) | Primarily related to sale of handsets for our mobile service and miscellaneous telecommunications equipment, as well as sale of residential units and commercial real estate developed by KT Estate. |
Total operating revenuesrevenue increased by 1.8%1.7%, or₩426383 billion, from₩23,12123,164 billion in 2016 to₩23,547 billion in 2017 primarily due to increases in the revenuesrevenue from sale of goods and our Internet services, the impact of which was partially offset in part by decreases in the revenuesrevenue from our mobile services and fixed-line and VoIP telephone services.
Mobile Services
Our mobile services revenuesrevenue decreased by 3.3%3.4%, or₩244253 billion, from₩7,3667,375 billion in 2016 to₩7,122 billion in 2017 primarily due to a decrease in our average revenue per user, and, to a lesser extent,which impact was partially offset by an increase in the maximum tariff discount to 25% from the prior 20%. our mobile subscribers.
Our average revenue per user decreased from₩35,768 in 2016 to₩34,444 in 2017 mainly due to manya substantial portion of our new mobile subscribers being subscribers for their second mobile devices with economichaving elected to receive subscription rate plans providing lower monthly rates. Thediscounts in lieu of handset subsidies. In addition, our average revenue per user was negatively impacted by an increase in the maximum tariff discount came into effect as ofrate applicable to mobile subscribers who elect not to receive handset subsidies from 20.0% to 25.0% starting in September 15, 2017 and many of our subscribers paid lower fees since then. The decrease in mobile service revenues was partially offset by2017.
We recorded a 5.9% increase in our mobile subscribers from approximately 18,892,00018.9 million as of December 31, 2016 to approximately 20,015,00020.0 million as of December 31, 2017.
Fixed-line Services
Our fixed-line services revenuesrevenue in the aggregate increased by 2.9%, or₩204 billion, from₩6,917 billion in 2016 to₩7,121 billion in 2017 primarily due to increases in Internet services revenuesrevenue and data communication services revenues,revenue, the impact of which was partially offset by a decrease in our fixed-line and VoIP telephone services revenues.revenue.
Fixed-line and VoIP Telephone Services. Our fixed-line and VoIP telephone services revenuesrevenue decreased by 10.7%, or₩219 billion, from₩2,053 billion in 2016 to₩1,834 billion in 2017 primarily due to decreases in othermonthly usage charges as well as in our subscribers of fixed-line telephone services revenues and monthly usage charges,reflecting a continued decrease in demand for such services, which was partially offset by an increase in monthly basic charges. Our other fixed-line telephone service revenue decreased primarily due to the continuing erosion of fixed-line services by mobile telephone services, Internet phone services and other VoIP services, as well as a decrease in the number of lines in service from 11.9 million in 2016 to 11.2 million in 2017. Our monthly usage charges decreased primarily due to the continuing decrease in the usage of fixed-line services. Our domestic long-distance call minutes decreased from 1.5 billion in 2016 to 1.1 billion in 2017 and local call pulses from 2.2 billion in 2016 to 1.61.3 billion in 2017, while the number of PSTN and VoIP lines in service decreased from 16.3 million as of December 31, 2016 to 15.6 million as of December 31, 2017. OurPartially offsetting such trends, our monthly basic charges increased primarily due to an increase in subscribers toof our unlimited fixed-line telephone service plan in 2017 which offers unlimited call minutes for fixed monthly basic charges priced higher than previous plans with lower monthly basic charges and additional usage charges.
Internet Services. Our Internet service revenuesservices revenue, which primarily consists of revenue from IPTV and broadband Internet access services, increased by 10.0%, or₩382 billion, from₩3,839 billion in 2016 to₩4,221 billion in 2017 primarily due to an increase in the number of IPTV subscribers from approximately 7.0 million as of December 31, 2016 to approximately 7.5 million as of December 31, 2017, andas well as an increase in the number of our ollehsubscribers of premium broadband Internet access services. The number of our KT GiGA Internet Serviceservice subscribers increased from approximately 2.4 million as of December 31, 2016 to approximately 3.9 million as of December 31, 2017.
Data Communication Services. Our data communication services revenuesrevenue increased by 4.0%, or₩41 billion, from₩1,025 billion in 2016 to₩1,066 billion in 2017 primarily due to an increase in revenuesrevenue from ourco-location and server leasing services offered to corporate customers.
Financial Services
Financial services revenue increased by 0.4%, or₩15 billion, from₩3,428 billion in 2016 to₩3,443 billion in 2017 primarily due to the sale of BC Card’s ownership interest in MasterCard and an increase in commission revenue from BC Card reflecting an expansion of its merchant payment network, which impacts were partially offset by a decrease in the transaction volume of foreign credit cards processed through BC Card that were used by Chinese tourists visiting Korea in 2017 as compared to 2016.
Others
Other operating revenue decreased by 3.5%, or₩92 billion, from₩2,592 billion in 2016 to₩2,500 billion in 2017 primarily due to a decrease in revenue from our systems integration business.
Sale of Goods
RevenuesRevenue from sale of goods increased by 24.3%17.8%, or₩681509 billion, from₩2,8082,852 billion in 2016 to₩3,4893,361 billion in 2017 primarily due to an increase in the sale of mobile handsets in 2017 compared to 2016 and, to a lesser extent, an increase in revenuesrevenue from development andthe sale of real estate developed by KT Estate. The sale of mobile handsets in 2017 increased largely due to an increaseincreases in the number of handset units sold and, to a lesser extent, an increase in theper-unit price of premium handsets.
Financial Services
Financial services revenues increased by 1.7%, or₩61 billion, from₩3,568 billion in 2016 to₩3,629 billion in 2017 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., primarily as a result of increased usage of credit cards and an increase in disposal ofavailable-for-sale financial assets, primarily related to the sale of capital stock in MasterCard, previously owned by BC Card Co., Ltd, which was partially offset by a decreased usage by incoming tourists in Korea of foreign credit cards processed through BC Card Co., Ltd. in 2017, as compared to 2016.
Others
Other operating revenues decreased by 11.2%, or₩276 billion, from₩2,462 billion in 2016 to₩2,186 billion in 2017 primarily due to a decrease in revenues from our systems integration business.
Operating Expenses
The following table presents a breakdown of our operating expenses and changes therein for 2016 and 2017:
For the Year Ended December 31, | Changes | For the Year Ended December 31, | Changes | |||||||||||||||||||||||||||||
2016 vs. 2017 | 2016 vs. 2017 | |||||||||||||||||||||||||||||||
2016 | 2017 | Amount | % | 2016 | 2017 | Amount | % | |||||||||||||||||||||||||
(In billions of Won) | (In billions of Won) | |||||||||||||||||||||||||||||||
Salaries and wages | ₩ | 3,478 | ₩ | 3,568 | ₩ | 90 | 2.6 | % | ₩ | 3,478 | ₩ | 3,568 | ₩ | 90 | 2.6 | % | ||||||||||||||||
Depreciation | 2,763 | 2,746 | (17 | ) | (0.6 | ) | 2,763 | 2,746 | (17 | ) | (0.6 | ) | ||||||||||||||||||||
Commissions | 1,099 | 1,086 | (13 | ) | (1.2 | ) | 1,099 | 1,086 | (14 | ) | (1.2 | ) | ||||||||||||||||||||
Interconnection charges | 690 | 641 | (49 | ) | (7.1 | ) | 690 | 641 | (50 | ) | (7.2 | ) | ||||||||||||||||||||
Purchase of inventories | 3,407 | 4,054 | 647 | 19.0 | 3,407 | 4,054 | 646 | 19.0 | ||||||||||||||||||||||||
Changes of inventories | 162 | (187 | ) | (349 | ) | N.M. | 162 | (187 | ) | (350 | ) | N.M. | ||||||||||||||||||||
Sales commission | 1,968 | 2,202 | 234 | 11.9 | 1,968 | 2,202 | 234 | 11.9 | ||||||||||||||||||||||||
Service cost | 1,322 | 1,428 | 106 | 8.0 | 1,322 | 1,428 | 106 | 8.0 | ||||||||||||||||||||||||
Card service costs | 3,050 | 3,095 | 45 | 1.5 | 3,050 | 3,095 | 45 | 1.5 | ||||||||||||||||||||||||
Insurance premium | 178 | 69 | (109 | ) | (61.2 | ) | 178 | 69 | (109 | ) | (61.1 | ) | ||||||||||||||||||||
Others(1) | 3,664 | 3,777 | 113 | 3.1 | 3,663 | 3,777 | 113 | 3.1 | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Total operating expenses | ₩ | 21,781 | ₩ | 22,478 | ₩ | 697 | 3.2 | % | ₩ | 21,781 | ₩ | 22,478 | ₩ | 697 | 3.2 | % | ||||||||||||||||
|
|
|
|
|
|
N.M. means not meaningful.
(1) | Including other operating expenses (which include other expenses) amortization of intangible assets, rent, utilities, international interconnection fee, installation fee, taxes and dues, research and development expenses and advertising expenses. |
Total operating expenses increased by 3.2%, or₩697 billion, from₩21,781 billion in 2016 to₩22,478 billion in 2017 primarily due to increases in purchase of inventories, sales commission and service cost, the impact of which was partially offset by decreases in changes of inventories and insurance premium as described below. Specifically:
Purchase of inventories increased by 19.0%, or₩647646 billion, from₩3,407 billion in 2016 to₩4,054 billion in 2017 primarily due to an increase in purchase of mobile handsets (consisting of an increase in the total number of mobile handsets (mostly smartphones) purchased and an increase in theper-unit price of mobile handsets) and, to a lesser extent, an increase in development expenses offor-sale real estate units.
Sales commission increased by 11.9%, or₩234 billion, from₩1,968 billion in 2016 to₩2,202 billion in 2017 primarily due to an increase in sales commissions that we paid to third-party dealers for procurement of mobile subscribers and mobile handset sales, both of which increased in 2017.
|
Service cost increased by 8.0%, or₩106 billion, from₩1,322 billion in 2016 to₩1,428 billion in 2017, primarily due to an increase in service costs relating to our IPTV and mobile services such as purchases of contents to meet increased and diversified demand from customers and an increase in installation fees as more sophisticated technologies and corresponding higher fees were required for the installation of certain new equipment and facilities.
These factors were partially offset by the following:
Changes of inventories, which reflectsreflect inventory changes during a period by calculating inventories at the beginning of period minus those at the end of period, amounted to₩162 billion in 2016 and₩(187) billion in 2017, which means inventories increased by₩187 billion in 2017 while they decreased by₩162 billion in 2016. This was primarily due to an increase in purchase of handsets in 2017 compared to 2016 as described above, which was partially offset by an increase in the sale of handsets in 2017 compared to 2016. Cost of sale of goods (which is the sum of changes of inventories and purchase of inventories) in 2017 increased by 8.3% to₩3,867 billion from₩3,569 billion in 2016, primarily reflecting an increase in handset unit sales and an increase inper-unit cost of handsets, in each case in 2017 compared to 2016.Per-unit cost of handsets increased primarily due to the higherper-unit cost of premium handsets, which was partially offset by the lowerper-unit cost of second device purchased by certain of our mobile subscribers. The increase in the handset unit sales was primarily due to the unusually lower handset unit sales in 2016 (due to mechanical defects of Galaxy Note 7 in 2016 as further explained in “—Operating Results—2015 Compared to 2016—Operating Expenses”). The handset unit sales were normalized in 2017 in the absence of suchone-off event.
₩162 billion in 2016 and₩(187) billion in 2017, which means inventories increased by₩187 billion in 2017 while they decreased by₩162 billion in 2016. This was primarily due to an increase in purchase of handsets in 2017 compared to 2016 as described above, which was partially offset by an increase in the sale of handsets in 2017 compared to 2016. Cost of sale of goods (which is the sum of changes of inventories and purchase of inventories) in 2017 increased by 8.3% to₩3,866 billion from₩3,570 billion in 2016, primarily reflecting an increase in handset unit sales and an increase inper-unit cost of handsets, in each case in 2017 compared to 2016.Per-unit cost of handsets increased primarily due to the higherper-unit cost of premium handsets, which was partially offset by the lowerper-unit cost of second devices purchased by certain of our mobile subscribers. The increase in the handset unit sales was primarily due to the unusually lower handset unit sales in 2016 due to mechanical defects relating to the Galaxy Note 7 handset in 2016. The handset unit sales were normalized in 2017 in the absence of suchone-off event. |
Insurance premium decreased by 61.2%61.1%, or₩109 billion, from₩178 billion in 2016 to₩69 billion in 2017 primarily due to a decrease in insurance premium rates for our handsets.
Operating Profit
Due to the factors described above, our operating profit decreased by 20.2%22.7%, or₩271314 billion, from₩1,3401,383 billion in 2016 to₩1,069 billion in 2017. Our operating margin, which is operating profit as a percentage of operating revenues,revenue, was 5.8%6.0% in 2016 and 4.5% in 2017.
Finance Income (Costs)
The following table presents a breakdown of our finance income and costs and changes therein for 2016 and 2017:
For the Year Ended December 31, | Changes | |||||||||||||||
2016 vs. 2017 | ||||||||||||||||
2016 | 2017 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Interest income | ₩ | 116 | ₩ | 93 | ₩ | (23 | ) | (19.5 | )% | |||||||
Interest expense | (337 | ) | (302 | ) | 35 | 10.3 | ||||||||||
Net foreign currency transaction gain (loss) | (13 | ) | 39 | 52 | N.M. | |||||||||||
Net foreign currency translation gain (loss) | (110 | ) | 213 | 323 | N.M. | |||||||||||
Net gain (loss) on settlement of derivatives | 8 | (59 | ) | (67 | ) | N.M. | ||||||||||
Net gain (loss) on valuation of derivatives | 109 | (210 | ) | (319 | ) | N.M. | ||||||||||
Net other finance costs(1) | 8 | (12 | ) | (20 | ) | N.M. | ||||||||||
|
|
|
|
|
| |||||||||||
Net finance costs | ₩ | (219 | ) | ₩ | (238 | ) | ₩ | (19 | ) | 8.8 | % | |||||
|
|
|
|
|
|
For the Year Ended December 31, | Changes | |||||||||||||||
2016 vs. 2017 | ||||||||||||||||
2016 | 2017 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Interest income | ₩ | 116 | ₩ | 93 | ₩ | (23 | ) | (19.5 | )% | |||||||
Gain on foreign currency transactions | 25 | 80 | 55 | 219.7 | ||||||||||||
Gain on foreign currency translation | 12 | 226 | 213 | 1,754.3 | ||||||||||||
Gain on settlement of derivatives | 9 | — | (9 | ) | (100.0 | ) | ||||||||||
Gain on valuation of derivatives | 109 | 0 | (109 | ) | (99.9 | ) | ||||||||||
Others | 25 | 8 | (17 | ) | (68.7 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total finance income | ₩ | 296 | ₩ | 406 | ₩ | 110 | 37.2 | |||||||||
|
|
|
|
|
| |||||||||||
Interest expenses | ₩ | 337 | ₩ | 302 | ₩ | (35 | ) | (10.3 | )% | |||||||
Loss on foreign currency transactions | 38 | 40 | 2 | 6.2 | ||||||||||||
Loss on foreign currency translation | 122 | 12 | (110 | ) | (90.0 | ) | ||||||||||
Loss on settlement of derivatives | 1 | 59 | 58 | 9,167.2 | ||||||||||||
Loss on valuation of derivatives | 0 | 210 | 209 | N.M. | ||||||||||||
Loss on disposal of trade receivables | 16 | 20 | 5 | 28.5 | ||||||||||||
Impairment loss onavailable-for-sale financial assets | 1 | 0 | (1 | ) | (99.1 | ) | ||||||||||
Others | 0 | 1 | 1 | 146.9 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total finance costs | ₩ | 515 | ₩ | 645 | ₩ | 130 | 25.2 | |||||||||
|
|
|
|
|
|
N.M. means not meaningful.
Our net finance costs decreased by 8.8%19.5%, or₩1923 billion, from₩219116 billion in 2016 to₩23893 billion in 2017 primarily due to an increaseinterest income recognized in net foreign currency translation gain, the impact of which was mostly offset by an increase2016 related to a delay in loss on valuation of derivatives. ToVAT
refund, compared to no such income recognized in 2017, as well as a lesser extent, thegeneral decrease in our net finance costsinterest rates in 2017 was also attributable to an increaseKorea in net foreign currency transaction gain and a decrease in net interest expense, partially offset by an increase in loss on settlement of derivative. Specifically:2017.
Our interest expenses decreased by 10.3%, or₩35 billion, from₩337 billion in 2016 to₩302 billion in 2017 primarily due to an increasea decrease in a loss from our currency swap contractsthe aggregate amount of borrowings for which we made interest payments as well as a resultgeneral decrease in interest rates in Korea in 2017.
Share of appreciationNet Profits (Losses) of the Won against the U.S. dollarAssociates and the Japanese Yen in 2017 compared to depreciation of the Won against such currencies in 2016. We entered into derivative instruments for foreign exchange risk hedging purposes and generally recognize net loss on valuation of derivatives when the Won appreciates against foreign currencies.
Income from Joint Ventures and Associates
We recognized loss from share of net profits fromof associates and joint ventures of₩3 billion in 2016, whereas we recognized share of net losses of associates and joint ventures of₩14 billion in 2017, whereas we recognized a gain of₩3 billion in 2016.2017.
Income Tax Expense
Income tax expense decreased by 17.4%19.2%, or₩5764 billion, from₩328335 billion in 2016 to₩271 billion in 2017, primarily due to a decrease in profit before income tax, which decreased by₩306350 billion, from₩1,1231,167 billion in 2016 to₩817 billion in 2017. See Note 2829 to the Consolidated Financial Statements.
Profit from Discontinued Operations
We did not have any profit from discontinued operations in 2016 and 2017.
Profit for the PeriodYear
Due to the factors described above, our profit for the periodyear decreased by 31.3%34.3%, or₩249286 billion, from₩795832 billion in 2016 to₩546 billion in 2017. Our net profit margin, which is net profit for the periodyear as a percentage of operating revenues was 3.5%revenue, decreased from 3.6% in 2016 andto 2.3% in 2017.
Segment Results—Customer/Marketing GroupMarketing/Customer
Our operating revenuesrevenue for this segment, prior to adjusting for inter-segment transactions, increased slightly by 0.6%0.3%, or₩9955 billion, from₩16,14416,187 billion in 2016 to₩16,243 billion in 2017 primarily due to increases in revenuesrevenue from our Internet services and data communication services, which was partially offset by decreases in revenuesrevenue from our mobile services and fixed-line telephone services, all as described above.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 3.0%6.8%, or₩3175 billion, from₩1,0501,093 billion in 2016 to₩1,019 billion in 2017, as the₩130 billion increase in operating expenses outpaced the₩9955 billion increase in the segment’s operating revenues.revenue. For this segment, operating margin, which is operating income as a percentage of total operating revenuesrevenue prior to adjusting for inter-segment transactions, was 6.5%decreased from 6.8% in 2016 andto 6.3% in 2017.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 0.9%, or₩26 billion, from₩2,870 billion in 2016 to₩2,896 billion in 2017.
Segment Results—Finance Group
Our operating revenuesrevenue for this segment, prior to adjusting for inter-segment transactions, increased by 1.7%, or₩60 billion, from₩3,578 billion in 2016 to₩3,638 billion in 2017 primarily due to an increase in commission revenuesrevenue of and an increase in disposal ofavailable-for-sale assets by BC Card, Co., Ltd., our financial subsidiary, which was partially offset by a decreased usage of foreign credit cards processed through BC Card, Co., Ltd., as described above.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 1.4%, or₩3 billion, from₩209 billion in 2016 to₩206 billion in 2017, as the₩63 billion increase in operating expenses outpaced the₩60 billion increase in the segment’s operating revenues.revenue. Operating margin for this segment decreased from 5.8% in 2016 to 5.7% in 2017.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 0.1%, or₩41 million, fromremained relatively stable at₩29 billion in each of 2016 to₩29 billion inand 2017.
Segment Results—Satellite TV Group
Our operating revenuesrevenue for this segment, prior to adjusting for inter-segment transactions, increased by 2.5%, or₩17 billion, from₩669 billion in 2016 to₩686 billion in 2017, primarily due to an increase in revenuesrevenue from an increase in the number of TV shopping channels and otherfee-generating platforms.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 6.3%5.8%, or₩5 billion, from₩80 billion in 2016 to₩75 billion in 2017, as the₩2221 billion increase in operating expenses outpaced the₩17 billion increase in the segment’s operating revenues.revenue. Operating margin for this segment decreased from 12.0% in 2016 to 10.9%11.0% in 2017.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 0.3%, or₩0.3 billion, fromremained relatively stable at₩99 billion in each of 2016 to₩99 billion inand 2017.
Segment Results—Others
Our operating revenuesrevenue for this segment, prior to adjusting for inter-segment transactions, increased by 5.5%5.4%, or₩344343 billion, from₩6,308 billion in 2016 to₩6,652 billion in 2017, primarily due to an increase in sale of handsets and an increase in revenuesrevenue from the development and sale of real estate by our consolidated subsidiary.
For this segment, prior to adjusting for inter-segment transactions, we recorded an operating income of₩40 billion in 2016, compared to an operating loss of₩187 billion in 2017, as the₩571570 billion increase in operating expenses outpaced the₩344343 billion increase in the segment’s operating revenuesrevenue in 2017. For this segment, operating margin was 0.6% in 2016 and the operating loss margin (operating loss as a percentage of total operating revenuesrevenue prior to adjusting for inter-segment transactions) was (2.8)% in 2017.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 2.1%, or₩7 billion, from₩339 billion in 2017 to₩332 billion in 2016.
Operating Results—2015 Compared to 2016
The following table presents selected income statement data and changes therein for 2015 and 2016:
For the Year Ended December 31, | Changes | |||||||||||||||
2015 vs. 2016 | ||||||||||||||||
2015 | 2016 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Operating revenues | ₩ | 22,700 | ₩ | 23,121 | ₩ | 421 | 1.9 | % | ||||||||
Revenue | 22,212 | 22,755 | 543 | 2.4 | ||||||||||||
Others | 488 | 366 | (122 | ) | (25.0 | ) | ||||||||||
Operating expenses | 21,623 | 21,781 | 158 | 0.7 | ||||||||||||
|
|
|
|
|
| |||||||||||
Operating profit (loss) | 1,077 | 1,340 | 263 | 24.4 | ||||||||||||
Finance income | 273 | 296 | 23 | 8.4 | ||||||||||||
Finance costs | (645 | ) | (515 | ) | 130 | (20.2 | ) | |||||||||
Income from joint ventures and associates | 6 | 3 | (3 | ) | (50.0 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Profit (loss) from continuing operations before income tax | 711 | 1,123 | 412 | 57.9 | ||||||||||||
Income tax expense (benefit) | 227 | 328 | 101 | 44.5 | ||||||||||||
Profit (loss) for the period from continuing operations | 484 | 795 | 311 | 64.3 | ||||||||||||
Profit from discontinued operations | 141 | — | (141 | ) | N.M. | |||||||||||
|
|
|
|
|
| |||||||||||
Profit (Loss) for the period | ₩ | 625 | ₩ | 795 | ₩ | 170 | 27.2 | |||||||||
|
|
|
|
|
|
N.M. means not meaningful.
Operating Revenues
The following table presents a breakdown of our operating revenues and changes therein for 2015 and 2016:
For the Year Ended December 31, | Changes | |||||||||||||||
2015 vs. 2016 | ||||||||||||||||
2015 | 2016 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Mobile services | ₩ | 7,260 | ₩ | 7,366 | ₩ | 106 | 1.5 | % | ||||||||
Fixed-line services | 6,755 | 6,917 | 162 | 2.4 | ||||||||||||
Fixed-line telephone services: | ||||||||||||||||
Monthly Basic Charges | 650 | 616 | (34 | ) | (5.2 | ) | ||||||||||
Monthly Usage Charges | 1,022 | 855 | (167 | ) | (16.3 | ) | ||||||||||
Others | 646 | 581 | (65 | ) | (10.1 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Sub-total | 2,318 | 2,053 | (265 | ) | (11.4 | ) | ||||||||||
Internet services: | ||||||||||||||||
Broadband Internet access service | 1,882 | 2,040 | 158 | 8.4 | ||||||||||||
Other Internet-related services | 1,479 | 1,799 | 320 | 21.6 | ||||||||||||
|
|
|
|
|
| |||||||||||
Sub-total | 3,361 | 3,839 | 478 | 14.2 | ||||||||||||
Data communication services | 1,076 | 1,025 | (51 | ) | (4.7 | ) | ||||||||||
Sale of goods | 2,756 | 2,808 | 52 | 1.9 | ||||||||||||
Financial services | 3,483 | 3,568 | 85 | 2.4 | ||||||||||||
Other | 2,446 | 2,462 | 16 | 0.7 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total operating revenues | ₩ | 22,700 | ₩ | 23,121 | ₩ | 421 | 1.9 | % | ||||||||
|
|
|
|
|
|
Total operating revenues increased by 1.9%, or₩421 billion, from₩22,700 billion in 2015 to₩23,121 billion in 2016 primarily due to increases in the revenues from our Internet services and mobile services, the impact of which was offset in part by a decrease in the revenues from our fixed-line telephone services.
Mobile Services
Our mobile services revenues increased by 1.5%, or₩106 billion, from₩7,260 billion in 2015 to₩7,366 billion in 2016 primarily due to a 4.7% increase in our mobile subscribers from approximately 18,038,000 as of December 31, 2015 to approximately 18,892,000 as of December 31, 2016. Such increase in our mobile subscribers was slightly enhanced by an increase in our average revenue per user. However, the magnitude of the increase in our average revenue per user in 2016 was smaller, as compared to 2015 because many of our new mobile subscribers in 2016 purchased economical rate plans for their secondary mobile devices. Accordingly, although the increase in our mobile subscribers in 2016 was larger, as compared to 2015, the increase in our mobile services revenues in 2016 was smaller than the increase in our mobile services revenues in 2015 primarily due to a decrease in the magnitude of the increase in our average revenue per user in 2016, as compared to 2015.
Fixed-line Services
Our fixed-line services revenues in the aggregate increased by 2.4%, or₩162 billion, from₩6,755 billion in 2015 to₩6,917 billion in 2016 primarily due to an increase in Internet services revenues, the impact of which was partially offset by decreases in our fixed-line telephone services revenues and data communication services revenues.
Fixed-line Telephone Services. Our fixed-line telephone services revenues decreased by 11.4%, or₩265 billion, from₩2,318 billion in 2015 to₩2,053 billion in 2016 due to decreases in monthly usage charges, other fixed-line telephone services revenues and monthly basic charges. Specifically:
Internet Services. Our Internet service revenues increased by 14.2%, or₩478 billion, from₩3,361 billion in 2015 to₩3,839 billion in 2016 primarily due to an increase in the number of IPTV subscribers from approximately 6.6 million as of December 31, 2015 to approximately 7.0 million as of December 31, 2016 and an increase in the number of our olleh GiGA Internet Service subscribers from approximately 1.0 million as of December 31, 2015 to approximately 2.4 million as of December 31, 2016.
Data Communication Services. Our data communication services revenues decreased by 4.7%, or₩51 billion, from₩1,076 billion in 2015 to₩1,025 billion in 2016 primarily due to a decrease in revenues from our leased lines, resulting from increased competition in the data communications market in Korea.
Sale of Goods
Revenues from sale of goods increased by 1.9%, or₩52 billion, from₩2,756 billion in 2015 to₩2,808 billion in 2016 primarily due to an increase in revenues from development and sale of real estate by KT Estate Inc. which was partially offset by a decrease in the sale of mobile handsets in 2016 compared to 2015. The number of mobile handsets sold in 2016 decreased largely due to order cancellation and customer returns of Samsung Galaxy Note 7 handsets, caused by the handsets’ explosive battery issue.
Financial Services
Financial services revenues increased by 2.4%, or₩85 billion, from₩3,483 billion in 2015 to₩3,568 billion in 2016 primarily due to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd., primarily as a result of increased usage of credit cards.
Others
Other operating revenues increased by 0.7%, or₩16 billion, from₩2,446 billion in 2015 to₩2,462 billion in 2016 primarily due to increases in revenues from our real estate lease business and systems integration business.
Operating Expenses
The following table presents a breakdown of our operating expenses and changes therein for 2015 and 2016:
For the Year Ended December 31, | Changes | |||||||||||||||
2015 vs. 2016 | ||||||||||||||||
2015 | 2016 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Salaries and wages | ₩ | 3,303 | ₩ | 3,478 | ₩ | 175 | 5.3 | % | ||||||||
Depreciation | 2,756 | 2,763 | 7 | 0.3 | ||||||||||||
Commissions | 1,037 | 1,099 | 62 | 6.0 | ||||||||||||
Interconnection charges | 689 | 690 | 1 | 0.1 | ||||||||||||
Purchase of inventories | 3,963 | 3,407 | (556 | ) | (14.0 | ) | ||||||||||
Changes of inventories | (198 | ) | 162 | 360 | N.M. | |||||||||||
Sales commission | 1,857 | 1,968 | 111 | 6.0 | ||||||||||||
Service cost | 1,164 | 1,322 | 158 | 13.6 | ||||||||||||
Card service costs | 2,960 | 3,050 | 90 | 3.0 | ||||||||||||
Others(1) | 4,092 | 3,842 | (250 | ) | (6.1 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total operating expenses | ₩ | 21,623 | ₩ | 21,781 | ₩ | 158 | 0.7 | % | ||||||||
|
|
|
|
|
|
N.M. means not meaningful.
Total operating expenses increased by 0.7%, or₩158 billion, from₩21,623 billion in 2015 to₩21,781 billion in 2016 primarily due to increases in changes of inventories, salaries and wages and service cost, the impact of which was largely offset by decreases in purchase of inventories and certain other operating expenses described below. Specifically:
These factors were partially offset by the following:
Operating Profit
Due to the factors described above, our operating profit increased by 24.4%, or₩263 billion, from₩1,077 billion in 2015 to₩1,340 billion in 2016. Our operating margin, which is operating profit as a percentage of operating revenues, was 4.7% in 2015 and 5.8% in 2016.
Finance Income (Costs)
The following table presents a breakdown of our finance income and costs and changes therein for 2015 and 2016:
For the Year Ended December 31, | Changes | |||||||||||||||
2015 vs. 2016 | ||||||||||||||||
2015 | 2016 | Amount | % | |||||||||||||
(In billions of Won) | ||||||||||||||||
Interest income | ₩ | 70 | ₩ | 116 | ₩ | 46 | 65.7 | % | ||||||||
Interest expense | (386 | ) | (337 | ) | 49 | (12.7 | ) | |||||||||
Net foreign currency transaction gain (loss) | (24 | ) | (13 | ) | 11 | (45.8 | ) | |||||||||
Net foreign currency translation gain (loss) | (164 | ) | (110 | ) | 54 | (32.9 | ) | |||||||||
Net gain (loss) on settlement of derivatives | (6 | ) | 8 | 14 | N.M. | |||||||||||
Net gain on valuation of derivatives | 140 | 109 | (31 | ) | (22.1 | ) | ||||||||||
Net other finance costs(1) | (2 | ) | 8 | 10 | N.M. | |||||||||||
|
|
|
|
|
| |||||||||||
Net finance costs | ₩ | (372 | ) | ₩ | (219 | ) | ₩ | 153 | (41.1 | )% | ||||||
|
|
|
|
|
|
N.M. means not meaningful.
Our net finance costs decreased by 41.1%, or₩153 billion, from₩372 billion in 2015 to₩219 billion in 2016, primarily due to decreases in net foreign currency translation loss and interest expense and an increase in interest income, the impact of which was partially offset by a decrease in net gain on valuation of derivatives. Specifically:
These factors were partially offset by the following:
Our net gain on valuation of derivatives decreased by 22.1%, or₩31 billion, from₩140 billion in 2015 to₩109 billion in 2016, primarily due to a decrease in gains from our currency swap contracts as a result of smaller depreciation of the Won against the
|
Income from Joint Ventures and Associates
Income from joint ventures and associates decreased by 50.0%, or₩3 billion, from₩6 billion in 2015 to₩3 billion in 2016, primarily due to a loss from joint ventures and associates recognized in connection with a sale of certain real estate by our wholly-owned subsidiary KT Estate Inc. to one of our associates and joint ventures,K-Realty Rental Housing REIT 2.
Income Tax Expense
Income tax expense increased by 44.5%, or₩101 billion, from₩227 billion in 2015 to₩328 billion in 2016, primarily due to an increase in profit before income tax, which increased by₩412 billion, from₩711 billion in 2015 and₩1,123 billion in 2016. See Note 28 to the Consolidated Financial Statements.
Profit from Discontinued Operations
We did not have any profit from discontinued operations in 2016, whereas our profit from discontinued operations in 2015 was₩141 billion, primarily due to recognition of net proceeds from the sale of capital stock of KT Rental Co., Ltd and KT Capital Co., Ltd. as profit from discontinued operations in 2015.
Profit for the Period
Due to the factors described above, our profit for the period increased by 27.2%, or₩170 billion, from₩625 billion in 2015 to₩795 billion in 2016. Our net profit margin, which is net profit for the period as a percentage of operating revenues was 2.8% in 2015 and 3.5% in 2016.
Segment Results—Customer/Marketing Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased slightly by 0.1%, or₩14 billion, from₩16,130 billion in 2015 to₩16,144 billion in 2016 primarily due to increase in revenues from our Internet services and mobile services, primarily due to an increase in subscribers, which was partially offset by a decrease in the fixed-line services revenues, all as described above.
Our operating income for this segment, prior to adjusting for inter-segment transactions, increased by 28.6%, or₩233 billion, from₩817 billion in 2015 to₩1,050 billion in 2016, as the segment’s operating expenses decreased by₩219 billion while the segment’s operating revenue increased by₩14 billion as described above. For this segment, operating margin, which is operating income as a percentage of total operating revenues prior to adjusting for inter-segment transactions, was 5.1% in 2015 and 6.5% in 2016.
Depreciation and amortization, prior to adjusting for inter-segment transactions, decreased by 1.0%, or₩28 billion, from₩2,898 billion in 2015 to₩2,870 billion in 2016.
Segment Results—Finance Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 1.9%, or₩65 billion, from₩3,513 billion in 2015 to₩3,578 billion in 2016 primarily due
to an increase in commission revenues from our financial subsidiaries, in particular BC Card Co., Ltd, as described above.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 25.6%, or₩72 billion, from₩281 billion in 2015 to₩209 billion in 2016, as the₩137 billion increase in operating expenses outpaced the₩65 billion increase in the segment’s operating revenues. Operating margin for this segment decreased from 8.0% in 2015 to 5.8% in 2016.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 16.0%, or₩4 billion, from₩25 billion in 2015 to₩29 billion in 2016.
Segment Results—Satellite TV Group
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, slightly increased by 0.1%, or₩0.4 billion, from₩668.5 billion in 2015 to₩668.9 billion in 2016, primarily due to an increase in revenues from an increase in the number of TV shopping channels and otherfee-generating platforms.
Our operating income for this segment, prior to adjusting for inter-segment transactions, decreased by 18.1%, or₩18 billion, from₩98 billion in 2015 to₩80 billion in 2016, as the₩18 billion increase in operating expenses outpaced the₩0.4 billion increase in the segment’s operating revenues. Operating margin for this segment decreased from 14.6% in 2015 to 12.0% in 2016.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 3.1%, or₩3 billion, from₩96 billion in 2015 to₩99 billion in 2016.
Segment Results—Others
Our operating revenues for this segment, prior to adjusting for inter-segment transactions, increased by 3.1%, or₩192 billion, from₩6,116 billion in 2015 to₩6,308 billion in 2016, primarily due to increases in revenues from the development and sale of real estate by our consolidated subsidiary.
For this segment, prior to adjusting for inter-segment transactions, we recorded an operating loss of₩100 billion in 2015, compared to an operating income of₩40 billion in 2016, as the₩192 billion increase in operating revenues outpaced the₩52 billion increase in the segment’s operating expenses in 2016. For this segment, operating loss margin (operating loss as a percentage of total operating revenues prior to adjusting for inter-segment transactions) was (1.6)% in 2015 and the operating margin was 0.6% in 2016.
Depreciation and amortization, prior to adjusting for inter-segment transactions, increased by 7.6%, or₩24 billion, from₩315 billion in 2015 to₩339 billion in 2016.
Item 5.B. Liquidity and Capital Resources
The following table sets forth the summary of our cash flows for the periodsyears indicated:
For the Years Ended December 31, | ||||||||||||
2015 | 2016 | 2017 | ||||||||||
(In billions of Won) | ||||||||||||
Net cash provided by operating activities | ₩ | 4,230 | ₩ | 4,771 | ₩ | 3,878 | ||||||
Net cash used in investing activities | (2,402 | ) | (3,485 | ) | (3,483 | ) | ||||||
Net cash provided by (used in) financing activities | (1,164 | ) | (943 | ) | (1,363 | ) | ||||||
Cash and cash equivalents at beginning of period | 1,889 | 2,559 | 2,900 | |||||||||
Cash and cash equivalents at end of period | 2,559 | 2,900 | 1,928 | |||||||||
Net increase (decrease) in cash and cash equivalents | 670 | 341 | (972 | ) |
For the Years Ended December 31, | ||||||||||||
2016 | 2017 | 2018 | ||||||||||
(In billions of Won) | ||||||||||||
Net cash inflow from operating activities | ₩ | 4,771 | ₩ | 3,878 | ₩ | 4,010 | ||||||
Net cash outflow from investing activities | (3,485 | ) | (3,483 | ) | (2,704 | ) | ||||||
Net cash outflow from financing activities | (943 | ) | (1,363 | ) | (532 | ) | ||||||
Cash and cash equivalents at beginning of the year | 2,559 | 2,900 | 1,928 | |||||||||
Cash and cash equivalents at end of the year | 2,900 | 1,928 | 2,703 | |||||||||
Net increase (decrease) in cash and cash equivalents | 341 | (972 | ) | 775 |
Capital Requirements
Historically, our capital requirements consisted principally of purchases of property and equipment and other assets and repayments of borrowings. In our investing activities, we used cash of₩3,116 billion in 2015,₩2,764 billion in 2016, and₩2,442 billion in 2017 and₩2,261 billion in 2018 for the acquisition of property and equipment and investment properties. In our financing activities, we used cash of₩6,648 billion in 2015,₩1,769 billion in 2016, and₩1,780 billion in 2017 and₩1,613 billion in 2018 for repaymentrepayments of borrowings and debentures.
From time to time, we may also require capital for investments involving acquisitions, including shares of our affiliates, and strategic relationships. For example, in October 2011, we, through our former subsidiary KT Capital Co., Ltd., acquired an additional 1,622,520 common shares of BC Card Co., Ltd. from Woori Bank, Busan Bank and Shinhan Card for approximately₩252 billion. We acquired an additional 1,349,920 common shares of BC Card Co., Ltd. in January 2012 for approximately₩287 billion, and owned 69.5% interest in BC Card Co., Ltd. as of December 31, 2017. Any such additional investments or acquisitions may require significant capital.
Our cash dividends paid to shareholders andnon-controlling interests amounted to₩42 billion in 2015,₩184 billion in 2016, and₩243 billion in 2017.2017 and₩299 billion in 2018.
We anticipate that capital expenditures and repayment of outstanding contractual obligations and commitments will represent the most significant use of funds for the next several years. We may also require capital for purchase of shares of our affiliates as well as investments involving acquisitions and strategic relationships. We compete primarily in the telecommunications sectorandInternet-related markets in Korea, which isare rapidly evolving. In recent years, competition among us, SK Telecom and LG U+ to commercialize 5G mobile services has intensified and we have made and will continue to make capital expenditure to develop 5G mobile service capabilities and technologies. We may need to incur additional capital expenditures to keep up with unexpected developments in rapidly evolving telecommunications technology. There can be no assurance that we will be able to secure funds on satisfactory terms from financial institutions or other sources that are sufficient for our unanticipated needs.
Payments of contractual obligations and commitments will also require considerable resources. In our ordinary course of business, we routinely enter into commercial commitments for various aspects of our operations, including repair and maintenance. We have also provided guarantees to our affiliates. See Note 1920 to the Consolidated Financial Statements for a disclosure of the guarantees provided.
The following table sets forth selected information regarding our contractual obligations to make future payments as of December 31, 2017:2018:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations(1) | Total | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
(In billions of Won) | ||||||||||||||||||||
Long-term debt obligations (including current portion of long-term debt) | ₩ | 6,575 | ₩ | 1,446 | ₩ | 1,763 | ₩ | 1,436 | ₩ | 1,930 | ||||||||||
Finance lease obligations (including any interests) | 220 | 88 | 103 | 29 | — | |||||||||||||||
Operating lease obligations | 377 | 109 | 174 | 92 | 2 | |||||||||||||||
Severance payment obligations(2) | 4,714 | 143 | 377 | 430 | 3,764 | |||||||||||||||
Asset retirement obligations | 115 | 32 | 14 | 9 | 60 | |||||||||||||||
Long-term accounts payable—others | 1,086 | 222 | 446 | 277 | 141 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | ₩ | 13,087 | ₩ | 2,040 | ₩ | 2,877 | ₩ | 2,273 | ₩ | 5,897 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Estimate of interest payment based on contractual interest rates effective as of December 31, 2017 | ₩ | 1,006 | ₩ | 183 | ₩ | 270 | ₩ | 172 | ₩ | 381 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations(1) | Total | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
(In billions of Won) | ||||||||||||||||||||
Long-term debt obligations (including current portion of long-term debt) | ₩ | 6,576 | ₩ | 1,276 | ₩ | 2,388 | ₩ | 911 | ₩ | 2,001 | ||||||||||
Finance lease obligations (including any interests) | 202 | 78 | 102 | 22 | — | |||||||||||||||
Operating lease obligations | 374 | 109 | 185 | 79 | 1 | |||||||||||||||
Severance payment obligations(2) | 5,108 | 183 | 453 | 499 | 3,973 | |||||||||||||||
Asset retirement obligations | 119 | 31 | 11 | 8 | 69 | |||||||||||||||
Long-term accounts payable—others | 1,825 | 355 | 687 | 297 | 486 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | 14,204 | 2,032 | 3,826 | 1,816 | 6,530 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Estimate of interest payment based on contractual interest rates effective as of December 31, 2018 | ₩ | 968 | ₩ | 150 | ₩ | 247 | ₩ | 176 | ₩ | 395 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Contractual obligations represent contractual liabilities as of the consolidated balance sheet date excluding refundable deposits for telephone installation and accruals for customer call bonus points, which do not have definitive payment schedules. |
(2) | The amount represents undiscounted pension benefit as of December 31, |
Capital Resources
We have traditionally met our working capital and other capital requirements principally from cash provided by operations, while raising the remainder of our requirements primarily through debt financing. From time to time, we have also disposed of our treasury shares to meet our capital requirements.
Our major sources of cash have been net cash provided by operating activities, including profits for the period,year, expenses not involving cash payments such as depreciation and amortization, and proceeds from issuance of bonds and borrowings. We expect that these sources will continue to be our principal sources of cash in the future. We recorded profits for the periodyear of₩625832 billion in 2015,₩795 billion in 2016, and₩546 billion in 2017 and₩719 billion in 2018 as discussed in “Item 5.A. Operating Results.”Non-cash expense adjustments in our statement of cash flows from depreciation and amortization of intangible assets amounted to₩3,640 billion in 2015,₩3,422 billion in 2016, and₩3,438 billion in 2017 and₩3,365 billion in 2018, primarily reflecting our capital investment activities during the recent years, including our purchase of bandwidthsbandwidth licenses for our operations, investments inLTE-related structures network infrastructures and acquisition of real estate. Cash proceeds from borrowings and debentures were₩5,675 billion in 2015,₩1,123 billion in 2016, and₩616 billion in 2017.2017 and₩1,473 billion in 2018. As of December 31, 2017,2018, we held 16,014,753 treasury15,967,040treasury shares.
Since 2012, we have disposed of a portion of our trade receivables relating to handset sales to several special purpose companies, as part of our efforts to improve our cash and asset management. We also entered into asset management agreements with each of these special purpose companies, and will be receiving management fees from such companies. See Note 1920 to the Consolidated Financial Statements.
We believe that we have sufficient working capital available to us for our current requirements and that we have a variety of alternatives available to us to satisfy our financial requirements to the extent that they are not met by funds generated by operations, including the issuance of debt securities and bank borrowings denominated in Won and various foreign currencies. For example, we successfully issued (i) three series of notes for an aggregate amount of₩450 billion in January 2015, (ii) Japanese Yen 15 billion of 0.48% notes due 2018 in February 2015, (iii) US$400 million of 2.500% notes due 2026 in July 2016, and (iv)(ii) US$400 million of 2.625% notes due 2022 in August 2017.2017, (iii) US$200 million of LIBOR(3M)+0.450% notes due 2020 in August 2018,
(iv) US$100 million of LIBOR(3M)+0.900% notes due 2023 in August 2018 and (v) Japanese Yen 30 billion of 0.300% notes due 2020 in November 2018. See Note 1516 to the Consolidated Financial Statements. However, our ability to rely on some of these alternatives could be affected by factors such as the liquidity of the Korean and the global financial markets, prevailing interest rates, our credit rating and the Government’s policies regarding Won currency and foreign currency borrowings. Other factors which could materially affect our liquidity in the future include unanticipated increase in capital expenditures and decrease in cash provided by operations resulting from a significant decrease in demand for our services. We may also need to raise additional capital sooner than we expect in order to fund unanticipated investments and acquisitions.
Our total equity was₩12,15612,917 billion as of December 31, 2015,2016,₩12,78313,183 billion as of December 31, 20162017 and₩13,04914,658 billion as of December 31, 2017.2018.
Liquidity
We had a working capital (current assets minus current liabilities) deficitsurplus of₩56327 billion as of December 31, 2015 and a working capital surplus of2016,₩193354 billion as of December 31, 20162017 and
₩2202,764 billion as of December 31, 2017.2018. The following table sets forth the summary of our significant current assets for the periodsyears indicated:
As of December 31, | As of December 31, | |||||||||||||||||||||||
2015 | 2016 | 2017 | 2016 | 2017 | 2018 | |||||||||||||||||||
(In billions of Won) | (In billions of Won) | |||||||||||||||||||||||
Cash and cash equivalents | ₩ | 2,559 | ₩ | 2,900 | ₩ | 1,928 | ₩ | 2,900 | ₩ | 1,928 | ₩ | 2,703 | ||||||||||||
Trade and other receivables, net | 4,854 | 5,327 | 5,814 | 5,478 | 5,965 | 5,680 | ||||||||||||||||||
Inventories, net | 617 | 455 | 642 | 455 | 642 | 1,075 | ||||||||||||||||||
Other financial assets | 293 | 721 | 973 | 721 | 973 | 995 |
Our cash and cash equivalents (substantially all of which are in Won) totaled₩2,559 billion as of December 31, 2015,₩2,900 billion as of December 31, 2016, and₩1,928 billion as of December 31, 2017.2017 and₩2,703 billion as of December 31, 2018. Under IFRS as issued by IASB, bank deposits held at call and all other highly liquid temporary cash instruments within maturities of three months are considered as cash equivalents. Other current financial assets primarily consist of financial instruments,available-for-sale financial assets and derivativesderivative assets used for hedge.hedging.
The following table sets forth the summary of our significant current liabilities for the periodsyears indicated:
As of December 31, | As of December 31, | |||||||||||||||||||||||
2015 | 2016 | 2017 | 2016 | 2017 | 2018 | |||||||||||||||||||
(In billions of Won) | (In billions of Won) | |||||||||||||||||||||||
Trade and other payables | ₩ | 6,335 | ₩ | 7,140 | ₩ | 7,424 | ₩ | 7,142 | ₩ | 7,426 | ₩ | 7,008 | ||||||||||||
Borrowings | 1,726 | 1,820 | 1,573 | 1,820 | 1,573 | 1,368 |
Substantially all of our revenues are denominated in Won. Depreciation of the Won would have an adverse effect on ourmay materially affect the results of our operations as a result of,because, among other things, increasesit causes an increase in the amount of Won required by us to make interest and principal payments on our foreign currency-denominated debt, the prices in Woncosts of telecommunications equipment that we purchase from overseas sources, net settlement payments to foreign carriers and certain payments related to our derivative instruments entered into for foreign exchange risk hedging purposes. As of December 31, 2017,2018, we entered into various commitments with financial institutions totaling₩2,8812,945 billion and US$254 million.233 million, of which₩607 billion and US$137 million was used. See Note 1920 to the Consolidated Financial Statements. As of December 31, 2017,₩563 billion and US$181 million was used under these facilities. Of the₩6,6846,648 billion total book value of debentures and borrowings outstanding as of December 31, 2017,2018,₩2,0622,392 billion was denominated in foreign currencies. See Note 16 to the
Consolidated Financial Statements. Upon the identification and evaluation of our currency risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to manage some of such risks. See and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Exchange Rate Risk and Interest Rate Risk.” We have not had, and do not believeanticipate that we will have, difficulty gaining access to short-term financing sufficient to meet our current requirements.
Capital Expenditures
We used cash of₩3,116 billion in 2015,₩2,764 billion in 2016, and₩2,442 billion in 2017 and₩2,261 billion in 2018 for the acquisition of property, plant and equipment and investment property.
Our current We currently expect our capital expenditure plan, on a separate basis, calls for the expenditureacquisition of approximatelyproperty, plant and equipment and investment property in 2019 to increase compared to the₩2,3002,261 billion incurred in 2018, which may be adjustedand remain subject to adjustment depending on market conditions, and our results of operations. The principal components ofoperations and changes in our capital investment plans are:
5G mobile telecommunications network.
Inflation
We do not consider that inflation in Korea has had a material impact on our results of operations in recent years. According to data published by the Bank of Korea, annual inflation in Korea was 0.7% in 2015, 1.0% in 2016, and 1.9% in 2017.2017 and 1.5% in 2018. See “Item 3. Key Information—Item 3.D. Risk Factors—Korea is our most important market, and our current business and future growth could be materially and adversely affected if economic or political conditions in Korea deteriorate.”
Item 5.C.Research and Development, Patents and Licenses, Etc.
In order to maintain our leadership in the converging telecommunications business environment and develop additional platforms, services and applications, we operate:engage in research and development (“R&D”) activities in our various business units and also operate the following R&D laboratories:
a service R&D laboratory; and
a convergence R&D laboratory.
As of December 31, 2017,2018, KT Corporation had 5,0194,892 domestic and 1,177 international registered patents domestically and 1,044 registered patents internationally.patents.
The MSIT has the authority to recommend to network service providers that they provide funds for national research and development of telecommunications technology and related projects. The required annual contribution is 0.5% (0.75% for market dominant service providers like us) of revenues attributable to key communications services (excluding revenues from telecommunications service using an allotted frequency if the consideration for such allotted frequency has been paid) from wireless subscribers for the previous year, and is applicable only to those network service providers who have at least₩30 billion in total sales for the previous year and have recorded no net loss in the current period. Under the policy, the maximum amount of the annual contribution to be made cannot exceed 70.0% of the net profit for the corresponding period of each company. Including such contributions, total expenditures (which include capitalized expenses) on research and development were₩225215 billion in 2015,2016,₩204435 billion in 20162017 and₩416273 billion in 2017.2018.
In recent years, we have focused our research and development efforts in the following areas:
These matters are discussed under Item 5.A. above where relevant.
Item 5.E.Off-balance Sheet Arrangements
These matters are discussed under Item 5.B. above where relevant.
Item 5.F.Tabular Disclosure of Contractual Obligations
These matters are discussed under Item 5.B. above where relevant.
See “Item 3. Key Information—Item 3.D. Risk Factors—Forward-looking statements may prove to be inaccurate.”
Item 6. Directors, Senior Management and Employees
Item 6.A.Directors and Senior Management
Directors
Our board of directors has the ultimate responsibility for the administration of our affairs. Our articles of incorporation provide for a board of directors consisting of:
up to three standing directors, including the chief executive officer; and
up to eight outside directors.
All of our directors are elected at the general shareholders’ meeting. If the total assets of a company listed on the KRX KOSPI Market exceed₩2,000 billion as of the end of the preceding year,
which is the case with us, the Commercial Code of Korea requires such company to have more than three outside directors, with outside directors being the majority of the board of directors. The term of office for a director is up to three years, but the term is extended to the close of the annual shareholders’ meeting convened with respect to the last full fiscal year of a director’s term of office. If the term of office for a director is not completed and ends before the close of the annual general shareholders’ meeting and a new director is appointed in his or her place, the term of office for such replacement director will coincide with the uncompleted remaining term of office of his or her predecessor.
Under the Commercial Code of Korea, we must establish a committee to nominate candidates for outside directors within the board of directors, and outside directors must make up more than half of the total members of the outside director candidate nominating committee. According to our articles of incorporation, such committee must consist of one standing director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. Our Outside Director Candidate Nominating Committee nominates outside director candidates for appointment at the general shareholders’ meeting.
Upon the request of any director (to the extent that the board of directors does not separately authorize only a particular director to make such request), a meeting of the board of directors will be assembled. The chairperson of the board of directors is elected from among the outside directors by a resolution of the board of directors. The term of office of the chairperson is one year.
Our current directors are as follows:
Name | Position | Director Since | Date of Birth | Expiration of Term of Office | ||||||||||
Standing Directors(1) | ||||||||||||||
Chang-Gyu Hwang | Chief Executive Officer | January 2014 | January 23, 1953 | 2020 | ||||||||||
Dong-Myun Lee | President, Head of Future Platform Business Group | March 2019 | October 15, 1962 | 2020 | ||||||||||
| President, | March | ||||||||||||
|
| |||||||||||||
Outside Directors(1) | ||||||||||||||
|
| |||||||||||||
|
| |||||||||||||
Jong-Gu Kim | Corporate lawyer, New Dimension Law Group | March 2014 | July 7, 1941 | 2020 | ||||||||||
Suk-Gwon Chang |
| March 2014 | February 21, 1956 | 2020 | ||||||||||
Gae-Min Lee | FormerEditor-in-Chief, The Korea Economic Daily | March 2017 | November 1, 1946 | 2020 | ||||||||||
Il Im | Professor, Business Administration, Yonsei University | March 2017 | March 20, 1966 | 2020 | ||||||||||
|
| March 2018 | July 21, 1951 | 2021 | ||||||||||
|
| March 2018 | May 6, 1947 | 2021 | ||||||||||
Hee-Yol Yu | Chair-Professor, Pusan National University | March 2019 | January 12, 1947 | 2022 | ||||||||||
Tae-Yoon Sung | Professor, School of Economics, Yonsei University | March 2019 | February 13, 1970 | 2022 |
(1) | All of our standing and outside directors beneficially own less than one percent of the issued shares of KT Corporation in the aggregate. |
Chang-Gyu Hwang has served as our standing director since 2014 and has served as our chief executive officer since January 2014. Prior to joining us,Previously, he served as a Distinguished Chair Professordistinguished chair professor at Sungkyunkwan University, president and National Chief Technology Officernational chief technology officer of the Office of Strategic Research and Development Planning at the former Ministry of Knowledge and Economy, president and chief technology officer of the Corporate Technology Office at Samsung Electronics Co., Ltd. and as president and chief executive officer of the Semiconductor Business at Samsung Electronics Co., Ltd. Mr. Hwang holds a bachelor’s degree and a master’s degree in electricelectrical engineering from Seoul National University and a Ph.D. in electronic and computer engineering from the University of Massachusetts, Amherst.
Hyeon Mo KuDong-Myun Lee has served as our standing director since March 20162019 and has served as the head of our president and chief strategy officerFuture Platform Business Group since December 2015. He has previously served as chief secretary to our chief executive officer since 2014. Before that,November 2018. Previously, he served as chief operating officerthe head of the Telecom &Institute of Convergence Business department.Technology. Mr. KuLee holds a bachelor’s degree in Industrial Engineeringelectrical engineering from Seoul National University and a Ph. D.master’s degree and a Ph.D. in Management Engineeringelectrical engineering from the Korea Advanced Institute of Science and Technology.
Seong Mok OhIn-Hoe Kim has served as our standing director since 2018March 2019 and has served as the president and the head of our Corporate Planning Group since November 2018. Previously, he served as the head of the Network Group since 2013. He has previously served as an executive officer of our mobile network business unit and mobile operation and management sales unit since 2009. Mr. Oh holds bachelor’s, masters and Ph.D. degrees in electrical engineering from Yonsei University.
Do Kyun Songhas served as our outside director since March 2013. He is currently a senior advisor to the law firm of Bae, Kim & Lee LLC. He was formerly a standing member of the KCCCEO office and the chief executive officerhead of Seoul Broadcasting System Co., Ltd.Financial Management Office. Mr. SongKim holds a bachelor’s degree in Spanish literature from Hankuk University of Foreign Studies.
Sang Kyun Cha has served as our outside director since March 2012. He is currently a professor of electrical and computer engineering at Seoul National University. Previously, he founded Transact In Memory, Inc., a next-generation memory database management system development company in the United States which was acquired by SAP AG in 2005, and was subsequently transformed into SAP Labs Korea, Inc. Mr. Cha holds a bachelor’s degree in electronic engineeringinternational economics from Seoul National University and a Ph.D.master’s degree in database systemsbusiness administration from Stanford University.the Korea Advanced Institute of Science and Technology.
Jong-Gu Kimhas served as our outside director since March 2014. He is currently a corporate lawyer at the New Dimension Law Group. Previously, he served as the minister of the Ministry of
Justice and as the head of the Seoul Supreme Prosecutors’ Office. Mr. Kim holds both a bachelor’s degree in law from Seoul National University and a Ph.D. in law from Dongguk University.
Suk-Gwon Chang has served as our outside director since March 2014. He is currently the deana professor of the School of Business at Hanyang University. Mr. Chang was formerlyPreviously, he served as the dean of Hanyang Cyber University Graduate School and the president of the Korea Association for Telecommunication Policy and Korea Media Management Association. Mr. Chang holds a bachelor’s degree in industrial engineering from Seoul National University and a Ph.D. in management science from Korea Advanced Institute of Science and Technology.
Gae-Min Lee has served as our outside director since March 2017. He was formerlyPreviously, he served as an advisor to the Korea News Editors’ Association Fund,editor-in-chief of The Korea Economic Daily and chief executive officer of Hankyung.com. Mr. Lee holds a bachelor’s degree and a Ph.D. in Economics from Kyung Hee University.
Il Im has served as our outside director since March 2017. He is currently a professor of business administration at Yonsei University,University. Previously, he served as a vice headmaster of the Yonsei Graduate School of
Business and a vice chairman of the Korean Academic Society of Business Administration. Mr. Im holds a bachelor’s degree and a master’s degreesdegree in business administration from Seoul National University and a Ph. DPh.D. in information systems from the University of Southern California.
Dae-youDae-You Kim has served as our outside director since March 2018. He formerlyis currently an outside director of DB Life Insurance Co., Ltd. Previously, he served as the vice chairman of Wonik Investment Partners and a professor of Hanyang University. He also previously served as a presidential secretary for economic policies to the President of Korea. Mr. Kim holds a bachelor’s degree in export studies at Seoul National University and a masters’ degree in public policy from the University of Wisconsin.
Gang-chulGang-Cheol Lee has served as our outside director since March 2018. He is currentlyserved as an independentauditing director of Ultra V Co., Ltd. and previouslyPreviously, he served as a presidential secretary of civil society policies to the President of Korea. Mr. Lee holds a bachelor’s degree in political science and diplomacy from Kyungpook National University.
Hee-Yol Yu has served as our outside director since March 2019. He is currently a chief-professor at Pusan National University and a board chairperson of the Korea Carbon Capture and Sequestration R&D Center. Previously, he served as vice minister of the Ministry of Science & Technology. Mr. Yu holds a bachelor’s degree in liberal arts and sciences from Seoul National University and a master’s degree in public administration from Seoul National University. He also holds a master of philosophy degree in technology innovation of the science policy research unit from Sussex University and a Ph.D in politics and science and technology policy making from Korea University.
Tae-Yoon Sung has served as our outside director since March 2019. He is currently a professor of economics at Yonsei University, a dean of the Yonsei Underwood International College and an editorial board member of the Korean Economic Review at Korean Economic Association. Mr. Sung holds a bachelor’s degree and a master’s degree in economics from Yonsei University and a Ph.D. in economics from Harvard University.
For the purposes of the Korean Commercial Code, our chief executive officer is deemed to be the “representative director” who is authorized to perform all judicial and extra-judicial acts relating to our business. Our shareholders elect the chief executive officer in accordance with the provisions of the Commercial Code and our articles of incorporation. In March 2018, we amended our articles of
incorporation in efforts to add more rigor and transparency to the process of selecting our chief executive officer. Our Corporate Governance Committee conducts investigation and composition of a pool of candidates and selects chief executive officer candidates whose candidacy will be further examined. Subsequently, the President Candidate Examination Committee examines and selects chief executive officer candidates and submits an examination report of such candidates to our board of directors. A chief executive officer candidate recommended by our board of directors is nominated at the shareholders’ meeting.
Under our articles of incorporation, the board of directors must submit a draft management contract between KT Corporation and the candidate covering our management objectives to the shareholders’ meeting at the time of candidate nomination to the meeting. When the draft management contract has been approved at the shareholders’ meeting, we enter into such management contract with the chief executive officer. In such case, the chairperson of the board of directors, on our behalf, signs the management contract.
The board of directors may conduct performance review discussions to determine if the new chief executive officer performed his or her duties under the management contract, or hire a professional evaluation agency for such purpose. If the board of directors determines, based on the results of the performance review, that the new chief executive officer has failed to achieve the management goals, it may propose to dismiss the chief executive officer at a shareholders’ meeting.
Senior Management
OurIn addition to our standing directors who are also our executive officers, consist of presidents and senior executive vice presidents. Thewe have the following executive officers other than the standing directors are appointed by the chief executive officer.
The current executive officers are as follows:of March 31, 2019:
Name | Title and Responsibilities | ||||||||||
Hyeon-Mo Ku | President, Customer & Media Business Group | ||||||||||
| President, | ||||||||||
| Senior Executive Vice President, | ||||||||||
Byung-Sam Park | Senior Executive Vice President, Legal Affairs Office | ||||||||||
Yoon-Young Park | Senior Executive Vice President, Enterprise Business Group | 1962 | |||||||||
| Senior Executive Vice President, | ||||||||||
Soo-Jung Shin | Senior Executive Vice President, IT Planning Office | 1965 | |||||||||
| |||||||||||
| |||||||||||
Jong-Jin Yoon | Senior Executive Vice President, Public Relations Office | 1964 | |||||||||
| Senior Executive Vice President, | ||||||||||
| Senior Executive Vice President, Institute of Convergence Technology | 1962 | |||||||||
Young-Myoung Kim | Executive Vice President, Energy Platform Business Unit | 1961 | |||||||||
Young-Sik Kim | Executive Vice President, Intelligent Network Service Unit | 1961 | |||||||||
Weon-Kyung Kim | Executive Vice President, GiGA Service Business Unit | 1963 | |||||||||
June-Keun Kim | Executive Vice President, Safety and Security Platform Business Unit | 1966 | |||||||||
Hee-Su Kim | Executive Vice President, KT Institute of Economics & Business Research | 1962 | |||||||||
Kyeong-Weon Park | Executive Vice President, Daegu Sales Headquarters | 1963 | |||||||||
Dae-Su Park | Executive Vice President, Business Relations Group | 1963 | |||||||||
Sang-Hoon Park | Executive Vice President, Gangbuk Network O&M Headquarters | 1962 | |||||||||
Chang-Seok Seo | Executive Vice President, Network Strategy Unit | 1967 | |||||||||
Kyung-Min Song | Executive Vice President, CEO Office | 1963 | |||||||||
Jae-Ho Song | Executive Vice President, Media Platform Business Unit | ||||||||||
Hyun-Yok Sheen | Executive Vice President, Corporate Management Group | ||||||||||
Sang-Keun Ahn | Executive Vice President, Southern Seoul Sales Headquarters | 1962 | |||||||||
Kyung-Keun Yoon | Executive Vice President, Financial Management Office | 1963 | |||||||||
Hye-Jeong Yun | Executive Vice President, Big Data Business Support Unit | 1966 | |||||||||
Seung-Yong Lee | Executive Vice President, Communication Business Relations Office | 1964 | |||||||||
Hyeon-Seuk Lee | Executive Vice President, Device Business Unit | 1966 | |||||||||
Sang-Kwi Chang | Executive Vice President, Legal Affairs Department 1 | 1968 | |||||||||
Yoon-Sik Jeong | Executive Vice President, Enterprise Customer Business Unit | 1964 | |||||||||
Young-Min Choi | Executive Vice President, KT Group HR Development Academy | 1961 |
In-Sik Kang | Senior Vice President, Media Contents Department | 1960 | ||||
Kyoung-Woo Ko | Senior Vice President, Busan Network O&M Headquarters | 1963 | ||||
Yoon-Jeon Koh | Senior Vice President, External Training | 1967 | ||||
Choong-Rim Ko | Senior Vice President, Strategic Channel Business Unit | 1967 | ||||
Ki-Yeon Kwak | Senior Vice President, External Training | 1971 | ||||
Kwang-Dong Kim | Senior Vice President, Future Convergence Policy Department | 1970 | ||||
Man-Sik Kim | Senior Vice President, Communications Policy Department 1 | 1967 | ||||
Byung-Kyun Kim | Senior Vice President, Device Development Department | 1968 | ||||
Bong-Gyun Kim | Senior Vice President, Biz Customer Business Unit | 1972 | ||||
Bong-Ki Kim | Senior Vice President, Security Design Task Force | 1968 | ||||
Sung-In Kim | Senior Vice President, Global Sales Unit | 1969 | ||||
Young-Woo Kim | Senior Vice President, Global Business Development Unit | 1967 | ||||
Young-In Kim | Senior Vice President, Network Strategy Department | 1968 | ||||
Young-Jin Kim | Senior Vice President, CEO Office Department 1 | 1967 | ||||
Young-Ho Kim | Senior Vice President, Northern Seoul Sales Headquarters | 1966 | ||||
Yi-Han Kim | Senior Vice President, Enterprise Business Performing Unit | 1966 | ||||
Jae-Kyung Kim | Senior Vice President, Corporate Strategy Research Department | 1971 | ||||
Jin-Koog Kim | Senior Vice President, Group Relations Unit | 1965 | ||||
Jin-Han Kim | Senior Vice President, AI Tech Center | 1963 | ||||
Chae-Hee Kim | Senior Vice President, AI Business Unit | 1974 | ||||
Cheol-Kee Kim | Senior Vice President, Future Business Relations Office | 1970 | ||||
Tae-Gyun Kim | Senior Vice President, Honam Network O&M Headquarters | 1971 | ||||
Hyeon-Soo Kim | Senior Vice President, External Training | 1966 | ||||
Hye-Joo Kim | Senior Vice President, Big Data Business Planning Department | 1970 | ||||
Hoon-Bae Kim | Senior Vice President, New Media Business Center | 1963 | ||||
Pyeong Ryu | Senior Vice President, Small & Medium Business Customer Department | 1966 | ||||
Sung-Uk Moon | Senior Vice President, New Renewable Energy Business Department | 1972 | ||||
Young-Il Moon | Senior Vice President, Data & Information Security Unit | 1966 | ||||
Hye-Byung Min | Senior Vice President, Corporate Planning Department | 1969 | ||||
Yong-Man Park | Senior Vice President, Jeonbuk Sales Headquarters | 1965 | ||||
Jeong-Jun Park | Senior Vice President, Enterprise Customer Department 1 | 1967 | ||||
Jong-Ryeol Park | Senior Vice President, SCM Strategy Office | 1963 | ||||
Joon-Hyun Park | Senior Vice President, Business Portfolio Department | 1971 | ||||
Hyun-Jin Park | Senior Vice President, 5G Service Business Unit | 1968 | ||||
Hyo-Il Park | Senior Vice President, CEO Office | 1970 | ||||
Gyu-Tae Baek | Senior Vice President, Service Laboratory | 1959 | ||||
Kyung-Cheol Seo | Senior Vice President, Chungbuk Sales Headquarters | 1967 | ||||
Young-Soo Seo | Senior Vice President, Chungcheong Network O&M Headquarters | 1968 | ||||
Yeong-Il Seo | Senior Vice President, Blockchain Biz Center | 1969 | ||||
So-Hee Shin | Senior Vice President, Global Sales Department 1 | 1968 | ||||
Chang-Yong Ahn | Senior Vice President, Gangnam Network O&M Headquarters | 1966 | ||||
Chi-Yong Ahn | Senior Vice President, Sales Operating Business Unit | 1966 | ||||
Yul-Mo Yang | Senior Vice President, Media Public Relations Department 2 | 1967 | ||||
Jin-Ho Yang | Senior Vice President, Legal Affairs Department 2 | 1973 | ||||
Gi-Seob Oh | Senior Vice President, Jeonnam Sales Headquarters | 1962 | ||||
Byung-Ki Oh | Senior Vice President, Global Sales Department 2 | 1964 | ||||
Hun-Yong Oh | Senior Vice President, Platform IT Service Unit | 1966 | ||||
Kyung-Hwa Ok | Senior Vice President, S/W Development Unit | 1968 | ||||
Heung-Jae Won | Senior Vice President, Customer Strategy Unit | 1967 | ||||
Yong-Kyu Yoo | Senior Vice President, Future Business Strategy Unit | 1971 | ||||
Chang-Kyu Yoo | Senior Vice President, Gangwon Sales Headquarters | 1966 | ||||
Kang-Soo Lee | Senior Vice President, Infra Service Unit | 1967 | ||||
Mi-Hyang Lee | Senior Vice President, Biz Incubation Center | 1965 | ||||
Mi-Hee Lee | Senior Vice President, IT Service Innovation Department | 1970 | ||||
Sun-Woo Lee | Senior Vice President, Infra Laboratory | 1966 | ||||
Sun-Joo Lee | Senior Vice President, Sustainability Management Unit | 1969 | ||||
Sung-Man Lee | Senior Vice President, IT Strategy & Planning Department | 1965 | ||||
Su-Kil Lee | Senior Vice President, Network Research Technology Support Unit | 1968 | ||||
Yong-Gyoo Lee | Senior Vice President, 5G Platform Development Unit | 1965 | ||||
Won-Joon Lee | Senior Vice President, Human Resources Office | 1967 | ||||
Jin-Woo Lee | Senior Vice President, Enterprise Service Unit | 1966 | ||||
Chang-Geun Lee | Senior Vice President, Public Customer Business Unit | 1967 |
Chang-Ho Yi | Senior Vice President, Transformation Unit | 1972 | ||||
Han-Sup Lee | Senior Vice President, Global Consulting/Service Delivery Unit | 1966 | ||||
Jong-Taek Lim | Senior Vice President, Management Support Office | 1964 | ||||
Min Jang | Senior Vice President, CEO Office Department 2 | 1968 | ||||
Dae-Jin Jang | Senior Vice President, Group Contents Strategy Department | 1971 | ||||
Jung-Soo Jung | Senior Vice President, Busan Sales Headquarters | 1966 | ||||
Chang-Hwan Cho | Senior Vice President, Tax Department | 1962 | ||||
Jung-Yong Ji | Senior Vice President, Network O&M Unit | 1968 | ||||
Keun-Ha Chin | Senior Vice President, Ethics Department 1 | 1968 | ||||
Kang-Rim Choi | Senior Vice President, Connected Car Biz Center | 1974 | ||||
Chan-Ki Choi | Senior Vice President, Chungnam Sales Headquarters | 1966 | ||||
Ho-Chang Choi | Senior Vice President, Group Communication Department | 1971 | ||||
Sang-Hyun Han | Senior Vice President, Enterprise Business Consulting Unit | 1963 | ||||
Ja-Kyung Hahn | Senior Vice President, Energy Intelligence Task Force | 1971 | ||||
Yong-Sun Hae | Senior Vice President, Western Seoul Sales Headquarters | 1963 | ||||
Suk-Zoon Huh | Senior Vice President, Marketing Strategy Department | 1967 | ||||
Gyung-Pyo Hong | Senior Vice President, Convergence Laboratory | 1962 |
Compensation of Directors and Executive Officers
In 2017,2018, the total amount of salaries, bonuses (including long-term performance-based incentives for directors)aggregate compensation paid and allowances paidaccrued to all directors of KT Corporation for services in all capacitiesand executive officers was approximately₩4.2 Won 37.2 billion which were paid on a cash basis.
Until February 2010, we had no incentive based compensation program for outside directors. Instead, compensationand the aggregate amount set aside or accrued by us to provide pension and retirement benefits to such persons was paid to outside directors in fixed amounts as an allowance for any expenses they incurred in executing their duties. The board of directors introduced a new compensation program for outside directors in March 2010, which consists of cash and stock grants and requires a one yearlock-up period, at a ratio of 3 to 1. The total cash basis remuneration for outside directors for 2017 was recorded at₩692 million.Won 4.4 billion.
The compensation of our five most compensated directors and executive officers who received total annual compensation exceeding₩500 million in 20172018 was as follows:
Name | Position | Total Compensation in | Composition of Total | |||
(In millions of Won) | ||||||
Chang-Gyu Hwang | Chief Executive Officer | ₩ | ₩573 (salary);₩ | |||
| ||||||
Hyun Mo Ku | President | ₩ | ₩ | |||
Heon Moon Lim* | President | ₩680 | ₩9 (salary);₩312 (bonus);₩2 (benefits)₩357 (retirement allowance) | |||
Seong-Mok Oh | President | ₩658 | ₩363 (salary);₩286 (bonus);₩9 (benefits) | |||
Kyoung Lim Yun** | Senior Executive Vice President | ₩738 | ₩311 (salary);₩417 (bonus);₩11 (benefits) |
* | Heon Moon Lim left the company on January 10, 2018. |
** | Kyoung Lim Yun left the company on March 18, 2019. |
The chairperson of our board of directors enters into an employment agreement on our behalf with our chief executive officer. The employment agreement sets certain management targets to be
achieved by the chief executive officer as determined by the Evaluation and Compensation Committee each year, including a target for the amount of “EBITDA” to be achieved in each year. EBITDA is defined as earnings before interest, tax, depreciation and amortization. Other management targets include (i) short-term operational and strategic goals centered around key performance indices and (ii) increase on a long-term basis in shareholder value measured against performance of companies listed on KOSPI and the shares of our competitors. Failure to achieve certain thresholds below the targets will allow the board of directors to take actions with respect to the chief executive officer’s employment, including proposing at the shareholders’ meeting an early termination of his employment.
In addition, the head of each of our functional departments, the president of each of our subsidiaries and the heads of each regional head office have entered into employment agreements with the chief executive officer that provide for similar management targets to be achieved by each of our departments, subsidiaries and regional head offices.
As of March 23, 2018,April 1, 2019, none of our standing or outside directors maintained directors’ service contracts with us or with any of our subsidiaries providing for benefits upon termination of employment.
Corporate Governance Committee
The Corporate Governance Committee is comprised of four outside directors and one standing director,Gae-MinDae-You Lee, Do Kyun Song,Kim,Jong-Gu Kim,Suk-Gwon Chang, Gang-Cheol Lee and Hyeon Mo Ku.In-Hoe Kim. The chairperson isGae-MinDae-You Lee.Kim. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance. The committee is also responsible for authorization of investigation and composition of a pool of internal and external chief executive officer candidates and selection of the chief executive officer candidates, who shall be further examined by the President Candidate Examination Committee, pursuant to the examination criteria determined by our board of directors. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.
President Candidate Examination Committee
The President Candidate Examination Committee is comprised of one standing director and all of our outside directors. No member of this committee shall become a candidate for the position of the chief executive officer during his or her term as a member of the committee. The committee’s duties include examining the chief executive officer candidates selected under the examination criteria determined by our board of directors, selecting the chief executive officer candidates pursuant to such criteria and reporting to the board of directors the outcome of the examination.
Outside Director Candidate Nominating Committee
The Outside Director Candidate Nominating Committee consists of one standing director and all of our outside directors, other than for election of an outside director resulting from the expiration of the term of the office, in which case such outside director whose term is expiring may not be a member of the committee. The committee’s duties include reviewing the qualifications of potential candidates and proposing nominees to serve as outside directors on our board of directors to the shareholders at the general shareholders’ meeting. The committee members’ terms expire immediately after the adjournment of the shareholders’ meeting where the outside directors are elected.
Evaluation and Compensation Committee
The Evaluation and Compensation Committee is currently comprised of four outside directors, Do Kyun Song,Gae-Min Lee, Gang-chulGang-Cheol Lee,Hee-Yol Yu, andDae-youTae-Yoon Kim.Sung. The chairperson is Do Kyun Song.
Gae-Min Lee. The committee’s duties include prior review of the chief executive officer’s management goals, terms and conditions proposed for inclusion in the management contract of the chief executive officer, including, but not limited to, determining whether the chief executive officer has achieved the management goals, and the determination of compensation for the chief executive officer and the standing directors. The committee members are elected by the board after the closing of the annual meeting, and the term of the committee members is one year.
Executive
Management Committee
The ExecutiveManagement Committee is currently comprised ofChang-Gyu Hwang, Hyeon Mo KuDong-Myun Lee and Seong Mok Oh.In-Hoe Kim. The chairperson isChang-Gyu Hwang. The committee’s duties include the authorization of establishment and management of branch offices, the disposal and sale of stocks of our subsidiaries, which have a market value between₩15 billion and₩30 billion, provided that no change of control with respect to such subsidiary occurs as a result of such disposal or sale for stocks with market value of₩10 billion or more, making investments and providing guarantees between₩15 billion to₩30 billion, the acquisition and disposal of real estate having market value between₩15 billion to₩30 billion, and the issuance of certain debt securities.
Related-Party Transactions Committee
The Related-Party Transactions Committee is currently comprised of four outside directors, Il Lim, Do Kyun Song,Im,Gae-Min Lee,Hee-Yol Yu andDae-youTae-Yoon Kim.Sung. The chairperson is Il Lim.Im. This committee’s duties include reviews of transactions between KT Corporation and its subsidiaries and ensures compliance with applicable antitrust laws. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.
Sustainability Management Committee
The Sustainability Management Committee is currently comprised of four outside directors and one standing director, Sang Kyun Cha, Gang-chulGang-Cheol Lee,Suk-GwonGae-Min Chang, Il ImLee,Hee-Yol Yu,Tae-Yoon Sung and Seong Mok Oh.Dong-Myun Lee. The chairperson is Sang Kyun Cha.Gang-Cheol Lee. The committee’s duties include reviews of sustainable management plan,plans, the authorization of establishment of medium- and long-term sustainable management strategies, sustainable management results, regular reporting and risk management of sustainable management activities and charitable contributions between₩100 million to₩1 billion. The committee members are elected by the board after the annual meeting, and the term of the committee members is one year.
Audit Committee
Under the Commercial Code of Korea and our articles of incorporation, we are required to establish an audit committee comprised of three or more outside directors and at leasttwo-thirds of the Audit Committee members are required to be outside directors. Audit Committee members must also meet the applicable independence criteria set forth under the rules and regulations of the Sarbanes-Oxley Act of 2002. The committee is currently comprised ofSuk-Gwon Chang,Jong-Gu Kim, Sang Kyun ChaDae-You Kim and Il Lim. The chairperson and the financial expert isSuk-Gwon Chang. Members of the committee are elected by our shareholders at the shareholders’ meeting. Our internal and external auditors report directly to the committee.
The duties of the committee include:
appointing independent auditors;
approving the appointment and recommending the dismissal of the internal auditor;
approving services to be provided by the independent auditors;
reviewing annual financial statements;
reviewing audit results and reports;
reviewing and evaluating our system of internal controls and policies; and
examining improprieties or suspected improprieties.improprieties; and
on a quarterly basis, reviewing reports on internal controls for legal compliance, including with respect to cybersecurity laws.
In addition, regarding the shareholders’ meeting, the committee may examine the agenda, financial statement and other reports to be submitted by the board of directors at each shareholders’ meeting.
On anon-consolidated basis, we had 23,81723,835 employees as of December 31, 2018, compared to 23,925 employees as of December 31, 2017 compared to 23,575and 23,670 employees as of December 31, 2016 and 23,531 employees as of December 31, 2015.2016.
Labor Relations
We consider our current relations with our work force to be good. However, in the past, we have experienced opposition from our labor union for our strategy of restructuring to improve our efficiency and profitability by disposing ofnon-core businesses and reducing our employee base.
As of December 31, 2017,2018, about 78.5%77.6% of the employees of KT Corporation were members of the KT Trade Union. On behalf of its members, the union negotiates with us a collective bargaining agreement with us every two years, and our current collective bargaining agreement expires on October 9, 2019. The current collective bargaining agreement provides that even in the event of a strike, the minimum number of employees necessary to operate the telecommunications business must continue to work.
The union also negotiates its members’ wages with us an annual agreement on wages on behalf of its members.every year. Under the Act of the Promotion of Worker’s Participation and Cooperation, our Employee-Employer Cooperation Committees, which are composed of representatives of management and labor for each business unit and regional office, meet quarterly to discuss employee grievances, working conditions and potential employee-initiated improvements in service or management.
The Trade Union and Labor Relations Adjustment Act (“Labor Act”) allow multiple labor unions to be formed within one company. Therefore, additional labor unions may be formed by our employees. Pursuant to such amendments, our employees formed a new labor union called “KT New Union” in July 2011. The Labor Act also requires such multiple unions to consolidate themselves into a single channel when negotiating with the company on behalf of their members and to enter into a single collective bargaining agreement with the company. As a result of the recent consolidation of labor unions, KT Trade Union was selected as the bargaining representative of the labor unions. Its term as the bargaining representative will last for two years from January 1, 2018.
Employee Stock Ownership and Benefits
We have an employee stock ownership association, which may purchase on behalf of its members up to 20.0% of any of our shares offered publicly in Korea. The employee stock ownership association owned 0.5% of our issued shares as of December 31, 2017.2018.
In accordance with the National Pension Act of Korea, we contribute an amount equal to 4.5% of an employee’s standard monthly wages, and each employee contributes 4.5% of his or her standard
monthly wages, into his or her personal pension account. Our employees, including executive officers as well asnon-executive employees, are subject to a pension insurance system, under which we make monthly contributions to the pension accounts of the employees, and upon retirement, such employees are paid the pension amount due from their pension accounts. Prior to April 2011, our executive andnon-executive employees were subject to alump-sum severance payment system, under which they were entitled to receive alump-sum severance payment upon termination of their employment, based on their length of service and salary level at the time of termination. Starting in April 2011, in accordance with the Korean Employee Retirement Income Security Act, we replaced suchlump-sum severance payment system with our current pension insurance system in the form of a defined benefit plan, and also introduced a defined contribution plan in December 2012, with a total combined unfunded portion of approximately₩1,5661,691 billion as of December 31, 2017.2018.Lump-sum severance amounts previously accrued prior to our adoption of the current pension insurance system continue to remain payable. We also provide a wide range of fringe benefits to our employees, including housing, housing loans, company-provided hospitals and schools, a company-sponsored pension program, an employee welfare fund, industrial disaster insurance, cultural and athletic facilities, physical education grants, meal allowances, medical examinations and training and resort centers. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results.”
Employee Training
The objective of our training program is to develop information and technology specialists who are able to create value for our customers. In order to develop skills of our employees, we require 8583 hours of training per year from most of our employees, using individually-tailored curriculums based on individual assessments. We also operate a Cyber Academy to provide online classes to our employees, as well as offer various foreign language classes to our employees. In addition, we provide tuition and living expense reimbursements to our high potential employees who pursue graduate programs in Korea and abroad, as well as provide financial assistance to those who pursue work-related professional licenses or participate in after-work study programs.
Ordinary Shares
The persons who currently serve as our directors or executive officers held, as a group, 75,209185,168 ordinary shares as of April 25, 2018,March 31, 2019, the most recent date for which this information is available. The table below shows the ownership of our ordinary shares by directors:our directors and executive officers:
Shareholders | Number of Ordinary Shares Owned | |||
Chang-Gyu Hwang | 39,074 | |||
| ||||
Seong-Mok Oh | 14,978 | |||
| 10,507 | |||
Dong-Myun Lee | 5,012 | |||
Hong-Beom Jeon | 4,980 | |||
Chang-Seok Seo | 4,700 | |||
Pill-Jai Lee | 4,442 | |||
In-Hoe Kim | 4,386 | |||
Jae-Ho Song | ||||
| ||||
Weon-Kyung Kim | 3,721 | |||
Dae-Su Park | 3,666 | |||
Jong-Ook Park | 3,436 | |||
Yoon-Sik Jeong | 3,134 | |||
Young-Ho Kim | 3,106 | |||
Young-Myoung Kim | 3,105 |
Yoon-Young Park | 3,088 | |||
Kyeong-Weon Park | 2,757 | |||
Jong-Jin Yoon | 2,756 | |||
Seung-Yong Lee | 2,685 | |||
Young-Sik Kim | 2,521 | |||
Soo-Jung Shin | 2,482 | |||
Hyeon-Seuk Lee | 2,482 | |||
Sang-Bong Nam | 2,472 | |||
Hye-Jeong Yun | 2,362 | |||
Gyung-Pyo Hong | 2,355 | |||
Hee-Su Kim | 2,324 | |||
Sun-Woo Lee | 2,259 | |||
June-Keun Kim | 2,099 | |||
Hyun-Yok Sheen | 2,099 | |||
Sang-Kwi Chang | 2,093 | |||
Byung-Sam Park | 2,006 | |||
In-Sik Kang | 1,977 | |||
Kyung-Keun Yoon | 1,710 | |||
Young-Min Choi | 1,710 | |||
Jong-Gu Kim | ||||
Suk-Gwon Chang | ||||
| 1,640 | |||
Mi-Hyang Lee | ||||
Han-Sup Lee | 1,111 | |||
Hoon-Bae Kim | 1,008 | |||
So-Hee Shin | 1,002 | |||
Man-Sik Kim | 998 | |||
Gyu-Tae Baek | 988 | |||
Kang-Soo Lee | 988 | |||
Chang-Geun Lee | 988 | |||
Sang-Hyun Han | 988 | |||
Heung-Jae Won | 858 | |||
Kyung-Min Song | 787 | |||
Bong-Gyun Kim | 787 | |||
Jong-Ryeol Park | 787 | |||
Dae-Jin Jang | 748 | |||
Chang-Hwan Cho | 722 | |||
Yeong-Il Seo | 690 | |||
Kwang-Dong Kim | 655 | |||
Gae-Min Lee | 399 | |||
Il Im | ||||
| 361 | |||
Yi-Han Kim | ||||
| 262 | |||
Byung-Ki Oh | 259 | |||
Young-Soo Seo | 246 | |||
Chang-Yong Ahn | 244 | |||
Chan-Ki Choi | 239 | |||
Mi-Hee Lee | ||||
Yong-Gyoo Lee | 162 | |||
Jung-Soo Jung | 106 | |||
Jae-Kyung Kim | 100 | |||
Jung-Yong Ji | 98 | |||
Hyo-Il Park | 61 | |||
Chang-Ho Yi | 51 | |||
Suk-Zoon Huh | 51 | |||
Young-Woo Kim | 46 | |||
Pyeong Ryu | 46 | |||
Sung-Man Lee | 46 | |||
Ja-Kyung Hahn | 46 | |||
Byung-Kyun Kim | 36 | |||
Young-In Kim | 36 |
Jin-Koog Kim | 36 | |||
Chae-Hee Kim | 36 | |||
Sung-Uk Moon | 36 | |||
Yong-Man Park | 36 | |||
Jeong-Jun Park | 36 | |||
Kyung-Cheol Seo | 36 | |||
Yong-Kyu Yoo | 36 | |||
Chang-Kyu Yoo | 36 | |||
Su-Kil Lee | 36 | |||
Min Jang | 36 | |||
Keun-Ha Chin | 36 | |||
Kang-Rim Choi | 36 | |||
Won-Joon Lee | 25 | |||
Young-Jin Kim | 14 | |||
Sun-Joo Lee | 10 | |||
Yong-Sun Hae | 10 | |||
Hyun-Jin Park | 1 | |||
Total | 185,168 | |||
Stock Options
We have not granted any stock options to our current directors and executive officers.
Item 7. Major Shareholders and Related Party Transactions
The following table sets forth certain information relating to the shareholders of our ordinary shares as of December 31, 2017:2018:
Shareholders | Number of Shares | Percent of Total Shares Issued | Number of Shares | Percent of Total Shares Issued | ||||||||||||
National Pension Corporation | 28,555,130 | 10.94 | % | 31,823,426 | 12.19 | % | ||||||||||
NTTDoCoMo, Inc. | 14,257,813 | 5.46 | % | |||||||||||||
NTT DoCoMo, Inc. | 14,257,813 | 5.46 | % | |||||||||||||
Silchester International Investors LLP | 13,397,056 | 5.13 | % | 11,687,193 | 4.48 | % | ||||||||||
Employee stock ownership association | 1,298,579 | 0.50 | % | 1,188,070 | 0.46 | % | ||||||||||
Directors as a group | 73,199 | 0.03 | % | 77,603 | 0.03 | % | ||||||||||
Public | 187,515,278 | 71.81 | % | 186,110,663 | 71.28 | % | ||||||||||
KT Corporation (held in the form of treasury stock) | 16,014,753 | 6.13 | % | 15,967,040 | 6.12 | % | ||||||||||
|
|
|
| |||||||||||||
Total issued shares | 261,111,808 | 100.00 | % | 261,111,808 | 100.00 | % | ||||||||||
|
|
|
|
Item 7.B.Related Party Transactions
We have engaged in various transactions with our subsidiaries and affiliated companies. See Note 3435 to the Consolidated Financial Statements. We have not issued any guarantees in favor of our consolidated subsidiaries.
Item 7.C.Interests of Experts and Counsel
Not applicable.
Item 8.A.Consolidated Statements and Other Financial Information
See “Item 18. Financial Statements” and pagesF-1 through F- 102.F-112.
Legal Proceedings
In July 2012, the Fair Trade Commission issued to us an administrative fine of approximately₩5 billion as well as certain corrective orders, after investigating certain pricing and subsidy practices of mobile service carriers and handset manufacturers. Samsung Electronics Co., Ltd., LG Electronics Co., Ltd., Pantech Curitel Co., Ltd., SK Telecom and LG U+ were also issued administrative fines as a result of the investigation. We filed for a stay of execution of the Fair Trade Commission’s decision, and in September 2012, the Seoul High Court granted a stay of execution with respect to the corrective order, and denied the stay of execution with respect to the administrative fine. We paid the entire fine in September 2012. In September 2012, we filed a lawsuit with the Seoul High Court against the Fair Trade Commission to appeal the administrative fine and the corrective order, and on February 6, 2014, the Seoul High Court ruled against us on our appeal. In February 2014, we filed another appeal with respect to the administrative fine with the Supreme Court of Korea and filed for a stay of execution with respect to the corrective order in March 2014, which was accepted and became effective in April 2014. The appeal is currently ongoing. The outcome of this case will not result in any fine in addition to the fine we already paid in September 2012.
In December 2013, the KCC imposed a combined fine of approximately₩106 billion on SK Telecom, LG U+ and us (our fine being approximately₩30 billion), which is the largest fine ever imposed by the KCC on local mobile operators for providing excessive subsidies to new subscribers. On March 7, 2014, the MSIP imposed a temporary suspension on us for 45 days (from March 13, 2014 to April 26, 2014), SK Telecom for 45 days (from April 5, 2014 to May 19, 2014), and LG U+ for 45 days (from March 13, 2014 to April 4, 2014 and again from April 27, 2014 to May 18, 2014) from accepting new subscribers as a result of continuing to offer excessive handset subsidies to new subscribers, despite the order from the KCC prohibiting such subsidies. Additionally, the MSIP announced that it plans to bring criminal charges with fines of up to₩150 million and imprisonment of less than three years against any carrier and responsible personnel that fails to adhere to the suspension or continues to offer illegal subsidies after the suspension is completed. In August 2014, the KCC imposed a fine of approximately₩58 billion on SK Telecom, LG U+ and us (our fine being approximately₩11 billion) for continuing to provideproviding excessive subsidies to new subscribers. In December 2014, the KCC further imposed a fine of approximately₩8 billion on each of SK Telecom, LG U+ and us for providing excessive handset subsidies. In March 2015, the KCC also imposed a combined fine of approximately₩34 billion on SK Telecom, LG U+ and us (our fine being approximately₩9 billion) for violation of regulations relating to handset sales, in connection with a used handset buyback program that we and the other telecommunications operators were promoting. On June 24, 2015, the KCC imposed a fine of₩52 million for violating privacy related regulations and undermining consumer interests. On July 31, 2015 and January 19, 2016, the KCC imposed a fine of₩350 million and₩560 million, respectively, on us for infringing upon consumer interests by advertising false and exaggerated information about bundled products. On March 8, 2016, the KCC imposed a fine of₩32 million on us for offering excessively reduced rates and waivers to certain customers. On December 6, 2016, the KCC imposed a combined fine of approximately₩10.7 billion on SK Telecom, LG U+, SK Broadband,t-broad, D’live, CJ HelloVision and us (our fine being approximately₩2.3 million) and ordered to take corrective measures for providing excessive promotional gifts to bundled products customers. In April 2017, the Fair Trade Commission imposed a combined fine of approximately₩47 million on us for failing to include developments relating to our management in our public disclosures. In October 2017, the Fair Trade Commission imposed a fine of approximately₩360 million on us for not including transactions between our affiliates in our public disclosures. On March 21, 2017, the KCC imposed a combined fine of approximately₩2.1 billion on SK Telecom, LG U+ and us (our fine being approximately₩361 million) for violation of regulations relating to handset sales and for offering excessive handset subsidies in case of sales to foreigners. On December 6, 2017, the KCC ordered SK Telecom, LG U+, SK Broadband and us to take corrective measures in regard to restriction on termination of broadband Internet access service and bundled product agreement. On January 24,February 23, 2018, the KCC imposed a combined fine of approximately₩50.6 billion on SK Telecom, LG U+ and us (our fine being approximately₩12.5 billion) for violation of regulations relating to handset sales in case of wholesale, online sale, etc. We have paid all of such fines as of the date hereof.
For example, in July 2012, the police arrested two third-party individuals in connection with the alleged theft of personal information relating to approximately 8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings starting from February 2012 into our New Service and Technology Evolution Program(“N-STEP”), our mobile customer information system. Since the incident, approximately 29,800 of our mobile phone subscribers filed a total of 16 lawsuits against us in connection with theN-STEP hackings, alleging that we failed to protect their personal information, and are seeking total damages of approximately₩15 billion. From August 2014 to October 2016, various district courts have awarded damages of₩100,000 per plaintiff for 14 of the cases involving a total of approximately 29,000 of the subscribers, resulting in damages of approximately₩3 billion to us, while the remaining two trials are currently ongoing at various district courts. We won three of the appeals without further appellate proceedings. The other appeal which we won has been appealed to the Supreme Court. We lost one of the
appeals and we appealed such decision to the Supreme Court. The other nine appeals are currently ongoing at the Seoul High Court or the Seoul Central Court.
Furthermore, in March 2014, the police arrested three third-party individuals in connection with their alleged theft of personal information relating to approximately 9.8 million of our subscribers. The individuals in question stole the personal information of our subscribers through a series of hackings into our main homepage starting from February 2014. Since the incident, approximately 15,000 subscribers filed 22 lawsuits against us in connection with the information theft, seeking total damages of approximately₩7 billion. From November 2016 to January 2018, we won 17 trials, lost two trials and the remaining three trials are currently ongoing at various district courts. The plaintiffs of nine of the 17 cases have appealed the district courts’ decisions to the Seoul High Court or the Seoul District Court. We appealed the district courts’ decisions of the two trials where we lost. In June 2014, we were fined₩85 million by the KCC and were ordered to take corrective measures in connection with the most recent hacking incident. We filed an administrative appeal in August 2014 in connection with the KCC fine and prevailed. The KCC appealed the administrative decision and the appeal is currently ongoing at the Seoul High Court.
In December 2013, the MSIP declared that the contracts over our sale of Koreasat 3 were null and void, on the grounds that the satellite was sold without obtaining proper government approval. We are currently involved in an International Chamber of Commerce arbitration against ABS over the Koreasat 3 satellite ownership and contract violation claims. In July 2017, the International Chamber of Commerce concluded that ABS has title to Koreasat 3 (such decision, “Partial Award”). In October 2017, we and KT SAT petitioned the U.S. District Court for the Southern District of New York to vacate the Partial Award. In March 2018, the International Chamber of Commerce issued an award of US$748,564 in damages, US$287,673.2 inpre-award interest and post-award interest of 9 percent per year to ABS (“Final Award”). We and KT SAT plan to petition the New York federal court to vacate the Final Award. With regard to the Partial Award, on April 10, 2018, the court dismissed the petition filed by KT SAT and us to vacate the Partial Award. We and KT SAT plan to file an appeal of the foregoing decision.
In 2009, we entered into a contract with Enspert, Co., Ltd.(“Enspert”), a consumer electronics manufacturer, to purchase approximately 200,000 tablet PCs. Due to defects with the tablet PCs, we cancelled our contract and the outstanding order for approximately 170,000 tablet PCs, for which we would have paid approximately₩51 billion. In June 2014, the Korea Fair Trade Commission imposed a fine of approximately₩2 billion on us, finding that we cancelled our contract with Enspert without cause. We appealed such decision but the decision was confirmed by the Seoul High Court and the Supreme Court in May 2016 and September 2016, respectively. In April 2017, Enspert filed a lawsuit against us at the Seoul Central Court, claimingalleging damages of approximately₩4794 billion allegedly caused by our cancellation of the contract between Enspert and us for the tablet PCs.
We arePCs and specifying a defendant in various other court proceedings involving claims for civil damages arising in the ordinary courseclaim amount of our business. We are a defendant in an ongoing court proceeding filed by the Industrial Bank of Korea on March 18, 2015. In connection with the filing of court receivership by KT ENGCORE, Industrial Bank of Korea claims that we are liable for₩10 billion of the₩65.8 billion asset-backed commercial papers of a renewable energy project for which KT ENGCORE was a contractor and guarantor. In October 2017,47 billion. The case is currently pending at the Seoul Central Court, ruledand we intend to vigorously defend against such lawsuit.
In April 2019, the claims of Industrial Bank of Korea findingFair Trade Commission determined that we, were notLG U+, SK Broadband and Sejong Telecom colluded in numerous biddings held by public institutions, including the Public Procurement Service and the Korea Racing Authority, between April 2015 to be held liableJune 2017 for the lossesengagement of telecommunications companies to provide dedicated fixed-line services, in violation of the plaintiffMonopoly Regulation and Fair Trade Act, and issued an order to cease and desist, imposed a fine of₩5.7 billion on us and filed a criminal complaint against us. These public institutions may also restrict us from bidding on their projects in connection with the bankruptcyfuture.
For a description of KT ENGCORE.our additional legal proceedings, see “Item 3. Key Information—Item 3.D. Risk Factors—The legal cases againstMr. Suk-chae Lee, a former chief executive officer, and other former executive officers or directors—and related adverse publicity—could have a material adverse effect on our business, reputation and stock price” and “Item 3. Key Information—Item 3.D. Risk
Factors—Our charitable or political donations, employment of certain individuals and engagement of an advertising agency connected to a scandal involvingMs. Soon-sil Choi, a confidante of former PresidentGeun-hye Park, and other incidents and allegations could have a material adverse effect on our business, reputation and stock price.”
As of December 31, 2017,2018, we have established provisions relating to litigationslitigation proceedings of₩1859 billion. See Note 1917 to the Consolidated Financial Statements. While we are unable to predict the ultimate disposition of these claims, in the opinion of our management, the ultimate disposition of these claims will not have a material adverse effect on our business, financial condition and results of operations.
Dividends
The table below sets out the annual dividends declared on the outstanding ordinary shares to shareholders of record on December 31 of the years indicated and the interim dividends declared on the outstanding ordinary shares to shareholders of record on June 30 of the years indicated:
Year | Annual Dividend per Ordinary Share | Interim Dividend per Ordinary Share | Average Total Dividend per Ordinary Share | Annual Dividend per Ordinary Share | Interim Dividend per Ordinary Share | Average Total Dividend per Ordinary Share | ||||||||||||||||||
(In Won) | (In Won) | (In Won) | (In Won) | (In Won) | (In Won) | |||||||||||||||||||
2013 | 800 | — | 800 | |||||||||||||||||||||
2014 | 0 | — | 0 | ₩ | 0 | — | ₩ | 0 | ||||||||||||||||
2015 | 500 | — | 500 | 500 | — | 500 | ||||||||||||||||||
2016 | 800 | — | 800 | 800 | — | 800 | ||||||||||||||||||
2017 | 1,000 | �� | 1,000 | 1,000 | — | 1,000 | ||||||||||||||||||
2018 | 1,100 | — | 1,100 |
If sufficient profits are available, the board of directors may propose annual dividends on the outstanding ordinary shares, which our shareholders must approve by a resolution at the ordinary general meeting of shareholders. This meeting is generally held in March of the following year and if our shareholders at such ordinary general meeting of shareholders approve the annual dividend, we must pay such dividend within one month following the date of such resolution. Typically, we pay such dividends shortly after the meeting. The declaration of annual dividends is subject to the vote of our shareholders, and consequently, there can be no assurance as to the amount of dividends per ordinary share or that any such dividends will be declared. Interim dividends paid in cash can be declared by a resolution of the board of directors. See “Item 10. Additional Information—Item 10.B. Memorandum and Articles of Association—Dividends” and “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares.”
The Commercial Code provides that shares of a company of the same class must receive equal treatment. However, major shareholders may consent to receive dividend distributions at a lesser rate than minor shareholders. Previously, the Government consented to receiving a smaller dividend compared to other shareholders. The Government no longer holds any interest in us.
Any cash dividends relating to the shares held in the form of ADSs will be paid to the depositary bank in Won. The deposit agreement provides that, except in certain circumstances, cash dividends received by the depositary bank will be converted by the depositary bank into Dollars and distributed to the holders of the ADRs, less withholding tax, other governmental charges and the depositary bank’s fees and expenses. See “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares.”
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
The table below shows the high and low closing prices and the average daily volume of trading activity on the KRX KOSPI Market for the shares since January 2012:
Price | Average Daily Trading Volume | |||||||||||
High | Low | |||||||||||
(In Won) | (Number of shares) | |||||||||||
2013 | 40,850 | 29,950 | 1,149,143 | |||||||||
2014 | 36,800 | 28,300 | 1,051,396 | |||||||||
2015 | 32,250 | 28,250 | 963,825 | |||||||||
2016 | 33,250 | 26,350 | 547,426 | |||||||||
First quarter | 29,800 | 26,350 | 619,422 | |||||||||
Second quarter | 32,550 | 29,150 | 654,800 | |||||||||
Third quarter | 32,750 | 29,850 | 454,623 | |||||||||
Fourth quarter | 33,250 | 29,400 | 466,237 | |||||||||
2017 | 35,400 | 28,700 | 638,754 | |||||||||
First quarter | 33,250 | 28,900 | 567,549 | |||||||||
Second quarter | 32,800 | 31,050 | 587,826 | |||||||||
Third quarter | 35,400 | 28,700 | 740,160 | |||||||||
Fourth quarter | 31,300 | 28,900 | 655,955 | |||||||||
November | 30,450 | 29,100 | 596,418 | |||||||||
December | 31,300 | 30,250 | 699,659 | |||||||||
2018 (through April 16) | 30,400 | 26,700 | 693,532 | |||||||||
First quarter | 30,400 | 26,950 | 725,268 | |||||||||
January | 30,400 | 29,500 | 688,747 | |||||||||
February | 29,550 | 27,450 | 993,625 | |||||||||
March | 27,850 | 26,950 | 553,507 | |||||||||
Second quarter (through April 16) | 27,700 | 26,700 | 517,544 | |||||||||
April (through April 16) | 27,700 | 26,700 | 517,544 |
ADSs
The outstanding ADSs, each of which representsone-half of one share of our ordinary share, have been traded on the New York Stock Exchange andunder the London Stock Exchangeticker symbol “KT” since May 25, 1999 until September 18, 2015, the date on which the ADSs were delisted from the London Stock Exchange. The ADSs, including those previously listed on the London Stock Exchange, continue to be tradable on the New York Stock Exchange.1999.
The price of the ADSs on the New York Stock Exchange as of the close of trading on April 16, 2018 was $13.46 per ADS. The table below shows the high and low trading prices and the average daily volume of trading activity on the New York Stock Exchange for our ADSs since January 2012:
Price | Average Daily Trading Volume | |||||||||||
High | Low | |||||||||||
(In US$) | (Number of ADSs) | |||||||||||
2013 | 18.16 | 14.33 | 528,291 | |||||||||
2014 | 17.46 | 13.24 | 440,020 | |||||||||
2015 | 14.85 | 11.83 | 336,711 | |||||||||
2016 | 16.73 | 11.03 | 608,543 | |||||||||
First quarter | 13.54 | 11.03 | 505,970 | |||||||||
Second quarter | 14.71 | 13.22 | 591,603 | |||||||||
Third quarter | 16.73 | 14.17 | 674,686 | |||||||||
Fourth quarter | 16.31 | 13.66 | 657,875 | |||||||||
2017 | 17.11 | 13.84 | 864,768 | |||||||||
First quarter | 17.10 | 13.84 | 840,494 | |||||||||
Second quarter | 17.11 | 15.63 | 775,662 | |||||||||
Third quarter | 18.6 | 13.87 | 1,298,422 | |||||||||
Fourth quarter | 15.78 | 13.9 | 891,759 | |||||||||
November | 15.6 | 13.91 | 842,314 | |||||||||
December | 15.78 | 15.31 | 671,375 | |||||||||
2018 (through April 16) | 16.01 | 12.9 | 1,037,449 | |||||||||
First quarter | 16.01 | 12.9 | 1,079,164 | |||||||||
January | 16.01 | 14.95 | 850,010 | |||||||||
February | 15.13 | 12.9 | 1,546,663 | |||||||||
March | 13.7 | 13.0 | 885,343 | |||||||||
Second quarter (through April 16) | 14.13 | 13.31 | 805,986 | |||||||||
April (through April 16) | 14.13 | 13.31 | 805,986 |
Not applicable.
The KRX KOSPI Market
On January 27, 2005, the Korea Exchange was established pursuantPlease refer to the Korea Securities“Item 9.A. Offering and Futures Exchange Act through the consolidation of the Korea Stock Exchange, the Korea Futures Exchange, the KOSDAQ Stock Market, Inc. (the “KOSDAQ”) and the KOSDAQ Committee within the Korea Securities Dealers Association, which was in charge of the management of the KOSDAQ. There are four different markets operated by the Korea Exchange: the KRX KOSPI Market, the KRX KOSDAQ Market, the KRX KONEX Market and the KRX Derivatives Market. The Korea Exchange has three trading floors located in Seoul, one for the KRX KOSPI Market, one for the KRX KOSDAQ Market, one for the KRX KONEX Market, and one trading floor in Busan for the KRX Derivatives Market. The Korea Exchange is a limited liability company, the shares of which are held by (i) securities companies and futures companies that were formerly members of the Korea Stock Exchange or the Korea Futures Exchange, (ii) the Small & Medium Business Corporation, (iii) the Korea Securities Finance Corporation and (iv) the Korea Financial Investment Association. Currently, the Korea Exchange is the only stock exchange in Korea and is operated by membership, having as its members most of the Korean securities companies and some Korean branches of foreign securities companies.
The KRX KOSPI Market has the power in some circumstances to suspend trading in the shares of a given company or tode-list a security. The KRX KOSPI Market also restricts share price movements. All listed companies are required to file accounting reports annually and quarterly and to release immediately all information that may affect trading in a security.
The KRX KOSPI Market publishes the KOSPI every ten seconds, which is an index of all equity securities listed on the KRX KOSPI Market. The KOSPI is calculated using the aggregate value method, in which the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.
Movements in KOSPI are set out in the following table together with the associated dividend yields and price earnings ratios:
Period Average | ||||||||||||||||||||||||
Year | Opening | High | Low | Closing | Dividend Yield (1)(2) (Percent) | Price Earnings Ratio (2)(3) | ||||||||||||||||||
1985 | 139.53 | 163.37 | 131.40 | 163.37 | 5.3 | 5.2 | ||||||||||||||||||
1986 | 161.40 | 279.67 | 153.85 | 272.61 | 4.3 | 7.6 | ||||||||||||||||||
1987 | 264.82 | 525.11 | 264.82 | 525.11 | 2.6 | 10.9 | ||||||||||||||||||
1988 | 532.04 | 922.56 | 527.89 | 907.20 | 2.4 | 11.2 | ||||||||||||||||||
1989 | 919.61 | 1,007.77 | 844.75 | 909.72 | 2.0 | 13.9 | ||||||||||||||||||
1990 | 908.59 | 928.82 | 566.27 | 696.11 | 2.2 | 12.8 | ||||||||||||||||||
1991 | 679.75 | 763.10 | 586.51 | 610.92 | 2.6 | 11.2 | ||||||||||||||||||
1992 | 624.23 | 691.48 | 459.07 | 678.44 | 2.2 | 10.9 | ||||||||||||||||||
1993 | 697.41 | 874.10 | 605.93 | 866.18 | 1.6 | 12.7 | ||||||||||||||||||
1994 | 879.32 | 1,138.75 | 855.37 | 1,027.37 | 1.2 | 16.2 | ||||||||||||||||||
1995 | 1,027.45 | 1,016.77 | 847.09 | 882.94 | 1.2 | 16.4 | ||||||||||||||||||
1996 | 882.29 | 986.84 | 651.22 | 651.22 | 1.3 | 17.8 | ||||||||||||||||||
1997 | 647.67 | 792.29 | 350.68 | 376.31 | 1.5 | 17.0 | ||||||||||||||||||
1998 | 374.41 | 579.86 | 280.00 | 562.46 | 1.9 | 10.8 | ||||||||||||||||||
1999 | 565.10 | 1,028.07 | 498.42 | 1,028.07 | 1.1 | 13.5 | ||||||||||||||||||
2000 | 1,028.33 | 1,059.04 | 500.60 | 504.62 | 2.1 | 12.9 | ||||||||||||||||||
2001 | 503.31 | 704.50 | 468.76 | 693.70 | 1.7 | 16.4 | ||||||||||||||||||
2002 | 698.00 | 937.61 | 584.04 | 627.55 | 1.6 | 15.2 | ||||||||||||||||||
2003 | 633.03 | 822.16 | 515.24 | 810.71 | 2.0 | 11.8 | ||||||||||||||||||
2004 | 821.26 | 936.06 | 719.59 | 895.92 | 2.0 | 13.8 | ||||||||||||||||||
2005 | 896.00 | 1,379.37 | 870.84 | 1,379.37 | 1.8 | 10.6 | ||||||||||||||||||
2006 | 1,383.32 | 1,464.70 | 1,203.86 | 1,434.46 | 1.6 | 11.1 | ||||||||||||||||||
2007 | 1,438.89 | 2,064.85 | 1,355.79 | 1,897.13 | 1.4 | 15.8 | ||||||||||||||||||
2008 | 1,891.45 | 1,888.88 | 938.75 | 1,124.47 | 2.6 | 8.9 | ||||||||||||||||||
2009 | 1,132.87 | 1,718.88 | 1,018.81 | 1,682.77 | 1.2 | 22.9 | ||||||||||||||||||
2010 | 1,696.14 | 2,051.00 | 1,552.79 | 2,051.00 | 1.1 | 18.0 | ||||||||||||||||||
2011 | 2,078.08 | 2,228.96 | 1,652.71 | 1,825.74 | 1.5 | 10.5 | ||||||||||||||||||
2012 | 1,826.37 | 2,049.28 | 1,769.31 | 1,997.05 | 1.3 | 12.3 | ||||||||||||||||||
2013 | 2,031.10 | 2,059.58 | 1,780.63 | 2,011.34 | 1.1 | 12.8 | ||||||||||||||||||
2014 | 1,967.19 | 2,082.61 | 1,886.85 | 1,915.59 | 1.2 | 13.2 | ||||||||||||||||||
2015 | 1,926.44 | 2,173.41 | 1,829.81 | 1,961.31 | 1.4 | 14.4 | ||||||||||||||||||
2016 | 1,918.76 | 2,068.72 | 1,835.28 | 2,026.46 | 1.6 | 13.5 | ||||||||||||||||||
2017 | 2,026.16 | 2,557.97 | 2,026.16 | 2,467.49 | 1.4 | 14.3 | ||||||||||||||||||
2018 (through April 16) | 2,479.65 | 2,598.19 | 2,363.77 | 2,457.49 | 1.3 | 13.1 |
|
Shares are quoted“ex-dividend” on the first trading day of the relevant company’s accounting period; since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in the KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.
With certain exceptions, principally to take account of a share being quoted“ex-dividend” and“ex-rights,Listing Details.” permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the KRX KOSPI Market to 30% of the previous day’s closing price of the shares, rounded down as set out below:
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.
Due to a deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the KRX KOSPI Market by the securities companies. In addition, a securities transaction tax will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares at the rate of 0.15% if such transfer is made through the KRX KOSPI Market. A special agricultural and fishery tax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the KRX KOSPI Market. See “Item 10. Additional Information—Item 10.E. Taxation—Korean Taxation.”
The number of companies listed on the KRX KOSPI Market, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:
Market Capitalization on the Last Day of Each Period | Average Daily Trading Volume, Value | |||||||||||||||||||||||
Year | Number of Listed Companies | (Billions of Won) | (Millions of Dollars)(1) | Thousands of Shares | (Millions of Won) | (Thousands of Dollars) (1) | ||||||||||||||||||
1985 | 342 | 6,570 | 7,381 | 18,925 | 12,315 | 13,834 | ||||||||||||||||||
1986 | 355 | 11,994 | 13,924 | 31,755 | 32,870 | 38,159 | ||||||||||||||||||
1987 | 389 | 26,172 | 33,033 | 20,353 | 70,185 | 88,583 | ||||||||||||||||||
1988 | 502 | 64,544 | 94,348 | 10,367 | 198,364 | 289,963 | ||||||||||||||||||
1989 | 626 | 95,477 | 140,490 | 11,757 | 280,967 | 414,430 | ||||||||||||||||||
1990 | 669 | 79,020 | 110,301 | 10,866 | 183,692 | 256,411 | ||||||||||||||||||
1991 | 686 | 73,118 | 96,107 | 14,022 | 214,263 | 281,629 | ||||||||||||||||||
1992 | 688 | 84,712 | 107,448 | 24,028 | 308,246 | 390,977 | ||||||||||||||||||
1993 | 693 | 112,665 | 139,420 | 35,130 | 574,048 | 710,367 | ||||||||||||||||||
1994 | 699 | 151,217 | 191,730 | 36,862 | 776,257 | 984,223 | ||||||||||||||||||
1995 | 721 | 141,151 | 182,201 | 26,130 | 487,762 | 629,613 | ||||||||||||||||||
1996 | 760 | 117,370 | 139,031 | 26,571 | 486,834 | 575,680 | ||||||||||||||||||
1997 | 776 | 70,989 | 50,162 | 41,525 | 555,759 | 392,707 | ||||||||||||||||||
1998 | 748 | 137,799 | 114,091 | 97,716 | 660,429 | 546,803 | ||||||||||||||||||
1999 | 725 | 349,504 | 305,137 | 278,551 | 3,481,620 | 3,039,655 | ||||||||||||||||||
2000 | 704 | 188,042 | 149,275 | 306,163 | 2,602,211 | 2,065,739 | ||||||||||||||||||
2001 | 689 | 253,843 | 191,421 | 473,241 | 1,997,420 | 1,506,237 | ||||||||||||||||||
2002 | 683 | 258,681 | 215,496 | 857,245 | 3,041,598 | 2,533,815 | ||||||||||||||||||
2003 | 684 | 355,363 | 296,679 | 542,010 | 2,216,636 | 1,850,589 | ||||||||||||||||||
2004 | 683 | 412,588 | 395,275 | 372,895 | 2,232,109 | 2,138,445 | ||||||||||||||||||
2005 | 702 | 655,075 | 646,668 | 467,629 | 3,157,662 | 3,117,139 | ||||||||||||||||||
2006 | 731 | 704,588 | 757,948 | 279,096 | 3,435,180 | 3,695,332 | ||||||||||||||||||
2007 | 746 | 951,887 | 1,014,589 | 363,732 | 5,539,588 | 5,904,485 | ||||||||||||||||||
2008 | 765 | 576,888 | 458,757 | 355,205 | 5,189,644 | 4,126,953 | ||||||||||||||||||
2009 | 770 | 887,316 | 759,949 | 483,902 | 5,783,552 | 4,953,367 | ||||||||||||||||||
2010 | 777 | 1,141,885 | 1,002,621 | 380,859 | 5,619,768 | 4,934,382 | ||||||||||||||||||
2011 | 791 | 1,041,999 | 903,493 | 353,760 | 6,863,146 | 5,950,877 | ||||||||||||||||||
2012 | 784 | 1,154,294 | 1,077,672 | 486,480 | 4,823,643 | 4,503,448 | ||||||||||||||||||
2013 | 777 | 1,185,974 | 1,123,826 | 328,325 | 3,993,422 | 3,784,158 | ||||||||||||||||||
2014 | 773 | 1,192,253 | 1,084,655 | 278,082 | 3,983,580 | 3,624,072 | ||||||||||||||||||
2015 | 770 | 1,242,832 | 1,060,437 | 455,256 | 5,351,734 | 4,566,326 | ||||||||||||||||||
2016 | 779 | 1,308,440 | 1,082,698 | 376,772 | 4,523,044 | 3,742,693 | ||||||||||||||||||
2017 | 774 | 1,605,821 | 1,498,806 | 340,457 | 5,325,760 | 4,970,842 | ||||||||||||||||||
2018 (through April 16) | 777 | 1,638,626 | 1,531,426 | 393,456 | 7,031,950 | 6,571,916 |
The Korean securities markets are principally regulated by the Financial Services Commission of Korea and the FSCMA. The Securities and Exchange Act which regulated the securities markets in the past was replaced with the FSCMA on February 4, 2009. The new law, as did the Securities and Exchange Act, imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation, takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests.
Further Opening of the Korean Securities Market
A stock index futures market was opened on May 3, 1996 and a stock index option market was opened on July 7, 1997, in each case at the KRX KOSPI Market. Remittance and repatriation of funds
in connection with investment in stock index futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign investment in Korean stocks.
Foreign investors are permitted to invest in warrants representing the right to subscribe for shares of a company listed on the KRX KOSPI Market or registered on the KRX KOSDAQ Market, subject to certain investment limitations. A foreign investor may not acquire such warrants with respect to shares of a class of a company for which the ceiling on aggregate investment by foreigners has been reached or exceeded.
Foreign investors are permitted to invest in all types of corporate bonds, bonds issued by national or local governments and bonds issued in accordance with certain special laws without being subject to any aggregate or individual investment ceiling. The Financial Services Commission sets forth procedural requirements for such investments. Foreigners are permitted to invest in certificates of deposit and repurchase agreements.
Currently, foreigners are permitted to invest in securities including shares of all Korean companies which are not listed on the KRX KOSPI Market nor registered on the KRX KOSDAQ Market and in bonds which are not listed.
Protection of Customer’s Interest in Case of Insolvency of Securities Companies
Under Korean law, the relationship between a customer and a securities company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securities company, the customer of the securities company is entitled to the proceeds of the securities sold by the securities company.
When a customer places a sell order with a securities company which is not a member of the KRX KOSPI Market and this securities company places a sell order with another securities company which is a member of the KRX KOSPI Market, the customer is still entitled to the proceeds of the securities sold received by thenon-member company from the member company regardless of the bankruptcy or reorganization of thenon-member company.
Under the FSCMA, the KRX KOSPI Market is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a securities company which is a member of the KRX KOSPI Market breaches its obligation in connection with a buy order, the KRX KOSPI Market is obliged to pay the purchase price on behalf of the breaching member. Therefore, the customer can acquire the securities that have been ordered to be purchased by the breaching member.
When a customer places a buy order with anon-member company and thenon-member company places a buy order with a member company, the customer has the legal right to the securities received by thenon-member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and thenon-member company’s creditors are concerned.
As the cash deposited with a securities company is regarded as belonging to the securities company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securities company if a bankruptcy or reorganization procedure is instituted against the securities company and, therefore, can suffer from loss or damage as a result.
However, the Depositor Protection Act provides that Korea Deposit Insurance Corporation will, upon the request of the investors, pay investors up to₩50 million in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. Pursuant to the FSCMA, securities companies are required to deposit the cash received from its customers to the extent the amount not covered by the insurance with the Korea Securities Finance Corporation, a special entity established pursuant to the Securities and Exchange Act.
Set-off or attachment of cash deposits by securities companies is prohibited. The premiums related to this insurance are paid by securities companies.
Not applicable.
Not applicable.
Item 9.F.Expenses of the Issuer
Not applicable.
Item 10. Additional Information
Currently, our authorized share capital is 1,000,000,000 shares, which consists of ordinary shares, par value₩5,000 per share (“Ordinary Shares”) and shares ofnon-voting preferred stock, par value₩5,000 per share(“Non-Voting Shares”). Ordinary Shares andNon-Voting Shares together are referred to as “Shares.” Under our articles of incorporation, we are authorized to issueNon-Voting Shares up toone-fourth of our total issued share capital. As of December 31, 2017,2018, 261,111,808 Ordinary Shares were issued, of which 16,014,75315,967,040 shares were held by the treasury stock fund or us as treasury shares. Weshares.We have never issued anyNon-Voting Shares. All of the issued Ordinary Shares are fully-paid andnon-assessable and are in registered form. We issue share certificates in denominations of 1, 5, 10, 50, 100, 500, 1,000 and 10,000 shares.
Item 10.B.Memorandum and Articles of Association
Under Article 2 of our articles of incorporation, the primary purpose of KT Corporation is to engage in, including but not limited to, the integrated telecommunications business, the new media and
internet multimedia broadcasting business, the development and sale of media contents and software, the sale of telecommunications devices, the testing and inspection of telecommunications equipment and the telemarketing business. This section provides information relating to our share capital, including brief summaries of material provisions of our articles of incorporation, the FSCMA, the Commercial Code and related laws of Korea, all as currently in effect. The following summaries are subject to, and are qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the FSCMA and the Commercial Code. We have filed a copy of our articles of incorporation as an exhibit to registration statements under the Securities Act or annual reports under the Securities Exchange Act previously filed by us.
Directors
A director is prohibited from voting on a proposal, arrangement or contract in which the director has an interest. Director compensation is determined based on the standards and methods of compensation as determined by the board of directors and reviewed by the Compensation Committee, which consists of four independent directors, and approved by the board of directors in accordance with our articles of incorporation. See “Item 6.B. Compensation—Compensation of Directors.” Directors appointed at the general shareholders meeting may not be beneficiaries nor participants of the employee welfare fund, which includes borrowings. There is no explicit age limit relating to a director’s retirement ornon-retirement, and there is no number of shares required for purposes of determining a director’s qualifications.
Dividends
We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. No dividends are distributed with respect to shares held by us or our treasury stock fund. The Ordinary Shares represented by the ADSs have the same dividend rights as other outstanding Ordinary Shares.
Holders ofNon-Voting Shares are entitled to receive dividends in priority to the holders of Ordinary Shares in an amount of not less than 9% of the par value of theNon-Voting Shares as determined by the board of directors at the time of their issuance, provided that if the dividends on the Ordinary Shares exceed those on theNon-Voting Shares, theNon-Voting Shares will also participate in the distribution of such excess dividend amount in the same proportion as the Ordinary Shares. If the amount available for dividends is less than the aggregate amount of such minimum dividend, the holders ofNon-Voting Shares will be entitled to receive such accumulated unpaid dividend in priority to the holders of Ordinary Shares from the dividends payable in respect of the next fiscal year.
We declare dividends annually at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in Shares. However, a dividend of Shares must be distributed at par value. If the market price of the Shares is less than their par value, dividends in Shares may not exceedone-half of the annual dividend. We may pay interim dividends in cash once a year to shareholders or registered pledgees who are registered in the registry of shareholders as of June 30 of each fiscal year by a resolution of the board of directors. We have no obligation to pay any annual dividend unclaimed for five years from the payment date.
Under the Commercial Code, we may pay our dividend only out of the excess of our net assets, on anon-consolidated basis, over the sum of (1) our stated capital and (2) the total amount of our capital surplus reserve and earned surplus reserve (the “Legal Reserve”) accumulated up to the end of the relevant dividend period. In addition, we may not pay any dividend unless we have set aside
as earned surplus reserve an amount equal to at least 10% of the cash portion of the dividend or unless we have accumulated an earned surplus reserve of not less thanone-half of our stated capital. We may not use the Legal Reserve to pay cash dividends but may transfer amounts from the Legal Reserve to share capital or use the Legal Reserve to reduce an accumulated deficit.
Distribution of Free Shares
In addition to paying dividends in Shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from the Legal Reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.
Preemptive Rights and Issuance of Additional Shares
We may issue authorized but unissued shares at times and, unless otherwise provided in the Commercial Code, on terms our board of directors may determine. Subject to the limitation described in “Limitation on Shareholdings” below, all our shareholders are generally entitled to subscribe for any newly issued Shares in proportion to their existing shareholdings. We must offer new Shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ register as of the relevant record date. Under the Commercial Code, we may vary, without shareholders’ approval, the terms of these preemptive rights for different classes of shares. We must give notice to all persons who are entitled to exercise preemptive rights regarding new Shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute Shares for which preemptive rights have not been exercised or where fractions of Shares occur.
Under the Commercial Code, it is required that the new Shares, convertible bonds or bonds with warrants be issued to persons other than the existing shareholders solely for the purpose of achieving managerial objectives. Under our articles of incorporation, we may issue new Shares
pursuant to a board resolution to persons other than existing shareholders, who in these circumstances will not have preemptive rights, if the new Shares are:
publicly offered pursuant to Articles 4 and 119 of the FSCMA;
issued to members of our employee stock ownership association;
represented by depositary receipts;
issued upon exercise of stock options granted to our officers and employees;
issued through an offering to public investors pursuant to Article165-6 of the FSCMA, the amount of which is no more than 10% of the issued Shares;
issued in order to satisfy specific needs such as strategic alliance, inducement of foreign funds or new technology, improvement of financial structure or other capital raising requirement; or
issued to domestic or foreign financial institutions when necessary for raising funds in emergency cases.
In addition, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of₩2,000 billion, to persons other than existing shareholders in the situations described above.
Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20.0% of the Shares publicly offered pursuant to the FSCMA. This right is exercisable only to the extent that the total number of Shares so acquired and held by members of our employee stock ownership association does not then exceed 20.0% of the total number of Shares then issued (including in such total both: (i) all issued and outstanding Shares at the time the preemptive rights are exercised; and (ii) all Shares to be newly issued in the applicable share issuance transaction in connection with which such preemptive rights are exercised). As of December 31, 2017,2018, 0.5% of the issued Shares were held by members of our employee stock ownership association.
LimitationLimitations on ShareholdingsShareholding
The Telecommunications Business Act permits maximum aggregate foreign shareholding in us to be 49.0% of our total issued and outstanding Shares with voting rights (including equivalent securities with voting rights, e.g., depositary certificates and certain other equity interests). For the purposes of the foregoing, a shareholder is a “foreign shareholder” if such shareholder is: (1) a foreign person; (2) a foreign government; or (3) a company whose largest shareholder is a foreign person (including any “specially related persons” as determined under the FSCMA) or a foreign government, in circumstances where (i) such foreign person or foreign government holds, in aggregate, 15.0% or more of such company’s total voting shares, and (ii) such company holds at least 1.0% of our total issued and outstanding Shares with voting rights. For the avoidance of doubt, both of conditions (i) and (ii) in the foregoing item (3) must exist for such a company to be counted as a “foreign shareholder” for the purposes of calculating whether the 49.0% foreign shareholding threshold is reached under the Telecommunications Business Act. In addition, the Telecommunications Business Act prohibits a foreign shareholder from being our largest shareholder if such shareholder owns 5.0% or more of our Shares with voting rights. For the purposes of this restriction, any two or more foreign persons or foreign governments who enter into an agreement to act in concert in the exercise of their voting rights
will be counted together and prohibited from becoming our largest shareholder in the event that they collectively hold 5.0% or more of our Shares. For the purposes of this restriction under the Foreign Investment Promotion Act, a “foreign shareholder” is defined in the same manner as described above with respect to the foreign shareholding restriction under the Telecommunications Business Act, provided, however, that no exception is made under the Foreign Investment Promotion Act regulations for companies that own less than 1.0% of our Shares (see item (3)(ii) above in this paragraph). A foreigner who has acquired the Shares in excess of such ceiling described above may not exercise its voting rights for shares in excess of such limitation, and the MSIT may require corrective measures to comply with the ownership restrictions.
General Meeting of Shareholders
We hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:
as necessary;
at the request of shareholders of an aggregate of 3.0% or more of our issued Ordinary Shares;
at the request of shareholders holding an aggregate of 1.5% or more of our issued Shares for at least six months; or
at the request of our Audit Committee.
We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of less than 1.0% of the total number of issued and outstanding Ordinary Shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use Seoul Shinmun, Maeil Business Newspaper and The Korea Economic Daily published in Seoul for this purpose. Shareholders not on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders ofNon-Voting Shares are not entitled to receive notice of general meetings of shareholders, but may attend such meetings.
Our general meetings of shareholders are held at our office in Seoul, or if necessary, may be held elsewhere.
Voting Rights
Holders of our Ordinary Shares are entitled to one vote for each Ordinary Share, except that voting rights of Ordinary Shares held by us, or by a corporate shareholder that is more than 10.0% owned by us either directly or indirectly, may not be exercised. The Commercial Code permits cumulative voting, under which voting method each shareholder has multiple voting rights corresponding to the number of directors to be appointed in the voting and may exercise all voting rights cumulatively to elect one director. Our articles of incorporation permit cumulative voting at our shareholders’ meeting. Under the Commercial Code of Korea, any shareholder holding shares equivalent to not less than 1/100 of the total number of shares issued may apply to us for selecting and appointing such directors by cumulative voting.
Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting, where the affirmative votes also represent at
leastone-fourth of our total voting shares then outstanding. However, under the Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at leasttwo-thirds of the voting shares present or represented at a meeting, where the affirmative votes also represent at leastone-third of our total voting shares then outstanding:
amending our articles of incorporation;
removing a director;
reduction of our share capital;
effecting any dissolution, merger or consolidation of us;
transferring the whole or any significant part of our business;
effecting our acquisition of all of the business of any other company or our acquisition of a part of the business of any other company which will significantly affect our business; or
issuing any new Shares at a price lower than their par value.
In general, holders ofNon-Voting Shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders. However, in the case of amendments to our articles of incorporation, any merger or consolidation of us, or in some other cases that affect the rights or interests of theNon-Voting Shares, approval of the holders ofNon-Voting Shares is required. We may obtain such approval by a resolution of holders of at leasttwo-thirds of theNon-Voting Shares present or represented at a class meeting of the holders ofNon-Voting Shares, where the affirmative votes also represent at leastone-third of our total outstandingNon-Voting Shares.
Shareholders may exercise their voting rights by proxy. The proxy must present a document evidencing an appropriate power of attorney prior to the start of the general meeting of shareholders. Additionally, shareholders may exercise their voting rights in absentia by submission of signedwrite-in voting forms. To make it possible for our shareholders to proceed with voting on awrite-in basis, we are required to attach the appropriatewrite-in voting form and related informational material to the notices distributed to shareholders for convening the relevant general meeting of shareholders. Any of our shareholders who desire to vote on suchwrite-in basis must submit their completed and signedwrite-in voting forms to us no later than one day prior to the date that the relevant general meeting of shareholders is convened.
Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying Ordinary Shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote the Ordinary Shares underlying their ADSs. See “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares.”
Appraisal Rights of Dissenting Shareholders
In some limited circumstances, including the transfer of the whole or any significant part of our business and our merger or consolidation with another company, dissenting shareholders have the right to require us to purchase their Shares. To exercise this right, shareholders must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their Shares. We are obligated to purchase the Shares of dissenting shareholders
within one month after the expiration of the20-day period. The purchase price for the Shares is required to be determined through negotiation between the dissenting shareholders and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily Share prices on the KRX KOSPI Market for thetwo-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily Share price on the KRX KOSPI Market for the one month period before the date of the adoption of the relevant board resolution and (3) the weighted average of the daily Share price on the KRX KOSPI Market for the one week period before the date of the adoption of the relevant board resolution. However, if we or any of the dissenting shareholders do not accept the purchase price calculated using the above method, the rejecting party may request the court to determine the purchase price. Holders of ADSs will not be able to exercise appraisal rights unless they have withdrawn the underlying ordinary shares and become our direct shareholders.
Register of Shareholders and Record Dates
Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It registersOur transfer agent currently effects transfers of Shares on the register of shareholders onupon the presentation of the Share certificates.certificates and will, starting from September 16, 2019, effect transfers of Shares on the register of shareholders only upon the electronic registration of such transfers pursuant to the Act on Electronic Registration of Stocks, Bonds, Etc. of Korea (the “Electronic Registration Act”).
The record date for annual dividends is December 31. For the purpose of determining the shareholders entitled to annual dividends, the register of shareholders may be closed for the period from the day after the record date to January 31 of the following year. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the Shares, we may, on at least two weeks’ public notice, set a record date and/or close the register of shareholders for not more than three months. The trading of Shares and the delivery of share certificates may continue while the register of shareholders is closed.
Annual Reports
At least one week before the annual general meeting of shareholders, we must make our annual report and audited consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the audited consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.
Under the FSCMA, we must file with the Financial Services Commission and the KRX KOSPI Market (1) an annual report within 90 days after the end of our fiscal year and (2) interim reports with respect to the three month period, six month period and nine month period from the beginning of each fiscal year within 45 calendar days following the end of each period. Copies of these reports are or will be available for public inspection at the Financial Services Commission and the KRX KOSPI Market.
Transfer of Shares
Under the Commercial Code, the transfer of Shares is currently effected by the delivery of share certificates. However,certificates and will, starting from September 16, 2019, only be effected by the electronic registration of such transfers pursuant to the Electronic Registration Act, under which the electronic registration of stocks, bonds and transfers thereof will be required. To assert shareholders’ rights against us, the transferee must have his name and address registered on our register of shareholders. For this purpose, a shareholder is required to file his name, address and seal with our transfer agent. Anon-Korean shareholder may file a specimen signature in place of a seal, unless he is a citizen of a country with a sealing system similar to that of Korea. In addition, anon-resident shareholder must appoint an agent authorized to receive notices on his behalf in Korea and file a mailing address in Korea. The above requirements do not apply to the holders of ADSs.
Under current Korean regulations, Korean securities companies and banks, including licensed branches ofnon-Korean securities companies and banks, investment management companies, futures trading companies, internationally recognized foreign custodians and the Korea Securities Depository may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of Shares bynon-residents ornon-Koreans. See “Item 10. Additional Information—Item 10.D. Exchange Controls.”
Our transfer agent is Kookmin Bank, located at 26,Gukjegeumyung-ro8-gil,Yeongdeungpo-gu, Seoul, Korea.
Acquisition of Shares by Us
Under the Commercial Code, we may acquire our own Shares by (i) purchasing on the KRX KOSPI Market, or (ii) purchasing from shareholders on a pro rata basis in accordance with the number of shares held by each shareholder. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year. Moreover, we must acquire our own Shares from dissenting shareholders who exercise their appraisal rights.
Under the FSCMA, we may acquire Shares only by (i) purchasing on the KRX KOSPI Market, (ii) purchasing from shareholders on a pro rata basis in accordance with the number of shares held by each shareholder, or (iii) receiving Shares returned to us upon the cancellation or termination of a trust agreement with a trustee who acquired the Shares by either of the methods indicated above. The aggregate purchase price for the Shares may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year.
In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our Shares.
As of December 31, 2017,2018, there were 16,014,75315,967,040 treasury shares including shares held by our treasury stock fund.
Liquidation Rights
In the event of our liquidation, after payment of all debts, liquidation expenses and taxes, our remaining assets will be distributed among shareholders in proportion to their shareholdings. Holders ofNon-Voting Shares have no preference in liquidation.
We have not entered into any material contracts since January 1, 2012, other than in the ordinary course of our business. For information regarding our agreements and transactions with certain related parties, see “Item 7. Major Shareholders and Related Party Transactions—Item 7.B. Related Party Transactions” and Note 36 to the Consolidated Financial Statements. For a description of certain agreements entered into during the past two years related to our capital commitments and obligations, see “Item 5. Operating and Financial Review and Prospects—Item 5.B. Liquidity and Capital Resources.”None.
General
The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) regulate investment in Korean
securities bynon-residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws,non-residents may invest in Korean securities only in compliance with the provisions of, and to the extent specifically allowed by, these laws or otherwise permitted by the Ministry of Strategy and Finance.MOEF. The Financial Services Commission has also adopted, pursuant to its authority under the FSCMA, regulations that control investment by foreigners in Korean securities and regulate the issuance of securities outside Korea by Korean companies.
Under the Foreign Exchange Transaction Laws, if the Government deems that certain emergency circumstances, including, but not limited to, the outbreak of natural calamities, wars or grave and sudden changes in domestic or foreign economies, are likely to occur, the Ministry of Strategy and FinanceMOEF may temporarily suspend the transactions where Foreign Exchange Transaction Laws are applicable, or impose an obligation to deposit or sell capital to certain Korean governmental agencies or financial institutions. In addition, if the Government deems that it is confronted or is likely to be confronted with serious difficulty in movement of capital between Korea and abroad which will bring serious obstacles in carrying out its currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Strategy and FinanceMOEF may take measures to require any person who performs transactions to deposit such capital to certain Korean governmental agencies or financial institutions.
Government Review of Issuance of ADSs
In order for us to issue shares represented by ADSs, we are required to file a prior report of the issuance with the Ministry of Strategy and FinanceMOEF if our securities and borrowings denominated in foreign currencies issued during theone-year period preceding such filing date exceed US$30 million in aggregate. No further Korean governmental approval is necessary for the initial offering and issuance of the ADSs.
Under current Korean laws and regulations, the depositary bank is required to obtain our prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by us or with the consent of us for the issuance of ADSs (including deposits in connection with the initial and all subsequent offerings of ADSs and stock dividends or other distributions related to these ADSs) and (2) the number of shares
on deposit with the depositary bank at the time of such proposed deposit. We can give no assurance that we would grant our consent, if our consent is required. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.
Reporting Requirements for Holders of Substantial Interests
Any person whose direct or beneficial ownership of shares, whether in the form of shares or ADSs, certificates representing the rights to subscribe for Shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively, the “Equity Securities”) together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5.0% or more of the total issued Equity Securities is required to report the status of the holdings to the Financial Services Commission and the KRX KOSPI Market within five business days after reaching the 5.0% ownership interest. In addition, any change in the ownership interest subsequent to the report which equals or exceeds 1.0% of the total issued Equity Securities is required to be reported to the Financial Services Commission and the KRX KOSPI Market within five business days from the date of the change. The required information to be included in the 5.0% report may be different if the acquisition of such shareholding interest is for the purpose of exercising influence over the management, as opposed to an acquisition for investment purposes. Any person reporting the holding of 5.0% or more of the total issued Equity Securities and any person reporting the
change in the ownership interest which equals or exceeds 1.0% of the total issued Equity Securities pursuant to the requirements described above must also deliver a copy of such reports to us.
Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the unreported ownership of Equity Securities exceeding 5.0%. Furthermore, the Financial Services Commission may issue an order to dispose ofnon-reported Equity Securities.
Restrictions Applicable to ADSs
No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery inside Korea of shares in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration certificate from the Financial Supervisory Service as described below. In general, the acquisition of the shares by a foreigner must be reported by the foreigner or his standing proxy in Korea immediately to the Governor of the Financial Supervisory Service; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository.
Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.
Restrictions Applicable to Shares
As a result of amendments to the Foreign Exchange Transaction Laws and Financial Services Commission regulations adopted in connection with the stock market opening from January 1992, which we refer to collectively as the Investment Rules, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the KRX KOSPI Market or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may
trade shares listed on the KRX KOSPI Market or the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, except in limited circumstances, including:
odd-lot trading of shares;
acquisition of shares (“Converted Shares”) by exercise of warrant, conversion right under convertible bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company;
acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;
over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded;
shares acquired by foreign direct investment as defined in the Foreign Investment Promotion Act;
disposal of shares pursuant to the exercise of appraisal rights of dissenting shareholders;
acquisition of shares by a foreign depositary in connection with the issuance of depositary receipts;
acquisition and disposal of shares through overseas stock exchange market if such shares are simultaneously listed on the KRX KOSPI Market or the KRX KOSDAQ Market and such overseas stock exchange;
acquisition and disposal of shares through alternative trading systems (ATS);
arm’s length transactions between foreigners, if all of such foreigners belong to an investment group managed by the same person.
Forover-the-counter transactions of shares between foreigners outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, an investment broker licensed in Korea must act as an intermediary.Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve a licensed investment trader in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions through borrowing shares from a securities company with respect to shares which are subject to a foreign ownership limit.
The Investment Rules require a foreign investor who wishes to invest in shares on the KRX KOSPI Market or the KRX KOSDAQ Market (including Converted Shares) to register its identity with the Financial Supervisory Service prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares or who acquire the shares in anover-the-counter transaction or dispose of shares where such acquisition or disposal is a foreign direct investment as defined in the Foreign Investment Promotion Act. Upon registration, the Financial Supervisory Service will issue to the foreign investor an
investment registration certificate that must be presented each time the foreign investor opens a brokerage account with a financial investment business entity. Foreigners eligible to obtain an investment registration certificate include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign public institutions, corporations incorporated under foreign laws, international organizations, funds and associations as defined under the FSCMA. All Korean offices of a foreign corporation as a group are treated as a separate entity from the offices of the corporation outside Korea. However, a foreign corporation or depositary bank issuing depositary receipts may obtain one or more investment registration certificates in its name in certain circumstances as described in the relevant regulations.
Upon a foreign investor’s purchase of shares through the KRX KOSPI Market or the KRX KOSDAQ Market, no separate report by the investor is required because the investment registration certificate system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor of the Financial Supervisory Service at the time of each such acquisition or sale; provided, however, that in cases where a foreigner acquires shares through the exercise of rights as a holder of ADSs (or other depositary certificates), the foreigner must cause such report to the Governor of the Financial Supervisory Service to be filed by the Korea Securities Depository; and further provided that a foreign investor must ensure that any acquisition or sale by it of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market in the case of trades in connection with a tender offer,odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership
limit has been reached or exceeded, is reported to the Governor of the Financial Supervisory Service by the investment trader, the investment broker, the Korea Securities Depository or the financial securities company engaged to facilitate such transaction. A foreign investor may appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks, including domestic branches of foreign banks, investment traders, investment brokers, the Korea Securities Depository, financial securities companies and internationally recognized custodians that satisfy all relevant requirements under the FSCMA.
Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only the Korea Securities Depository, foreign exchange banks including domestic branches of foreign banks, investment traders, investment brokers, collective investment business entities and internationally recognized custodians satisfying the relevant requirements under the FSCMA are eligible to act as a custodian of shares for anon-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor of the Financial Supervisory Service in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.
Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40.0% ceiling on the acquisition of shares by foreigners in the aggregate and a ceiling on the acquisition of shares by a single foreign investor pursuant to the articles of incorporation of such corporation. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10.0% of the issued shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Act, which is, in general, subject to the report to, and acceptance, by the Ministry of Trade Industry & Energy. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the
business of the Korean company. A foreigner who has acquired our ordinary shares in excess of this ceiling may not exercise his voting rights with respect to our ordinary shares exceeding the limit.
Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at an investment broker or an investment trader. Funds in the foreign currency account may be remitted abroad without any governmental approval.
Dividends on Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any shares held by anon-resident of Korea must be deposited either in a Won account with the investor’s investment broker or investment trader or his Won Account. Funds in the investor’s Won Account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won Account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.
Investment brokers and investment traders are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea.
Through these accounts, these investment brokers and investment traders may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.
The following summary is based upon tax laws of the United States and the Republic of Korea as in effect on the date of this annual report on Form20-F, and is subject to any change in United States or Korean law that may come into effect after such date. Investors in the ordinary shares or ADSs are advised to consult their own tax advisers as to the United States, Korean or other tax consequences of the purchase, ownership and disposition of such securities, including the effect of any national, state or local tax laws.
Korean Taxation
The following summary of Korean tax considerations applies to you as long as you are not:
a resident of Korea;
a corporation organized under Korean law; or
engaged in a trade or business in Korea through a permanent establishment or a fixed base.
Shares or ADSs
Dividends on Ordinary Shares or ADSs
Unless an applicable tax treaty provides otherwise, we will deduct Korean withholding tax from dividends paid to you either in cash or shares at a rate of 22.0% (including local income tax). If you are
a resident of a country that has entered into a tax treaty with Korea, you may qualify for a reduced rate of Korean withholding tax under such a treaty. For example, if you are a qualified resident of the United States for purposes of theUS-Korea Tax Treaty (the “Treaty”) and you are the beneficial owner of a dividend, a reduced withholding tax rate of 16.5% (including local income tax) generally will apply. You will not be entitled to claim treaty benefits if you are not the beneficial owner of a dividend.
In order to obtain the benefits of a reduced withholding tax rate under a tax treaty, you must submit to us, prior to the dividend payment date, an application for entitlement to a reduced tax rate. If you hold ADSs and receive the dividends through a depositary, you are not required to submit the application for entitlement to a reduced tax rate. If you are an overseas investment vehicle (an “OIV”), which is defined as an organization established in anon-Korean jurisdiction that manages funds collected through investment solicitation by way of acquiring, disposing, or otherwise investing in any such assets and distributes the yield therefrom to investors), you must submit to us a report of the OIV and a schedule of beneficial owners together with their applications for entitlement to a reduced tax rate, which you should collect from each beneficial owner. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have tax withheld at a lower rate.
If we distribute to you free shares representing a transfer of certain capital reserves or asset revaluation reserves intopaid-in capital, that distribution may be a deemed dividend subject to Korean tax.
Capital Gains
Capital gains from a sale of ordinary shares will generally be exempt from Korean taxation if you have owned, together with certain related parties, less than 25.0% of our total issued shares during the year of sale and the five calendar years before the year of sale, and the sale is made through the KRX KOSPI Market, and you have no permanent establishment in Korea. Capital gains earned by anon-Korean holder from a sale of ADSs outside of Korea are exempt from Korean taxation by virtue of the Special Tax Treatment Control Law of Korea (the “STTCL”), provided that the issuance of the ADSs is deemed to be an overseas issuance under the STTCL.
If you are subject to Korean taxation on capital gains from a sale of ADSs, or ordinary shares that you acquired as a result of a withdrawal, your gain will be calculated based on your cost of acquiring the ADSs representing the ordinary shares, although there are no specific Korean tax provisions or rulings on this issue. In the absence of the application of a tax treaty that exempts tax on capital gains, the amount of Korean tax imposed on such capital gains will be the lesser of 11.0% (including local income tax) of the gross realization proceeds or, subject to the production of satisfactory evidence of the acquisition cost and the transaction costs of the ADSs, 22.0% (including local income tax) of the net capital gain.
If you are subject to Korean taxation on capital gains from a sale of ADSs, or ordinary shares that you acquire as a result of a withdrawal, and you sell your ordinary shares or ADSs, the purchaser or, in the case of a sale of ordinary shares on the KRX KOSPI Market or through a licensed securities company in Korea, the licensed securities company, is required to withhold Korean tax from the sales price in an amount equal to 11% (including local income tax) of the gross realization proceeds and to make payment thereof to the Korean tax authorities, unless you establish your entitlement to an exemption from taxation under an applicable tax treaty or produce satisfactory evidence of your acquisition cost and the transaction costs for the ordinary shares or ADSs. In order to obtain the benefit of an exemption from tax pursuant to a tax treaty, you must submit to the purchaser or the securities company (or through the depositary), as the case may be, prior to the first payment, an exemption application, together with a certificate of your tax residence issued by a competent authority of your
residence country. If you are an OIV, you must submit a report of the OIV and a schedule of beneficial owners together with their applications for exception, which you should collect from each beneficial owner. The withholding obligor must submit the application and the report to the relevant tax office by the ninth day of the month following the date of the first payment of such income. This requirement will not apply to exemptions under Korean tax law. Excess taxes withheld may be recoverable if you subsequently produce satisfactory evidence that you were entitled to have taxes withheld at a lower rate.
Most tax treaties that Korea has entered into provide exemptions for capital gains tax for capital gains from sale of ordinary shares. However, Korea’s tax treaties with Japan, Austria, Spain and a few other countries do not provide an exemption from such capital gains tax. For example, Article 13 of Korea’s tax treaty with Japan provides that if a taxpayer holding 25% or more (including those shares held by any related party of the taxpayer) of total issued shares of a company in a taxable year sells 5% or more (including those sold by any related party of the taxpayer) of total issued shares of the same company in the same taxable year, the country where the company is a resident may impose tax on such taxpayer.
Inheritance Tax and Gift Tax
Korean inheritance tax is imposed upon (a) all assets (wherever located) of the deceased if at the time of his death he was domiciled in Korea or had resided in Korea for at least 183 days immediately prior to his death and (b) all property located in Korea which passes on death (irrespective
of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. Taxes are currently imposed at the rate of 10% to 50% if the value of the relevant property is above a certain limit and vary according to the identity of the parties involved.
Under Korean Inheritance and Gift Tax Law, shares issued by a Korean corporation are deemed located in Korea irrespective of where they are physically located or by whom they are owned. It remains unclear whether, for Korean inheritance and gift tax purposes, anon-resident holder of ADSs will be treated as the owner of the shares underlying the ADSs. If suchnon-resident is treated as the owner of the shares, the heir or donee of suchnon-resident (or in certain circumstances, thenon-resident as the donor) will be subject to Korean inheritance or gift tax at the same rate as described above.
Securities Transaction Tax
If you transfer ordinary shares on the KRX KOSPI Market, you will be subject to the securities transaction tax at a rate of 0.15% and an agriculture and fishery special tax at a rate of 0.15%, calculated based on the sales price of the shares. If you transfer ordinary shares and your transfer is not made on the KRX KOSPI Market you will generally be subject to the securities transaction tax at a rate of 0.5% and will generally not be subject to the agriculture and fishery special tax.
With respect to transfers of ADSs, a tax ruling issued in 2004 by the Korean tax authority appears to hold that depositary receipts (such as the ADSs) constitute share certificates subject to the securities transaction tax. In May 2007, the Seoul Administrative Court held that depositary receipts do not constitute share certificates subject to the securities transaction tax. In 2008, the Seoul Administrative Court’s holding was upheld by the Seoul High Court and was further upheld by the Supreme Court. Subsequent to this series of rulings, however, the Securities Transaction Tax Law was amended to expressly provide that depositary receipts constituted a form of share certificates subject to the securities transaction tax. However, the sale price of ADSs from a transfer of depositary receipts listed on the New York Stock Exchange, the Nasdaq National Market or other qualified foreign exchanges are exempt from the securities transaction tax.
United States Federal Income Taxation
The following discussion describes the materialUnited States federal income tax consequences of the ownership of our ADSs and ordinary shares as of the date hereof. This discussion deals only with ADSs and ordinary shares that are held as capital assets by a United StatesU.S. Holder (as defined below). In addition, the discussion set forth below is applicable only to United StatesU.S. Holders (i) who are residents of the United States for purposes of the current Treaty, (ii) whose ADSs or ordinary shares are not, for purposes of the Treaty, effectively connected with a permanent establishment in Korea and (iii) who otherwise qualify for the full benefits of the Treaty.
As used herein, the term “United StatesFor purposes of this summary, a “U.S. Holder” meansis a beneficial owner of our ADSs or ordinary shares that is, for United States federal income tax purposes, any of the following:is:
a citizen or resident of the United States;
a corporation (or other entity treated as a corporation for United States federal income tax purposes) createddomestic corporation; or organized in or under the laws of the United States, any state thereof or the District of Columbia;
otherwise is subject to United States federal income taxation regardlesson a net income basis in respect of its source;such ADSs or
This discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions thereunder as of the date hereof. Thosehereof, as well as the Treaty (as defined above).Those authorities may be changed, perhaps retroactively, so as to result in United States federal income tax consequences different from those summarized below. In addition, this discussion is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
a dealer in securities or currencies;
a financial institution;
a regulated investment company;
a real estate investment trust;
an insurance company;
atax-exempt organization;
a person holding our ADSs or ordinary shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle;
a trader in securities that has elected themark-to-market method of accounting for your securities;
a person liable for alternative minimum tax;
a person who owns or is deemed to own 10% or more of our voting stock;stock (by vote or value);
a partnership or other pass-through entity for United States federal income tax purposes; or
a person whose “functional currency” is not the United States dollar.
If a partnership (or other entity treated as a partnership for United States federal income tax purposes) holds our ADSs or ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ADSs or ordinary shares, you should consult your tax advisors.
This discussion does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address the Medicare contribution tax on net investment income or the effects of any state, local ornon-United States tax laws.If you are considering the purchase of our ADSs or ordinary shares, you should consult your own taxadvisors concerning the particular United States federal income taxconsequences to you of the purchase, ownership and disposition of our ADSs or ordinary shares, as well as the consequences to you arising under other United States federal tax laws and the laws of any other taxing jurisdiction.
ADSs
If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying ordinary shares that are represented by such ADSs.Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax. For the remainder of this discussion, references to “ordinary shares” should be interpreted to include ADSs, unless otherwise specified.
Taxation of Dividends
The gross amount of distributions onof cash or property with respect to the ADSs or ordinary shares (including any amounts withheld to reflect Koreanwithholding taxes) will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as atax-free return of capital, causing a reduction in the tax basis of the ADSs or ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain recognized on a sale or exchange. WeBecause we do not however, expect to determine earnings and profits in accordance with United States federal income tax principles. Therefore,principles, you should expect that a distribution will generally be treated as a dividend.dividend for United States federal income tax purposes.
Any dividends that you receive (including any withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of ordinary shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code. With respect tonon-corporate United States investors, certain dividends received from a qualified foreign corporation may be subject to reducedpreferential rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States which the United States Treasury Department determines to be satisfactory for these purposes and which includes an exchange of information provision. The United States Treasury Department has determined that the Treaty meets these requirements, and we believe we are eligible for the benefits of the Treaty. However,non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult your own tax advisors regarding the application of these rules to your particular circumstances.
Non-corporate United StatesU.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company in the taxable year in which such dividends are paid or in the preceding taxable year (see “—Passive Foreign Investment Company” below).
The amount of any dividend paid in Won will equal the United States dollar value of the Won received calculated by reference to the exchange rate in effect on the date the dividend is received by
you, in the case of ordinary shares, or by the depositary, in the case of ADSs, regardless of whether the Wonare converted into United States dollars. If the Won received as a dividend are converted into United States dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the Wonreceived as a dividend are not converted into United States dollars on the date of receipt, you will have a basis in the Wonequal to their United States dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Wonwill be treated as United States source ordinary income or loss.
Subject to certain conditions and limitations (including a minimum holding period requirement), Koreanwithholding taxes on dividends may be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADSs or ordinary shares will be treated as income from sources outside the United States and will generally constitute passive category income. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
Passive Foreign Investment Company
Based on the past and projected composition of our income and assets, and the valuation of our assets we do not believe we would have beenwere a passive foreign investment company, or PFIC, for our most recent taxable year if we were taxable as a corporation for United States federal income tax purposes, and we do not expect to become a PFIC in the current taxable year or the foreseeable future, although there can be no assurance in this regard.
In general, we will be a PFIC for any taxable year in which:
at least 75% of our gross income is passive income, or
at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income.
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, for purposes of determining whether we are a PFIC, we will be treated as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.
The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. If we are a PFIC for any taxable year during which you hold our commonordinary shares, you will be subject to special tax rules discussed below.
If we are a PFIC for any taxable year during which you hold our commonordinary shares and you do not make a timelymark-to-market election, as described below, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of commonordinary shares. Distributions received in a taxable year will be treated as excess distributions to the extent that they are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the commonordinary shares. Under these special tax rules:
the excess distribution or gain will be allocated ratably over your holding period for the commonordinary shares,
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and
the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
Although the determination of whether we are a PFIC is made annually, if we are a PFIC for any taxable year in which you hold our commonordinary shares, you will generally be subject to the special tax rules described above for that year and for each subsequent year in which you hold the commonordinary shares (even if we do not qualify as a PFIC in such subsequent years). However, if we cease to be a PFIC, you can avoid the continuing impact of the PFIC rules by making a special election to recognize gain as if your commonordinary shares had been sold on the last day of the last taxable year during which we were a PFIC. You are urged to consult your own tax advisor about this election.
In lieu of being subject to the special tax rules discussed above, you may make amark-to-market election with respect to your commonordinary shares provided such commonordinary shares are treated as “marketable stock.” The commonordinary shares generally will be treated as marketable stock if they are regularly traded on a “qualified exchange or other market” (within the meaning of the applicable Treasury regulations).
If you make an effectivemark-to-market election, for each taxable year that we are a PFIC you will include as ordinary income the excess of the fair market value of your commonordinary shares at the end of the year over your adjusted tax basis in the commonordinary shares. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted tax basis in the commonordinary shares over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of themark-to-market election. Your adjusted tax basis in the commonordinary shares will be increased by the amount of any income inclusion and decreased by the amount of any deductions under themark-to-market rules. In addition, upon the sale or other disposition of your commonordinary shares in a year that we are a PFIC, any gain will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount of income previously included income as a result of themark-to-market election.
If you make amark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the commonordinary shares are no longer regularly traded on a qualified exchange or other market, or the Internal Revenue Service (the “IRS”) consents to the revocation of the election. You are urged to consult your tax advisor about the availability of themark-to-market election, and whether making the election would be advisable in your particular circumstances.
Alternatively, you can sometimes avoid the special tax rules described above by electing to treat a PFIC as a “qualified electing fund” under Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.
If we are a PFIC for any taxable year during which you hold our commonordinary shares and any of ournon-United States subsidiaries is also a PFIC, you will be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of the PFIC rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
You will generally be required to file Internal Revenue ServiceIRS Form 8621 if you hold our commonordinary shares in any year in which we are classified as a PFIC. You are urged to consult your tax advisors concerning the United
advisors concerning the United States federal income tax consequences of holding commonordinary shares if we are considered a PFIC in any taxable year.
Taxation of Capital Gains
For United States federal income tax purposes, you will recognize taxable gain or loss on any sale or exchange of the ADSs or ordinary shares in an amount equal to the difference between the amount realized for the ADSs or ordinary shares and your tax basis in the ADSs or ordinary shares.Such gain or loss will generally be capital gain or loss and will generally be long-term capital gain or loss if you have held the ADSs or ordinary shares for more than one year. Long-term capital gains ofnon-corporate United StatesU.S. Holders (including individuals) are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as United States source gain or loss.
You should note that any Koreansecurities transaction tax will not be treated as a creditable foreign tax for United States federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code. You should consult your own tax advisors regarding the application of the foreign tax credit rules to your investment in, and disposition of, the ordinary shares.
Foreign Financial Asset Reporting
Certain U.S. Holders that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 are generally required to file an information statement along with their tax returns, currently on IRS Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at anon-United States financial institution, as well as securities issued by anon-United States issuer that are not held in accounts maintained by financial institutions. The understatement of income attributable to “specified foreign financial assets” in excess of US$5,000 extends the statute of limitations with respect to the tax return to six years after the return was filed. U.S. Holders who fail to report the required information could be subject to substantial penalties. You are encouraged to consult with your own tax advisors regarding the possible application of these rules, including the application of the rules to your particular circumstances.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of our ADSs or ordinary shares and the proceeds from the sale, exchange or other disposition of our ADSs or ordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. A backup withholding tax may apply to such payments if you fail to provide a taxpayer identification number or certification of exempt status or fail to report in full dividend and interest income.
Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.IRS.
Item 10.F.Dividends and Paying Agents
See “Item 8. Financial Information—Item 8.A. Consolidated Statements and Other Financial Information—Dividends” for information concerning our dividend policies and our payment of dividends. See “—Item 10.B. Memorandum and Articles of Association—Dividends” for a discussion of the process by which dividends are paid on our ordinary shares. See “Item 12. Description of Securities Other than Equity Securities—Item 12.D. American Depositary Shares” for a discussion of the process by which dividends are paid on our ADSs. The paying agent for payment of our dividends on ADSs in the United States is Citibank, N.A.
Item 10.G.Statements by Experts
Not applicable.
Item 10.H.Documents on Display
We are subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended, and, in accordance therewith, are required to file reports, including annual reports on Form20-F, and other information with the U.S. Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the Commission’s public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at1-800-SEC-0330 for further information on the public reference rooms. We are required to make filings with the Commission by electronic means, which will be available to the public over the Internet at the Commission’s web sitewebsite at http://www.sec.gov.
Item 10.I.Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to foreign exchange rate and interest rate risks primarily associated with underlying liabilities, and to equity price risk as a result of our investment in equity securities. Our long-term financial policies are annually reported to our Board of Directors, and our Financefinance division conducts financial risk management and assessment. Upon identification and evaluation of our risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to manage some of such risks. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. The activities of our finance division are subject to policies approved by our foreign exchange and interest rate risk management committee. These policies address the use of derivative financial instruments, including the approval of counterparties, setting of limits and investment of excess liquidity. Our general policy is to hold or issue derivative financial instruments largely for hedging purposes.
For our trading financial instruments, we recognized a valuation gain of₩0 and a valuation loss of₩2 billion in 2015, a valuation gain of₩1 billion and a valuation loss of₩8 billion in 2016 and a valuation gain of₩0 billion and a valuation loss of₩4 billion in 2017. For our hedging derivative contracts, we recognized a valuation gain of₩142 billion, a valuation loss of₩2 billion and accumulated other comprehensive income of₩148 billion in 2015, a valuation gain of₩109 billion, a valuation loss of₩0.1 billion and accumulated other comprehensive income of₩85 billion in 2016 and a valuation gain of₩0.1 billion, a valuation loss of₩210 billion and accumulated other comprehensive loss of₩147 billion in 2017.2017 and a valuation gain of₩66 billion, a valuation loss of₩2 billion and accumulated other comprehensive income of₩22 billion in 2018. For further details regarding the assets, liabilities, gains and losses recorded relating to our derivative contracts outstanding as of December 31, 2015, 2016, 2017 and 2017,2018, see Note 7 to the Consolidated Financial Statements.
Exchange Rate Risk
Substantially allMost of our cash flow is denominated in Won. We are exposed to foreign exchange risk related to foreign currency denominated liabilities and anticipated foreign exchange payments. Anticipated foreign exchange payments, mostly in U.S. Dollars, relate primarily to payments of foreign currency denominated debt, net settlements paid to foreign telecommunication carriers and payments for equipment purchased from foreign suppliers. We have entered into several currency swap contracts, combined interest currency swap contracts and currency forward contracts to hedge our foreign currency risks.
The following table shows our assets and liabilities denominated in foreign currency as of December 31, 2015, 2016, 2017 and 2017:2018:
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2015 | 2016 | 2017 | 2016 | 2017 | 2018 | |||||||||||||||||||||||||||||||||||||||||||
(in thousands of foreign currencies) | Financial assets | Financial liabilities | Financial assets | Financial liabilities | Financial assets | Financial liabilities | Financial assets | Financial liabilities | Financial assets | Financial liabilities | Financial assets | Financial liabilities | ||||||||||||||||||||||||||||||||||||
U.S. Dollar | 183,254 | 2,351,003 | 210,474 | 2,536,090 | 236,476 | 1,908,831 | 210,474 | 2,536,090 | 236,476 | 1,908,831 | 279,327 | 1,893,782 | ||||||||||||||||||||||||||||||||||||
Special Drawing Right | 444 | 849 | 311 | 737 | 306 | 738 | 311 | 737 | 306 | 738 | 267 | 730 | ||||||||||||||||||||||||||||||||||||
Japanese Yen | 73,716 | 40,279,411 | 80,555 | 21,802,051 | 28,267 | 21,801,443 | 80,555 | 21,802,051 | 28,267 | 21,801,443 | 66,078 | 50,000,000 | ||||||||||||||||||||||||||||||||||||
British Pound | 8 | 888 | 1 | 151 | — | 74 | 1 | 151 | — | 74 | — | 256 | ||||||||||||||||||||||||||||||||||||
Euro | 29 | 29 | 40 | 2,571 | 186 | 3,625 | 40 | 2,571 | 186 | 3,625 | 2 | 6 | ||||||||||||||||||||||||||||||||||||
Algerian Dinar | — | — | 471 | — | 47 | — | 471 | — | 47 | — | 618 | — | ||||||||||||||||||||||||||||||||||||
Chinese Yuan | 15,562 | 107 | 15,262 | 381 | 46,555 | 10 | 15,262 | 381 | 46,555 | 10 | 16,315 | 271 | ||||||||||||||||||||||||||||||||||||
Uzbekistani Som | — | — | 39,531 | — | 136,787 | — | ||||||||||||||||||||||||||||||||||||||||||
Uzbekistani Sum | 39,531 | — | 136,787 | — | 121,053 | — | ||||||||||||||||||||||||||||||||||||||||||
Rwandan Franc | — | — | 1,203 | — | 3,346 | — | 1,203 | — | 3,346 | — | 857 | — | ||||||||||||||||||||||||||||||||||||
Thai Bhat | — | — | — | — | 1,685 | 1,685 | ||||||||||||||||||||||||||||||||||||||||||
Indonesian Rupiah | — | — | 15,646,011 | 53,142,167 | 14,886,393 | 710,162 | 15,646,011 | 53,142,167 | 14,886,393 | 710,162 | 64,240,286 | 41,510,330 | ||||||||||||||||||||||||||||||||||||
Myanmar Kyat | — | — | 2,750 | — | 84 | — | 2,750 | — | 84 | — | 84 | — | ||||||||||||||||||||||||||||||||||||
Tanzanian Shilling | — | — | 29,987 | — | 317,348 | — | 29,987 | — | 317,348 | — | — | 2,876 | ||||||||||||||||||||||||||||||||||||
Botswana Pula | — | — | 15 | — | 42 | — | 15 | — | 42 | — | 897 | — | ||||||||||||||||||||||||||||||||||||
Hong Kong Dollar | 9 | — | 254 | — | — | — | 254 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Bangladeshi Taka | 6 | — | 69,473 | — | 38,074 | — | 69,473 | — | 38,074 | — | 39,494 | — | ||||||||||||||||||||||||||||||||||||
Polish Zloty | 207,273 | — | 106,025 | — | 338 | — | 106,025 | — | 338 | — | 26 | — | ||||||||||||||||||||||||||||||||||||
Vietnamese Dong | 270,000 | — | 515,412 | — | 311,649 | — | 515,412 | — | 311,649 | — | 467,272 | — | ||||||||||||||||||||||||||||||||||||
Central African Franc | — | — | — | — | 666 | — | ||||||||||||||||||||||||||||||||||||||||||
Swiss Franc | — | — | — | — | — | 12 | — | — | — | 12 | — | — |
As of December 31, 2015, 2016 and 2017, a 10% increase in the exchange rate between the Won and all foreign currencies, with all other variables held constant, would have decreased our income before income tax by₩52 billion,₩28 billion and₩10 billion, respectively, and total equity by₩46 billion,₩24 billion and₩7 billion, respectively, with a 10% decrease in the exchange rate having the opposite effect. As of December 31, 2018, a 10% increase in the exchange rate between the Won and all foreign currencies, with all other variables held constant, would have decreased our income before income tax by₩2 billion and increased total equity by₩0.6 billion, and a 10% decrease would have decreased our income before income tax by₩3 billion and total equity by₩0.06 billion. The foregoing sensitivity analysis assumes that all variables other than foreign exchange rates are held constant, and as such, does not reflect any correlation between foreign exchange rates and other variables, nor our decision to decrease the risk. See Note 3536 to the Consolidated Financial Statements.
Interest Rate Risk
We are also subject to market risk exposure arising from changing interest rates. A reduction of interest rates increases the fair value of our debt portfolio, which is primarily of a fixed interest nature. We use, to a limited extent, interest rate swap contracts and combined interest rate and currency swap contracts to reduce interest rate volatility on some of our debt and manage our interest expense by achieving a balanced mixture of floating and fixed rate debt. We entered into several interest rate swap contracts in which we exchange fixed interest rate payments with variable interest rate payments for a specified period, as well as entered into the combined interest rate and currency swap contracts to hedge our interest rate risk.
The following table summarizes the principal amounts, fair values, principal cash flows by maturity date and weighted average interest rates of our short-term and long-term liabilities as of December 31, 20172018 which are sensitive to exchange rates and/or interest rates. The information is presented in Won, which is our reporting currency:
|
|
|
|
| December 31, 2017 | December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2019 | 2020 | 2021 | Thereafter | Total | Fair Value | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||||||||||||||||||||
(in millions of Won, except rates) | (in millions of Won, except rates) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Local currency: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate | 1,039,266 | 582,318 | 501,875 | 992,368 | 1,692,475 | 4,808,302 | 4,830,307 | 970,832 | 504,218 | 1,149,218 | 11,442 | 1,781,981 | 4,417,691 | 4,448,167 | ||||||||||||||||||||||||||||||||||||||||||
Average weighted rate(1) | 3.86 | % | 2.83 | % | 3.20 | % | 4.04 | % | 3.12 | % | 3.45 | % | — | 3.05 | % | 3.29 | % | 3.91 | % | 4.45 | % | 3.06 | % | 3.31 | % | — | ||||||||||||||||||||||||||||||
Variable rate | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Average weighted rate(1) | — | % | — | % | — | % | — | % | — | % | — | % | — | % | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Sub-total | 1,039,266 | 582,318 | 501,875 | 992,368 | 1,692,475 | 4,808,302 | 4,830,307 | 970,832 | 504,218 | 1,149,218 | 11,442 | 1,781,981 | 4,417,691 | 4,448,167 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Foreign currency: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate | 206,906 | 375,015 | 518 | 25 | 974,753 | 1,557,217 | 1,564,967 | 391,335 | 344,481 | 162,109 | 447,240 | 559,050 | 1,904,215 | 1,905,567 | ||||||||||||||||||||||||||||||||||||||||||
Average weighted rate(1) | 0.60 | % | 2.63 | % | 1.52 | % | 2.00 | % | 3.01 | % | 2.60 | % | — | 2.63 | % | 0.30 | % | 0.38 | % | 2.62 | % | 3.30 | % | 2.21 | % | — | ||||||||||||||||||||||||||||||
Variable rate | 327,848 | 6,428 | 3,214 | — | — | 337,490 | 343,052 | 6,709 | 226,974 | — | — | 111,810 | 345,493 | 345,035 | ||||||||||||||||||||||||||||||||||||||||||
Average weighted rate(1) | 2.84 | % | 2.40 | % | 2.40 | % | — | % | — | % | 2.82 | % | — | 3.51 | % | 3.21 | % | — | — | 3.71 | % | 3.38 | % | — | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Subtotal | 534,754 | 381,443 | 3,732 | 25 | 974,753 | 1,894,707 | 1,908,019 | 398,044 | 571,455 | 162,109 | 447,240 | 670,860 | 2,249,708 | 2,250,602 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total | 1,574,020 | 963,761 | 505,607 | 992,393 | 2,667,228 | 6,703,009 | 6,738,326 | 1,368,876 | 1,075,673 | 1,311,327 | 458,682 | 2,452,841 | 6,667,399 | 6,698,769 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Weighted average rates of the portfolio at the period end. |
As of December 31, 2015, 2016, 2017 and 2017,2018, a 100 basis point increase in the market interest rate, with all other variables held constant, would have decreased our profit before income tax by₩43 billion, andincreased our profit before income tax by₩32 billion and increased our profit before income tax by₩21 billion, respectively. As of December 31, 2015, 2016, 2017 and 2017,2018, such increase, with all other variables held constant, would have decreased our shareholders’ equity by₩245 million and2 billion, increased our shareholders’ equity by₩25 billion and increased our shareholders’ equity by₩510 billion, respectively.
As of December 31, 2015, 2016, 2017 and 2017,2018, a 100 basis point decrease in the market interest rates, with all other variables held constant, would have increased our profit before income tax by₩43 billion, anddecreased our profit before income tax by₩32 billion and decreased our profit before income tax by₩2 billion, respectively. As of December 31, 2015, 2016, 2017 and 2017,2018, a 100 basis point decrease in the market interest rates, with all other variables held constant, would have decreased our shareholders’ equity by₩65 billion,₩5 billion and₩510 billion, respectively. The foregoing sensitivity analysis assumes that all variables other than market interest rates are held constant, and as such, does not reflect any correlation between market interest rates and other variables, nor our decision to decrease the risk, but reflects the effects of derivative contracts in place at the time of conducting the analysis.
Equity Price Risk
We are also subject to market risk exposure arising from changes in the equity securities market, which affect the fair value of our equity portfolio. As of December 31, 2015, 2016, 2017 and 2017,2018, a 10% increase in the equity indices where our marketable equity securities are listed, with all other variables held constant, would have increased our total equity by₩30.5 billion,₩0.50.7 billion and₩0.70.9 billion, respectively, with a 10% decrease in the equity index having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than changes in the equity index are held constant, and that our marketable equity instruments had moved according to the historical correlation to the index, and as such, does not reflect any correlation between the equity index and other variables.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
Not applicable.
Not applicable.
Item 12.D.American Depositary Shares
Fees and Charges
Under the terms of the deposit agreement, holders of our ADSs are required to pay the following service fees to the depositary:
Services | Fees | |
Issuance of ADSs upon deposit of shares | Up to $0.05 per ADS issued | |
Delivery of deposited shares against surrender of ADSs | Up to $0.05 per ADS surrendered | |
Distribution delivery of ADSs pursuant to sale or exercise of rights | Up to $0.02 per ADS held | |
Distributions of dividends | None | |
Distribution of securities other than ADSs | Up to $0.02 per ADS held | |
Other corporate action involving distributions to shareholders | Up to $0.02 per ADS held |
Holders of our ADSs are also responsible for paying certain fees and expenses incurred by the depositary and certain taxes and governmental charges such as:
• | fees for the transfer and registration of shares charged by the registrar and transfer agent for the shares in Korea (i.e., upon deposit and withdrawal of shares); |
expenses incurred for converting foreign currency into U.S. dollars;
expenses for cable, telex and fax transmissions and for delivery of securities;
• | taxes and duties upon the transfer of securities (i.e., when shares are deposited or withdrawn from deposit); and |
fees and expenses incurred in connection with the delivery or servicing of shares on deposit.
Depositary fees payable upon the issuance and surrender of ADSs are typically paid to the depositary by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for surrender. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend rights), the depositary charges the applicable fee to the ADS record-date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary sends invoices to the applicable record-date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via the Depository Trust Company, or DTC), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.
In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse to provide the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to such holder of ADSs.
The fees and charges that holders of our ADSs may be required to pay may vary over time and may be changed by us and by the depositary. Holders of our ADSs will receive prior notice of such changes.
Fees and Payments from the Depositary to Us
In 2017,2018, we received the following payments, after deduction of applicable U.S. taxes, from the depositary:
Reimbursement of NYSE listing fees | $ | 92,582.00 | $ | 219,842.29 | ||||
Reimbursement of SEC filing fees | $ | 148,532.41 | $ | 5,874.05 | ||||
Reimbursement of settlement infrastructure fees (including maintenance fees) | $ | 104,870.57 | $ | 126,326.42 | ||||
Reimbursement of proxy process expenses (printing, postage and distribution) | $ | 29,983.01 | $ | 28,927.96 | ||||
Reimbursement of legal fees (reimbursement received in April 2017 in respect of 2016) | $ | 322,255.59 | $ | 3,522.00 | ||||
Contributions toward our investor relations efforts (includingnon-deal roadshows, investor conferences and investor relations agency fees) | $ | 473,715.68 | $ | 204,038.27 |
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable.
Item 15. Controls and Procedures
Disclosure Controls and Procedures
Our management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures, as such term is defined in Rules13a-15(e) and15d-15(e) under the Exchange Act, as of December 31, 2017.2018. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2017.2018. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed by, and under the supervision of, our principal executive, principal operating and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management has performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017,2018, utilizing the criteria discussed in the Internal Control—Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, we concluded that our internal control over financial reporting was effective as of December 31, 2017.2018.
Samil PricewaterhouseCoopers, an independent registered public accounting firm, which also audited our consolidated financial statements as of, and for the year ended December 31, 2017,2018, as stated in their report which is included herein, has issued an attestation report on the effectiveness of our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
The attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting is furnished in Item 18 of this Form20-F.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during 20172018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
Our Audit Committee is comprised ofSuk-Gwon Chang,Jong-Gu Kim, Sang Kyun ChaDae-You Kim and Il Lim.Im. The board of directors has determined thatSuk-Gwon Chang is the financial expert of the Audit Committee.Suk-Gwon Chang is independent as such term is defined in Section 303A.02 of the NYSE Listed Company Manual, Rule10A-3 under the Exchange Act and the Korea Stock Exchange listing standards.
We have adopted a code of ethics, as defined in Item 16B. of Form20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our chief executive officer, chief financial officer and persons performing similar functions, as well as to our directors, other officers and employees. Our code of ethics is available on our web site at www.kt.com. If we amend the provisions of our code of ethics that apply to our chief executive officer, chief financial officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website.
Item 16C. Principal Accountant Fees and Services
Audit andNon-Audit Fees
The following table sets forth the fees billed to us by Samil PricewaterhouseCoopers, our independent registered public accounting firm, during the fiscal year ended December 31, 20162017 and 2017.2018. Such fees exclude the fees billed for work associated with our foreign subsidiaries which Samil PricewaterhouseCoopers did not provide services and with our former subsidiaries.
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2016 | 2017 | 2017 | 2018 | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
Audit fees(1) | ₩ | 3,090 | ₩ | 3,373 | ₩ | 3,373 | ₩ | 3,225 | ||||||||
Audit-related fees | — | — | — | — | ||||||||||||
Tax fees(2) | 78 | 68 | 68 | 104 | ||||||||||||
All other fees | — | — | — | — | ||||||||||||
|
|
|
| |||||||||||||
Total fees | ₩ | 3,168 | ₩ | 3,441 | ₩ | 3,441 | 3,329 | |||||||||
|
|
|
|
(1) | Audit fees consist of fees for the annual audit and quarterly review services engagement and the comfort letters. |
(2) | Tax fees consist of fee for tax services which are mainly the preparation ornon-recurring tax compliance review of original or amended tax returns. |
Audit CommitteePre-Approval Policies and Procedures
Our Audit Committee has establishedpre-approval policies and procedures topre-approve all audit services to be provided by Samil PricewaterhouseCoopers, our independent registered public accounting firm. Our Audit Committee’s policy regarding thepre-approval ofnon-audit services to be provided to us by our independent registered public accounting firm is that all such services shall bepre-approved by our Audit Committee.Non-audit services that are prohibited to be provided to us by our independent registered public accounting firm under the rules of the SEC and applicable law may not bepre-approved. In addition, prior to the granting of anypre-approval, our Audit Committee must be satisfied that the performance of the services in question will not compromise the independence of our independent registered public accounting firm and does not include delegation of the Audit Committee’s responsibilities to the management under the Securities Exchange Act of 1934, as amended.
Our Audit Committee did notpre-approve anynon-audit services under the de minimis exception of Rule2-01 (c)(7)(i)(C) of RegulationS-X as promulgated by the SEC.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth the repurchases of ordinary shares by us or any affiliated purchasers during the fiscal year ended December 31, 2017:2018:
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
| ||||||||||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share (In Won) | Total Number of Shares Purchased as Part of Publicly Announced Plans | Maximum Number of Shares that May Yet be Purchased Under the Plans | ||||||||||||
January 1 to January 31 | — | — | — | — | ||||||||||||
February 1 to February 29 | — | — | — | — | ||||||||||||
March 1 to March 31 | — | — | — | — | ||||||||||||
April 1 to April 30 | — | — | — | — | ||||||||||||
May 1 to May 31 | — | — | — | — | ||||||||||||
June 1 to June 30 | — | — | — | — | ||||||||||||
July 1 to July 31 | — | — | — | — | ||||||||||||
August 1 to August 31 | 680,000 | 28,759 | 680,000 | 167,620 | ||||||||||||
September 1 to September 30 | 167,620 | 28,884 | 167,620 | — | ||||||||||||
October 1 to October 31 | — | — | — | — | ||||||||||||
November 1 to November 30 | — | — | — | — | ||||||||||||
December 1 to December 31 | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 847,620 | 28,784 | 847,620 | 167,620 | ||||||||||||
|
|
|
|
|
|
|
|
Neither we nor any “affiliated purchaser,” as defined in Rule10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
The following is a summary of the significant differences between the New York Stock Exchange’s corporate governance standards and those that we follow under Korean law:
NYSE Corporate Governance Standards | KT Corporation’s Corporate Governance Practice | |
Director Independence | ||
Independent directors must comprise a majority of the board. | The Commercial Code of Korea requires that our board of directors must comprise no less than a majority of outside directors. Our outside directors must meet the criteria for outside directorship set forth under the Commercial Code of Korea.
The majority of our board of directors is independent (as defined in accordance with the New York Stock Exchange’s standards), and 8 out of 11 directors are outside directors. | |
Nominating/Corporate Governance Committee | ||
Listed companies must have a nominating/corporate governance committee composed entirely of independent directors. | We have not established a nominating/corporate governance committee composed entirely of independent directors. However, we maintain an Outside Director Candidate Nominating Committee composed of all of our outside directors and one standing director. We also maintain a Corporate Governance Committee comprised of four outside directors and one standing director. The committee is responsible for the review of matters with respect to our Corporate Governance Guidelines and our performance under such guidelines to monitor effectiveness of our corporate governance. |
|
| |
Compensation Committee | ||
Listed companies must have a compensation committee composed entirely of independent directors. | We maintain an Evaluation and Compensation Committee composed of four outside directors. | |
Executive Session | ||
Non-management directors must meet in regularly scheduled executive sessions without management. | Our outside directors hold meetings solely attended by outside directors in accordance with the charter of our board of directors. | |
Audit Committee | ||
Listed companies must have an audit committee which has a minimum of three directors and satisfy the requirements ofRule10A-3 under the Exchange Act. | We maintain an Audit Committee comprised of four outside directors who meet the applicable independence criteria set forth under Rule10A-3 under the Exchange Act. | |
Shareholder Approval of Equity Compensation Plan | ||
Listed companies must allow their shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan. | We currently have two equity compensation plans: one providing for the grant of stock options to officers and standing directors; and an employee stock ownership association program.
All material matters related to the granting stock options are provided in our articles of incorporation, and any amendments to the articles of incorporation are subject to shareholders’ approval. Matters related to the employee stock ownership association program are not subject to shareholders’ approval under Korean law. | |
Shareholder Approval of Equity Offerings | ||
Listed companies must allow its shareholders to exercise their voting rights with respect to equity offerings that do not qualify as public offerings for cash, and offerings of equity of related parties. | Voting rights are not separately provided for equity offerings that do not qualify as public offerings for cash, or offerings of equity of related parties. | |
Corporate Governance Guidelines | ||
Listed companies must adopt and disclose corporate governance guidelines. | We have adopted Corporate Governance Guidelines in March 2007 setting forth our practices with respect to corporate governance matters. Our Corporate Governance Guidelines are in compliance with Korean law but do not meet all requirements established by the New York Stock Exchange for U.S. companies listed on the exchange. A copy of our Corporate Governance Guidelines in Korean is available on our website at www.kt.com. | |
Code of Business Conduct and Ethics | ||
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for executive officers. | We have adopted a Code of Ethics for all directors, officers and employees. A copy of our Code of Ethics in Korean is available on our website at www.kt.com |
Item 16H. Mine Safety Disclosure
Not applicable.
Not applicable.
AUDITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OF KT CORPORATION
* | Filed previously. |
(P) | Paper filing. |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
KT CORPORATION |
(Registrant) |
/s/CHANG-GYU HWANG |
Name:Chang-Gyu Hwang |
Title: Chief Executive Officer |
Date: April 30, 20182019
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of KT Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of KT Corporation and its subsidiaries (the “Company”) as ofat December 31, 20172018 and 2016,2017, and the related consolidated statements of operations, of comprehensive income, (loss), of changes in equity and of cash flows for each of the three years in the period ended December 31, 2017,2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as ofat December 31, 2017,2018, based on criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofat December 31, 20172018 and 2016,2017, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172018 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofat December 31, 2017,2018, based on criteria established inInternal Control—Integrated Framework (2013) issued by the COSO.
Change in Accounting Principles
As discussed in Note 41 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers and the manner in which it accounts for financial instruments in 2018.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Annual Report on Internal Control Over Financial Reporting inappearing under Item 15 of Form20-F.15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Samil PricewaterhouseCoopers |
Seoul, Korea April 30, |
We have served as the Company’s auditor since 2010.
KT Corporation and Subsidiaries
Consolidated Statements of Financial Position
January 1, 2017, December 31, 20162017 and 2017December 31, 2018
(in millions of Korean won) | Notes | 2016 | 2017 | |||||||||||||||||||||||
(In millions of Korean won) | Notes | January 1, 2017 | December 31, 2017 | December 31, 2018 | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||
Cash and cash equivalents | 4, 5 | ₩ | 2,900,311 | ₩ | 1,928,182 | 4,5 | ₩ | 2,900,311 | ₩ | 1,928,182 | ₩ | 2,703,422 | ||||||||||||||
Trade and other receivables, net | 4, 6 | 5,327,352 | 5,814,283 | 4,6 | 5,477,634 | 5,964,565 | 5,680,349 | |||||||||||||||||||
Other financial assets | 4, 7 | 720,555 | 972,631 | 4,7 | 720,555 | 972,631 | 994,780 | |||||||||||||||||||
Current income tax assets | 2,079 | 9,030 | 2,079 | 9,030 | 4,046 | |||||||||||||||||||||
Inventories, net | 8 | 454,588 | 642,027 | 8 | 454,588 | 642,027 | 1,074,634 | |||||||||||||||||||
Current assets held for sale | — | 7,230 | 10 | — | �� | 7,230 | 13,035 | |||||||||||||||||||
Other current assets | 9 | 311,135 | 304,860 | 9 | 311,135 | 304,860 | 1,687,548 | |||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total current assets | 9,716,020 | 9,678,243 | 9,866,302 | 9,828,525 | 12,157,814 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||||
Trade and other receivables, net | 4, 6 | 709,011 | 828,832 | 4,6 | 709,011 | 828,832 | 842,995 | |||||||||||||||||||
Other financial assets | 4, 7 | 664,726 | 754,992 | 4,7 | 664,726 | 754,992 | 623,176 | |||||||||||||||||||
Property, plant and equipment, net | 10, 20 | 14,312,111 | 13,562,319 | |||||||||||||||||||||||
Property and equipment, net | 11, 21 | 14,312,111 | 13,562,319 | 13,068,257 | ||||||||||||||||||||||
Investment properties, net | 11 | 1,148,044 | 1,189,531 | 12 | 1,148,044 | 1,189,531 | 1,091,084 | |||||||||||||||||||
Intangible assets, net | 12 | 3,022,803 | 2,632,704 | 13 | 3,022,803 | 2,632,704 | 3,407,123 | |||||||||||||||||||
Investments in associates and joint ventures | 13 | 284,075 | 279,431 | 14 | 284,075 | 279,431 | 272,407 | |||||||||||||||||||
Deferred income tax assets | 28 | 701,409 | 712,222 | 29 | 701,409 | 712,222 | 465,369 | |||||||||||||||||||
Other non-current assets | 9 | 106,099 | 107,165 | 9 | 106,099 | 107,165 | 545,895 | |||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total non-current assets | 20,948,278 | 20,067,196 | 20,948,278 | 20,067,196 | 20,316,306 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total assets | ₩ | 30,664,298 | ₩ | 29,745,439 | ₩ | 30,814,580 | ₩ | 29,895,721 | ₩ | 32,474,120 | ||||||||||||||||
|
|
|
|
|
KT Corporation and Subsidiaries
Consolidated Statements of Financial Position (Continued)
January 1, 2017, December 31, 20162017 and 2017December 31, 2018
(in millions of Korean won) | Notes | 2016 | 2017 | |||||||||||||||||||||||
(In millions of Korean won) | Notes | January 1, 2017 | December 31, 2017 | December 31, 2018 | ||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||
Trade and other payables | 4, 14 | ₩ | 7,139,771 | ₩ | 7,424,134 | 4,15 | ₩ | 7,141,725 | ₩ | 7,426,088 | ₩ | 7,007,515 | ||||||||||||||
Borrowings | 4, 15 | 1,820,001 | 1,573,474 | 4,16 | 1,820,001 | 1,573,474 | 1,368,481 | |||||||||||||||||||
Other financial liabilities | 4,7 | 233 | 37,223 | 4,7 | 233 | 37,224 | 942 | |||||||||||||||||||
Current income tax liabilities | 28 | 88,739 | 68,880 | 29 | 102,843 | 82,984 | 249,837 | |||||||||||||||||||
Provisions | 16 | 96,485 | 78,172 | 17 | 96,485 | 78,172 | 117,881 | |||||||||||||||||||
Deferred revenue | 35,617 | 17,906 | 35,617 | 17,906 | 52,878 | |||||||||||||||||||||
Other current liabilities | 9 | 342,291 | 258,315 | 9 | 342,291 | 258,314 | 596,589 | |||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total current liabilities | 9,523,137 | 9,458,104 | 9,539,195 | 9,474,162 | 9,394,123 | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||
Trade and other payables | 4, 14 | 1,188,311 | 1,001,369 | 4,15 | 1,188,311 | 1,001,369 | 1,513,864 | |||||||||||||||||||
Borrowings | 4, 15 | 6,300,790 | 5,110,188 | 4,16 | 6,300,790 | 5,110,188 | 5,279,812 | |||||||||||||||||||
Other financial liabilities | 4,7 | 108,431 | 149,267 | 4,7 | 108,431 | 149,267 | 163,454 | |||||||||||||||||||
Defined benefit liabilities, net | 17 | 378,404 | 395,079 | 18 | 378,404 | 395,079 | 561,269 | |||||||||||||||||||
Provisions | 16 | 100,694 | 124,858 | 17 | 100,694 | 124,858 | 163,995 | |||||||||||||||||||
Deferred revenue | 85,372 | 91,698 | 85,372 | 91,698 | 110,702 | |||||||||||||||||||||
Deferred income tax liabilities | 28 | 137,680 | 128,462 | 29 | 137,680 | 128,462 | 204,785 | |||||||||||||||||||
Other non-current liabilities | 9 | 58,761 | 237,284 | 9 | 58,761 | 237,284 | 423,626 | |||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total non-current liabilities | 8,358,443 | 7,238,205 | 8,358,443 | 7,238,205 | 8,421,507 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total liabilities | 17,881,580 | 16,696,309 | 17,897,638 | 16,712,367 | 17,815,630 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||
Share capital | 21 | 1,564,499 | 1,564,499 | 22 | 1,564,499 | 1,564,499 | 1,564,499 | |||||||||||||||||||
Share premium | 1,440,258 | 1,440,258 | 1,440,258 | 1,440,258 | 1,440,258 | |||||||||||||||||||||
Retained earnings | 22 | 9,644,483 | 9,826,926 | 23 | 9,778,707 | 9,961,150 | 11,256,069 | |||||||||||||||||||
Accumulated other comprehensive income | 23 | (1,432 | ) | 30,985 | 24 | (1,432 | ) | 30,985 | 50,158 | |||||||||||||||||
Other components of equity | 23 | (1,217,934 | ) | (1,205,302 | ) | 24 | (1,217,934 | ) | (1,205,302 | ) | (1,181,083 | ) | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Equity attributable to owners of the Controlling Company | 11,429,874 | 11,657,366 | 11,564,098 | 11,791,590 | 13,129,901 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Non-controlling interest | 1,352,844 | 1,391,764 | 1,352,844 | 1,391,764 | 1,528,589 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total equity | 12,782,718 | 13,049,130 | 12,916,942 | 13,183,354 | 14,658,490 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||
Total liabilities and equity | ₩ | 30,664,298 | ₩ | 29,745,439 | ₩ | 30,814,580 | ₩ | 29,895,721 | ₩ | 32,474,120 | ||||||||||||||||
|
|
|
|
|
The above consolidated staementsstatements of financial position should be read in conjunction with the accompanying notes.
KT Corporation and Subsidiaries
Consolidated Statements of Operations
Years ended December 31, 2015, 2016, 2017 and 20172018
(in millions of Korean won, except per share amounts) | ||||||||||||||
Notes | 2015 | 2016 | 2017 | |||||||||||
Continuing operations: | ||||||||||||||
Operating revenue | 25 | ₩ | 22,699,856 | ₩ | 23,120,878 | ₩ | 23,546,929 | |||||||
Revenue | 22,211,673 | 22,755,006 | 23,259,541 | |||||||||||
Others | 488,183 | 365,872 | 287,388 | |||||||||||
Operating expenses | 26 | 21,622,788 | 21,781,098 | 22,477,837 | ||||||||||
|
|
|
|
|
| |||||||||
Operating profit | 1,077,068 | 1,339,780 | 1,069,092 | |||||||||||
Finance income | 27 | 272,860 | 296,139 | 406,328 | ||||||||||
Finance costs | 27 | (645,331 | ) | (515,087 | ) | (644,531 | ) | |||||||
Share of net profits of associates and joint venture | 13 | 6,144 | 2,599 | (13,892 | ) | |||||||||
|
|
|
|
|
| |||||||||
Profit from continuing operations before income tax | 710,741 | 1,123,431 | 816,997 | |||||||||||
Income tax expense | 28 | 227,131 | 328,314 | 270,656 | ||||||||||
|
|
|
|
|
| |||||||||
Profit from continuing operations | 483,610 | 795,117 | 546,341 | |||||||||||
Discontinued Operations | ||||||||||||||
Profit from discontinued operations | 141,075 | — | — | |||||||||||
|
|
|
|
|
| |||||||||
Profit for the year | ₩ | 624,685 | ₩ | 795,117 | ₩ | 546,341 | ||||||||
|
|
|
|
|
| |||||||||
Profit for the year attributable to: | ||||||||||||||
Owners of the Controlling Company | ₩ | 546,361 | ₩ | 708,362 | ₩ | 461,559 | ||||||||
Profit from continuing operations | 404,045 | 708,362 | 461,559 | |||||||||||
Profit from discontinued operations | 142,316 | — | — | |||||||||||
Non-controlling interest | ₩ | 78,324 | ₩ | 86,755 | ₩ | 84,782 | ||||||||
Profit from continuing operations | 79,565 | 86,755 | 84,782 | |||||||||||
Loss from discontinued operations | (1,241 | ) | — | — | ||||||||||
Earnings per share attributable to the equity holders of the Controlling Company during the year | ||||||||||||||
Basic earnings per share | 29 | ₩ | 2,231 | ₩ | 2,893 | ₩ | 1,884 | |||||||
From continuing operations | 1,650 | 2,893 | 1,884 | |||||||||||
From discontinued operations | 581 | — | — | |||||||||||
Diluted earnings per share | 29 | ₩ | 2,231 | ₩ | 2,891 | ₩ | 1,883 | |||||||
From continuing operations | 1,650 | 2,891 | 1,883 | |||||||||||
From discontinued operations | 581 | — | — |
(In millions of Korean won, except per share amounts) | Notes | 2016 | 2017 | 2018 | ||||||||||
Operating revenue | 26 | ₩ | 23,164,202 | ₩ | 23,546,929 | ₩ | 23,436,050 | |||||||
Revenue | 22,798,330 | 23,259,541 | 23,220,052 | |||||||||||
Others | 365,872 | 287,388 | 215,998 | |||||||||||
Operating expenses | 27 | 21,781,098 | 22,477,837 | 22,335,190 | ||||||||||
|
|
|
|
|
| |||||||||
Operating profit | 1,383,104 | 1,069,092 | 1,100,860 | |||||||||||
Finance income | 28 | 296,139 | 406,328 | 374,243 | ||||||||||
Finance costs | 28 | (515,087 | ) | (644,531 | ) | (435,659 | ) | |||||||
Share of net profit (losses) of associates and joint venture | 14 | 2,599 | (13,892 | ) | (5,467 | ) | ||||||||
|
|
|
|
|
| |||||||||
Profit before income tax | 1,166,755 | 816,997 | 1,033,977 | |||||||||||
Income tax expense | 29 | 334,910 | 270,656 | 314,565 | ||||||||||
|
|
|
|
|
| |||||||||
Profit for the year | ₩ | 831,845 | ₩ | 546,341 | ₩ | 719,412 | ||||||||
|
|
|
|
|
| |||||||||
Profit for the year attributable to: | ||||||||||||||
Owners of the Controlling Company | ₩ | 745,090 | ₩ | 461,559 | ₩ | 645,571 | ||||||||
Non-controlling interest | ₩ | 86,755 | ₩ | 84,782 | ₩ | 73,841 | ||||||||
Earnings per share attributable to the equity holders of the Controlling Company during the year (in Korean won): | ||||||||||||||
Basic earnings per share | 30 | ₩ | 3,043 | ₩ | 1,884 | ₩ | 2,634 | |||||||
Diluted earnings per share | 30 | ₩ | 3,041 | ₩ | 1,883 | ₩ | 2,634 |
The above consolidated staementsstatements of financial positionoperations should be read in conjunction with the accompanying notes.
KT Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Years ended December 31, 2015, 2016, 2017 and 20172018
(in millions of Korean won) | ||||||||||||||
Notes | 2015 | 2016 | 2017 | |||||||||||
Profit for the year | ₩ | 624,685 | ₩ | 795,117 | ₩ | 546,341 | ||||||||
Other comprehensive income | ||||||||||||||
Items that will not be reclassified to profit or loss: | ||||||||||||||
Remeasurements of the net defined benefit liability | 17 | (37,872 | ) | 4,213 | (83,962 | ) | ||||||||
Shares of remeasurement gain (loss) of associates and joint ventures | (2,407 | ) | 116 | (115 | ) | |||||||||
Items that may be subsequently reclassified to profit or loss: | ||||||||||||||
Changes in value of available-for-sale financial assets | 47,381 | 10,925 | 51,235 | |||||||||||
Other comprehensive income from available-for sale financial assets reclassified to loss | (83,397 | ) | (3,840 | ) | (55,450 | ) | ||||||||
Net gain (loss) on cash flow hedges | 111,914 | 64,796 | (111,083 | ) | ||||||||||
Other comprehensive income (loss) from cash flow hedges reclassified to gain (loss) | (97,962 | ) | (75,871 | ) | 141,929 | |||||||||
Shares of other comprehensive income (loss) from associates and joint ventures | (1,608 | ) | (602 | ) | 10,280 | |||||||||
Exchange differences on translation of foreign operations | (4,884 | ) | (5,407 | ) | (21,122 | ) | ||||||||
|
|
|
|
|
| |||||||||
Total other comprehensive loss | (68,835 | ) | (5,670 | ) | (68,288 | ) | ||||||||
|
|
|
|
|
| |||||||||
Total comprehensive income for the year | ₩ | 555,850 | ₩ | 789,447 | ₩ | 478,053 | ||||||||
|
|
|
|
|
| |||||||||
Total comprehensive income for the year attributable to: | ||||||||||||||
Owners of the Controlling Company | 495,139 | 701,685 | 413,149 | |||||||||||
Non-controlling interest | 60,711 | 87,762 | 64,904 |
(In millions of Korean won) | ||||||||||||||||
Notes | 2016 | 2017 | 2018 | |||||||||||||
Profit for the year | ₩ | 831,845 | ₩ | 546,341 | ₩ | 719,412 | ||||||||||
Other comprehensive income | ||||||||||||||||
Items that will not be reclassified to profit or loss: | ||||||||||||||||
Remeasurements of the net defined benefit liability | 18 | 4,213 | (83,962 | ) | (73,511 | ) | ||||||||||
Shares of remeasurement gain (loss) of associates and joint ventures | 116 | (115 | ) | (816 | ) | |||||||||||
Gain on valuation of equity instruments at fair value through other comprehensive income | — | — | 43,077 | |||||||||||||
Items that may be subsequently reclassified to profit or loss: | ||||||||||||||||
Gain on valuation of debt instruments at fair value through other comprehensive income | — | — | 734 | |||||||||||||
Changes in value of available-for-sale financial assets | 10,925 | 51,235 | — | |||||||||||||
Other comprehensive income from available-for sale financial assets reclassified to loss | (3,840 | ) | (55,450 | ) | — | |||||||||||
Valuation gain (loss) on cash flow hedge | 64,796 | (111,083 | ) | 17,268 | ||||||||||||
Other comprehensive income (loss) from cash flow hedges reclassified to profit (loss) | (75,871 | ) | 141,929 | (44,279 | ) | |||||||||||
Share of other comprehensive income (loss) from associates and joint ventures | (602 | ) | 10,280 | (41 | ) | |||||||||||
Exchange differences on translation of foreign operations | (5,407 | ) | (21,122 | ) | 2,940 | |||||||||||
|
|
|
|
|
| |||||||||||
Total other comprehensive loss | (5,670 | ) | (68,288 | ) | (54,628 | ) | ||||||||||
|
|
|
|
|
| |||||||||||
Total comprehensive income for the year | ₩ | 826,175 | ₩ | 478,053 | ₩ | 664,784 | ||||||||||
|
|
|
|
|
| |||||||||||
Total comprehensive income for the year attributable to: | ||||||||||||||||
Owners of the Controlling Company | 738,413 | 413,149 | 589,179 | |||||||||||||
Non-controlling interest | 87,762 | 64,904 | 75,605 |
The above consolidated staementsstatements of financial positioncomprehensive income should be read in conjunction with the accompanying notes.
KT Corporation and Subsidiaries
Consolidated Statements of Changes in Equity
Years ended December 31, 2015, 2016, 2017 and 20172018
Attributable to owners of the Controlling Company | Attributable to owners of the Controlling Company | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions of Korean won) | Notes | Share capital | Share premium | Retained earnings | Accumulated other comprehensive income | Other components of equity | Total | Non-controlling interest | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2015 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 8,568,399 | ₩ | 25,790 | ₩ | (1,260,709 | ) | ₩ | 10,338,237 | ₩ | 1,449,320 | ₩ | 11,787,557 | |||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions of Korean won) | Notes | Share capital | Share premium | Retained earnings | Accumulated other comprehensive income | Other components of equity | Total | Non-controlling interest | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as at December 31, 2015 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 9,049,971 | ₩ | 13,870 | ₩ | (1,232,863 | ) | ₩ | 10,835,735 | ₩ | 1,320,396 | ₩ | 12,156,131 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments from prior years | 2.1 | — | — | 97,496 | — | — | 97,496 | — | 97,496 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as at January 1, 2016 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 9,147,467 | ₩ | 13,870 | ₩ | (1,232,863 | ) | ₩ | 10,933,231 | ₩ | 1,320,396 | ₩ | 12,253,627 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Profit for the year | — | — | 546,361 | — | — | 546,361 | 78,324 | 624,685 | — | — | 745,090 | — | — | 745,090 | 86,755 | 831,845 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in value of available-for-sale financial assets | 4,7 | — | — | — | (24,310 | ) | — | (24,310 | ) | (11,706 | ) | (36,016 | ) | 4,7 | — | — | — | 1,691 | 1,691 | 5,394 | 7,085 | |||||||||||||||||||||||||||||||||||||||||||||||
Remeasurements of the net defined benefit liability | 17 | — | — | (37,914 | ) | — | — | (37,914 | ) | 42 | (37,872 | ) | 18 | — | — | 8,531 | — | — | 8,531 | (4,318 | ) | 4,213 | ||||||||||||||||||||||||||||||||||||||||||||||
Valuation loss on cash flow hedge | 4,7 | — | — | — | 13,924 | — | 13,924 | 28 | 13,952 | 4,7 | — | — | — | (11,075 | ) | — | (11,075 | ) | — | (11,075 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Shares of other comprehensive losses of joint ventures and associates | — | — | — | (1,357 | ) | — | (1,357 | ) | (251 | ) | (1,608 | ) | — | — | — | (571 | ) | — | (571 | ) | (31 | ) | (602 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Shares of gain on remeasurements of joint ventures and associates | — | — | (2,109 | ) | — | — | (2,109 | ) | (298 | ) | (2,407 | ) | — | — | 94 | — | — | 94 | 22 | 116 | ||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | (177 | ) | — | (177 | ) | (4,707 | ) | (4,884 | ) | — | — | — | (5,347 | ) | — | (5,347 | ) | (60 | ) | (5,407 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income for the year | — | — | 506,338 | (11,920 | ) | — | 494,418 | 61,432 | 555,850 | — | — | 753,715 | (15,302 | ) | — | 738,413 | 87,762 | 826,175 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Transactions with equity holders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid by the Controlling Company | — | — | (122,425 | ) | — | — | (122,425 | ) | — | (122,425 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid to non-controlling interest of subsidiaries | — | — | — | — | — | — | (41,575 | ) | (41,575 | ) | — | — | — | — | — | — | (61,674 | ) | (61,674 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Appropriation of loss on disposal of treasury stock | — | — | (24,766 | ) | — | 24,766 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in consolidation scope | — | — | — | — | — | — | (154,188 | ) | (154,188 | ) | — | — | — | — | 11,369 | 11,369 | (15,550 | ) | (4,181 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Change in ownership interest in subsidiaries | — | — | — | — | (2,968 | ) | (2,968 | ) | 2,699 | (269 | ) | — | — | (50 | ) | — | 50 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Appropriation of loss on disposal of treasury stock | — | — | — | — | — | — | 21,769 | 21,769 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Others | — | — | — | — | 6,048 | 6,048 | 2,708 | 8,756 | — | — | — | — | 3,510 | 3,510 | 141 | 3,651 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | — | — | (24,766 | ) | — | 27,846 | 3,080 | (190,356 | ) | (187,276 | ) | — | — | (122,475 | ) | — | 14,929 | (107,546 | ) | (55,314 | ) | (162,860 | ) | |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2015 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 9,049,971 | ₩ | 13,870 | ₩ | (1,232,863 | ) | ₩ | 10,835,735 | ₩ | 1,320,396 | ₩ | 12,156,131 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as at December 31, 2016 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 9,778,707 | ₩ | (1,432 | ) | ₩ | (1,217,934 | ) | ₩ | 11,564,098 | ₩ | 1,352,844 | ₩ | 12,916,942 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above consolidated staementsstatements of financial positionchanges of equity should be read in conjunction with the accompanying notes.
KT Corporation and Subsidiaries
Consolidated Statements of Changes in Equity (Continued)
Years ended December 31, 2015, 2016, 2017 and 20172018
Attributable to owners of the Controlling Company | Attributable to owners of the Controlling Company | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions of Korean won) | Notes | Share capital | Share premium | Retained earnings | Accumulated other comprehensive income | Other components of equity | Total | Non-controlling interest | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2016 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 9,049,971 | ₩ | 13,870 | ₩ | (1,232,863 | ) | ₩ | 10,835,735 | ₩ | 1,320,396 | ₩ | 12,156,131 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions of Korean won) | Notes | Share capital | Share premium | Retained earnings | Accumulated other comprehensive income | Other components of equity | Total | Non-controlling interest | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as at January 1, 2017 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 9,778,707 | ₩ | (1,432 | ) | ₩ | (1,217,934 | ) | ₩ | 11,564,098 | ₩ | 1,352,844 | ₩ | 12,916,942 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Profit for the year | — | — | 708,362 | — | — | 708,362 | 86,755 | 795,117 | — | — | 461,559 | — | — | 461,559 | 84,782 | 546,341 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in value of available-for-sale financial assets | 4,7 | — | — | — | 1,691 | 1,691 | 5,394 | 7,085 | 4,7 | — | — | — | (1,433 | ) | (1,433 | ) | (2,782 | ) | (4,215 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Remeasurements of the net defined benefit liability | 17 | — | — | 8,531 | — | — | 8,531 | (4,318 | ) | 4,213 | 18 | — | — | (80,711 | ) | — | — | (80,711 | ) | (3,251 | ) | (83,962 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Valuation loss on cash flow hedge | 4,7 | — | — | — | (11,075 | ) | — | (11,075 | ) | — | (11,075 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares of other comprehensive losses of joint ventures and associates | — | — | — | (571 | ) | — | (571 | ) | (31 | ) | (602 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares of gain on remeasurements of joint ventures and associates | — | — | 94 | — | — | 94 | 22 | 116 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Valuation gains on cashflow hedge | 4,7 | — | — | — | 30,846 | — | 30,846 | — | 30,846 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares of other comprehensive income of associates and joint ventures | — | — | — | 10,148 | — | 10,148 | 132 | 10,280 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares of loss on remeasurements of associates and joint ventures | — | — | (116 | ) | — | — | (116 | ) | 1 | (115 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | (5,347 | ) | — | (5,347 | ) | (60 | ) | (5,407 | ) | — | — | — | (7,144 | ) | — | (7,144 | ) | (13,978 | ) | (21,122 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income for the year | — | — | 716,987 | (15,302 | ) | — | 701,685 | 87,762 | 789,447 | — | — | 380,732 | 32,417 | — | 413,149 | 64,904 | 478,053 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transactions with equity holders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid by the Controlling Company | — | — | (122,425 | ) | — | — | (122,425 | ) | — | (122,425 | ) | — | — | (195,977 | ) | — | — | (195,977 | ) | — | (195,977 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid to non-controlling interest of subsidiaries | — | — | — | — | — | — | (61,674 | ) | (61,674 | ) | — | — | — | — | — | — | (47,162 | ) | (47,162 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in consolidation scope | — | — | — | — | 11,369 | 11,369 | (15,550 | ) | �� | (4,181 | ) | — | — | — | — | — | — | 250 | 250 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in ownership interest in subsidiaries | — | — | (50 | ) | — | 50 | — | — | — | — | — | — | — | 5,441 | 5,441 | 21,242 | 26,683 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Appropriation of loss on disposal of treasury stock | — | — | — | — | — | — | 21,769 | 21,769 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Appropriations of loss on disposal of treasury stock | — | — | (2,312 | ) | — | 2,312 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Others | — | — | — | — | 3,510 | 3,510 | 141 | 3,651 | — | — | — | — | 4,879 | 4,879 | (314 | ) | 4,565 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | — | — | (122,475 | ) | — | 14,929 | (107,546 | ) | (55,314 | ) | (162,860 | ) | — | — | (198,289 | ) | — | 12,632 | (185,657 | ) | (25,984 | ) | (211,641 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 9,644,483 | ₩ | (1,432 | ) | ₩ | (1,217,934 | ) | ₩ | 11,429,874 | ₩ | 1,352,844 | ₩ | 12,782,718 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 9,961,150 | ₩ | 30,985 | ₩ | (1,205,302 | ) | ₩ | 11,791,590 | ₩ | 1,391,764 | ₩ | 13,183,354 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above consolidated staementsstatements of financial positionchanges in equity should be read in conjunction with the accompanying notes.
KT Corporation and Subsidiaries
Consolidated Statements of Changes in Equity (Continued)
Years ended December 31, 2015, 2016, 2017 and 20172018
Attributable to owners of the Controlling Company | Attributable to owners of the Controlling Company | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions of Korean won) | Notes | Share | Share premium | Retained earnings | Accumulated other comprehensive income | Other components of equity | Total | Non-controlling interest | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2017 | ₩ 1,564,499 | ₩ | 1,440,258 | ₩ | 9,644,483 | ₩ | (1,432 | ) | ₩ | (1,217,934 | ) | ₩ | 11,429,874 | ₩ | 1,352,844 | ₩ | 12,782,718 | |||||||||||||||||||||||||||||||||||||||||||||||||||
(In millions of Korean won) | Notes | Share capital | Share premium | Retained earnings | Accumulated other comprehensive income | Other components of equity | Total | Non-controlling interest | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as at January 1, 2018 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 9,961,150 | ₩ | 30,985 | ₩ | (1,205,302 | ) | ₩ | 11,791,590 | ₩ | 1,391,764 | ₩ | 13,183,354 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in accounting policy | 41 | — | — | 954,053 | 17,741 | — | 971,794 | 77,128 | 1,048,922 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjusted total equity at the beginning of the financial year | 1,564,499 | 1,440,258 | 10,915,203 | 48,726 | (1,205,302 | ) | 12,763,384 | 1,468,892 | 14,232,276 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Profit for the year | — | — | 461,559 | — | — | 461,559 | 84,782 | 546,341 | — | — | 645,571 | — | — | 645,571 | 73,841 | 719,412 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in value of available-for-sale financial assets | 4,7 | — | — | — | (1,433 | ) | (1,433 | ) | (2,782 | ) | (4,215 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Remeasurements of the net defined benefit liability | 17 | — | — | (80,711 | ) | — | — | (80,711 | ) | (3,251 | ) | (83,962 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Valuation gains on cashflow hedge | 4,7 | — | — | — | 30,846 | — | 30,846 | — | 30,846 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares of other comprehensive income of associates and joint ventures | — | — | — | 10,148 | — | 10,148 | 132 | 10,280 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares of loss on remeasurements of associates and joint ventures | — | — | (116 | ) | — | — | (116 | ) | 1 | (115 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Remeasurements of net defined benefit liability | 18 | — | — | (61,449 | ) | — | (61,449 | ) | (12,062 | ) | (73,511 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share of loss on remeasurements of joint ventures and associates | — | — | (816 | ) | — | — | (816 | ) | — | (816 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share of other comprehensive income of associates and joint ventures | — | — | — | (136 | ) | — | (136 | ) | 95 | (41 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Valuation loss on cash flow hedge | 4,7 | — | — | — | (27,011 | ) | — | (27,011 | ) | — | (27,011 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain(loss) on disposal of equity instruments at fair value through other comprehensive income | 4,7 | 4,441 | (4,441 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain on valuation of financial instruments at fair value through other comprehensive income | 4,7 | — | — | — | 30,731 | — | 30,731 | 13,080 | 43,811 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | (7,144 | ) | — | (7,144 | ) | (13,978 | ) | (21,122 | ) | — | — | — | 2,289 | — | 2,289 | 651 | 2,940 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income for the year | — | — | 380,732 | 32,417 | — | 413,149 | 64,904 | 478,053 | — | — | 587,747 | 1,432 | — | 589,179 | 75,605 | 664,784 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Transactions with owners | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid by the Controlling Company | — | — | (195,977 | ) | — | — | (195,977 | ) | — | (195,977 | ) | — | — | (245,097 | ) | — | — | (245,097 | ) | — | (245,097 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid to non-controlling interest of subsidiaries | — | — | — | — | — | — | (47,162 | ) | (47,162 | ) | — | — | — | — | — | — | (53,535 | ) | (53,535 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Changes in consolidation scope | — | — | — | — | — | — | 250 | 250 | — | — | — | — | (1,803 | ) | (1,803 | ) | 102 | (1,701 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Change in ownership interest in subsidiaries | — | — | — | — | 5,441 | 5,441 | 21,242 | 26,683 | — | — | — | — | 11,118 | 11,118 | 37,471 | 48,589 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Appropriations of loss on disposal of treasury stock | — | — | (2,312 | ) | — | 2,312 | — | — | — | — | — | (2,046 | ) | — | 2,046 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Disposal of treasury stock | — | — | — | — | 9,547 | 9,547 | — | 9,547 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Others | — | — | — | — | 4,879 | 4,879 | (314 | ) | 4,565 | — | — | 262 | — | 3,311 | 3,573 | 54 | 3,627 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | — | — | (198,289 | ) | — | 12,632 | (185,657 | ) | (25,984 | ) | (211,641 | ) | — | — | (246,881 | ) | — | 24,219 | (222,662 | ) | (15,908 | ) | (238,570 | ) | ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2017 | ₩ 1,564,499 | ₩ | 1,440,258 | ₩ | 9,826,926 | ₩ | 30,985 | ₩ | (1,205,302 | ) | ₩ | 11,657,366 | ₩ | 1,391,764 | ₩ | 13,049,130 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as at December 31, 2018 | ₩ | 1,564,499 | ₩ | 1,440,258 | ₩ | 11,256,069 | ₩ | 50,158 | ₩ | (1,181,083 | ) | ₩ | 13,129,901 | ₩ | 1,528,589 | ₩ | 14,658,490 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above consolidated staementsstatements of financial positionchanges in equity should be read in conjunction with the accompanying notes.
KT Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 2015, 2016, 2017 and 20172018
(in millions of Korean won) | ||||||||||||||||||||||||||||||||
Notes | 2015 | 2016 | 2017 | |||||||||||||||||||||||||||||
(In millions of Korean won) | ||||||||||||||||||||||||||||||||
Notes | 2016 | 2017 | 2018 | |||||||||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||||||||
Cash generated from operations | 31 | ₩ | 4,579,260 | ₩ | 5,202,520 | ₩ | 4,318,884 | 32 | ₩ | 5,202,520 | ₩ | 4,318,884 | ₩ | 4,212,222 | ||||||||||||||||||
Interest paid | (436,363 | ) | (372,525 | ) | (252,405 | ) | (372,525 | ) | (252,405 | ) | (304,428 | ) | ||||||||||||||||||||
Interest received | 128,422 | 104,679 | 93,769 | 104,679 | 93,769 | 242,951 | ||||||||||||||||||||||||||
Dividends received | 35,768 | 10,824 | 10,843 | 10,824 | 10,843 | 14,074 | ||||||||||||||||||||||||||
Income tax paid | (77,122 | ) | (174,748 | ) | (293,342 | ) | (174,748 | ) | (293,342 | ) | (154,355 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Net cash inflow from operating activities | 4,229,965 | 4,770,750 | 3,877,749 | 4,770,750 | 3,877,749 | 4,010,464 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||||||||
Collection of loans | 38,856 | 47,887 | 55,190 | 47,887 | 55,190 | 64,023 | ||||||||||||||||||||||||||
Loans granted | (79,136 | ) | (57,400 | ) | (59,800 | ) | (57,400 | ) | (59,800 | ) | (60,229 | ) | ||||||||||||||||||||
Disposal of derivatives | 176,681 | — | — | |||||||||||||||||||||||||||||
Disposal of financial assets at fair value through profit or loss | — | — | 397,224 | |||||||||||||||||||||||||||||
Disposal of financial assets at amortized cost | — | — | 255,290 | |||||||||||||||||||||||||||||
Disposal of financial assets at fair value through other comprehensive income | — | — | 2,474 | |||||||||||||||||||||||||||||
Disposal of assets held-for-sale | — | — | 9,842 | |||||||||||||||||||||||||||||
Disposal of available-for-sale financial assets | 243,125 | 35,791 | 146,429 | 35,791 | 146,429 | — | ||||||||||||||||||||||||||
Acquisition of available-for-sale financial assets | (99,111 | ) | (44,302 | ) | (89,027 | ) | (44,302 | ) | (89,027 | ) | — | |||||||||||||||||||||
Disposal of investments in associates and joint ventures | 42,946 | 11,074 | 59,818 | 11,074 | 59,818 | 7,832 | ||||||||||||||||||||||||||
Acquisition of investments in associates and joint ventures | (12,238 | ) | (38,675 | ) | (41,780 | ) | (38,675 | ) | (41,780 | ) | (34,420 | ) | ||||||||||||||||||||
Disposal of current and non-current financial instruments | 363,260 | 293,283 | 645,686 | 293,283 | 645,686 | — | ||||||||||||||||||||||||||
Acquisition of current and non-current financial instruments | (341,373 | ) | (597,345 | ) | (1,231,917 | ) | (597,345 | ) | (1,231,917 | ) | — | |||||||||||||||||||||
Disposal of property and equipment, and investment properties | 28,303 | 93,401 | 68,229 | 93,401 | 68,229 | 90,992 | ||||||||||||||||||||||||||
Acquisition of property and equipment, and investment properties | (3,115,728 | ) | (2,764,346 | ) | (2,442,223 | ) | (2,764,346 | ) | (2,442,223 | ) | (2,260,879 | ) | ||||||||||||||||||||
Acquisition of financial assets at fair value through profit or loss | — | — | (158,787 | ) | ||||||||||||||||||||||||||||
Acquisition of financial assets at amortized cost | — | — | (248,789 | ) | ||||||||||||||||||||||||||||
Acquisition of financial assets at fair value through other comprehensive income | — | — | (16,239 | ) | ||||||||||||||||||||||||||||
Disposal of intangible assets | 25,841 | 17,891 | 22,680 | 17,891 | 22,680 | 20,037 | ||||||||||||||||||||||||||
Acquisition of intangible assets | (399,377 | ) | (455,763 | ) | (613,556 | ) | (455,763 | ) | (613,556 | ) | (746,213 | ) | ||||||||||||||||||||
Increase in cash due to exclusion from consolidation scope | 741,834 | — | — | |||||||||||||||||||||||||||||
Cash inflow(outflow) from changes in scope of consolidation | (15,751 | ) | (26,454 | ) | (2,974 | ) | ||||||||||||||||||||||||||
Decrease in cash due to business combination, etc. | (26,454 | ) | (2,974 | ) | (26,288 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Net cash outflow from investing activities | (2,401,868 | ) | (3,484,958 | ) | (3,483,245 | ) | ||||||||||||||||||||||||||
(3,484,958 | ) | (3,483,245 | ) | (2,704,130 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Cash flows from financing activities | ||||||||||||||||||||||||||||||||
Proceeds from borrowings and debentures | 5,675,302 | 1,122,898 | 616,257 | 1,122,898 | 616,257 | 1,473,016 | ||||||||||||||||||||||||||
Repayments of borrowings and debentures | (6,648,177 | ) | (1,768,768 | ) | (1,780,174 | ) | (1,768,768 | ) | (1,780,174 | ) | (1,612,731 | ) | ||||||||||||||||||||
Settlement of derivative assets and liabilities, net | (3,371 | ) | (33,199 | ) | 71,370 | (33,199 | ) | 71,370 | (3,461 | ) | ||||||||||||||||||||||
Cash inflow from consolidated capital transactions | — | 800 | 27,261 | 800 | 27,261 | — | ||||||||||||||||||||||||||
Cash outflow from consolidated capital transactions | — | (5,140 | ) | (300 | ) | (5,140 | ) | (300 | ) | (5,506 | ) | |||||||||||||||||||||
Cash inflow from other financing activities | — | — | 16,962 | — | 16,962 | 13,939 | ||||||||||||||||||||||||||
Dividends paid to shareholders | (41,575 | ) | (184,099 | ) | (243,140 | ) | (184,099 | ) | (243,140 | ) | (298,632 | ) | ||||||||||||||||||||
Acquisition of treasury stock | — | — | (24,415 | ) | ||||||||||||||||||||||||||||
Decrease in finance leases liabilities | (146,175 | ) | (75,763 | ) | (71,735 | ) | (75,763 | ) | (71,735 | ) | (73,885 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Net cash outflow from financing activities | (1,163,996 | ) | (943,271 | ) | (1,363,499 | ) | (943,271 | ) | (1,363,499 | ) | (531,675 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Effect of exchange rate change on cash and cash equivalents | 6,700 | (1,674 | ) | (3,134 | ) | (1,674 | ) | (3,134 | ) | 581 | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 670,801 | 340,847 | (972,129 | ) | 340,847 | (972,129 | ) | 775,240 | ||||||||||||||||||||||||
Cash and cash equivalents | ||||||||||||||||||||||||||||||||
Beginning of the year | 1,888,663 | 2,559,464 | 2,900,311 | 2,559,464 | 2,900,311 | 1,928,182 | ||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
End of the year | ₩ | 2,559,464 | ₩ | 2,900,311 | ₩ | 1,928,182 | ₩ | 2,900,311 | ₩ | 1,928,182 | ₩ | 2,703,422 | ||||||||||||||||||||
|
|
|
|
|
|
The above consolidated staementsstatements of financial positioncash flows should be read in conjunction with the accompanying notes.
KT Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2015, 2016, 2017 and 20172018
1. | General Information |
The consolidated financial statements include the accounts of KT Corporation, which is the controlling company as defined under IFRS 10, Consolidated Financial Statements, and its 5963 controlled subsidiaries as described in Note 1.2 (collectively referred to as the “Group”).
1.1 | The Controlling Company |
KT Corporation (the “Controlling Company”) commenced operations on January 1, 1982, when it spun off from the Korea Communications Commission (formerly the Korean Ministry of Information and Communications) to provide telephone services and to engage in the development of advanced communications services under the Act of Telecommunications of Korea. The headquarters are located in Seongnam City, Gyeonggi Province, Republic of Korea, and the address of its registered head office is 90,Buljeong-ro,Bundang-gu, Seongnam City, Gyeonggi Province.
On October 1, 1997, upon the announcement of the Government-Investment Enterprises Management Basic Act and the Privatization Law, the Controlling Company became a government-funded institution under the Commercial Code of Korea.
On December 23, 1998, the Controlling Company’s shares were listed on the Korea Exchange.
On May 29, 1999, the Controlling Company issued 24,282,195 additional shares and issued American Depository Shares (ADS), representing new shares and 20,813,311 government-owned shares, at the New York Stock Exchange. On July 2, 2001, the additional ADS representing 55,502,161 government-owned shares were issued at the New York Stock Exchange.
In 2002, the Controlling Company acquired the entire government-owned shares in accordance with the Korean government’s privatization plan. As ofat the end of the reporting period, the Korean government does not own any share in the Controlling Company.
KT Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2015, 2016 and 2017
1.2 | Consolidated Subsidiaries |
The consolidated subsidiaries as at December 31, 2017 and 2018, are as follows:
Controlling percentage ownership1(%) | ||||||||||
Subsidiary | Type of Business | Location | December 31, 2017 | December 31, 2018 | Closing month | |||||
KT Powertel Co., Ltd.2 | Trunk radio system business | Korea | 44.8% | 44.8% | December | |||||
KT Linkus Co., Ltd. | Public telephone maintenance | Korea | 91.4% | 92.4% | December | |||||
KT Submarine Co., Ltd.2, 4 | Submarine cable construction and maintenance | Korea | 39.3% | 39.3% | December | |||||
KT Telecop Co., Ltd. | Security service | Korea | 86.8% | 86.8% | December | |||||
KT Hitel Co., Ltd. | Data communication | Korea | 67.1% | 67.1% | December | |||||
KT Service Bukbu Co., Ltd. | Opening services of fixed line | Korea | 67.3% | 67.3% | December | |||||
KT Service Nambu Co., Ltd. | Opening services of fixed line | Korea | 77.3% | 77.3% | December | |||||
KT Commerce Inc. | B2C, B2B service | Korea | 100.0% | 100.0% | December | |||||
KT Strategic Investment Fund No.1 | Investment fund | Korea | 100.0% | 100.0% | December | |||||
KT Strategic Investment Fund No.2 | Investment fund | Korea | 100.0% | 100.0% | December |
KT Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2016, 2017 and 2018
Controlling percentage ownership1(%) | ||||||||||
Subsidiary | Type of Business | Location | December 31, 2017 | December 31, 2018 | Closing month | |||||
KT Strategic Investment Fund No.3 | Investment fund | Korea | 100.0% | 100.0% | December | |||||
KT Strategic Investment Fund No.4 | Investment fund | Korea | 100.0% | 100.0% | December | |||||
BC-VP Strategic Investment Fund No.1 | Investment fund | Korea | — | 100.0% | December | |||||
BC Card Co., Ltd. | Credit card business | Korea | 69.5% | 69.5% | December | |||||
VP Inc. | Payment security service for credit card, others | Korea | 50.9% | 50.9% | December | |||||
H&C Network | Call centre for financial sectors | Korea | 100.0% | 100.0% | December | |||||
BC Card China Co., Ltd. | Software development and data processing | China | 100.0% | 100.0% | December | |||||
INITECH Co., Ltd.4 | Internet banking ASP and security solutions | Korea | 58.2% | 58.2% | December | |||||
Smartro Co., Ltd. | VAN (Value Added Network) business | Korea | 81.1% | 81.1% | December | |||||
KTDS Co., Ltd.4 | System integration and maintenance | Korea | 95.5% | 95.5% | December | |||||
KT M Hows Co., Ltd. | Mobile marketing | Korea | 90.0% | 90.0% | December | |||||
KT M&S Co., Ltd. | PCS distribution | Korea | 100.0% | 100.0% | December | |||||
GENIE Music Corporation(KT Music Corporation)2 | Online music production and distribution | Korea | 42.5% | 36.0% | December | |||||
KT MOS Bukbu Co., Ltd.4 | Telecommunication facility maintenance | Korea | — | 100.0% | December | |||||
KT MOS Nambu Co., Ltd.4 | Telecommunication facility maintenance | Korea | — | 98.4% | December | |||||
KT Skylife Co., Ltd.4 | Satellite broadcasting business | Korea | 50.3% | 50.3% | December | |||||
Skylife TV Co., Ltd. | TV contents provider | Korea | 92.6% | 92.6% | December | |||||
KT Estate Inc. | Residential building development and supply | Korea | 100.0% | 100.0% | December | |||||
KT AMC Co., Ltd. | Asset management and consulting services | Korea | 100.0% | 100.0% | December | |||||
NEXR Co., Ltd. | Cloud system implementation | Korea | 100.0% | 100.0% | December | |||||
KTSB Data service | Data centre development and related service | Korea | 51.0% | 51.0% | December | |||||
KT Sat Co., Ltd. | Satellite communication business | Korea | 100.0% | 100.0% | December | |||||
Nasmedia Co., Ltd.3 | Online advertisement | Korea | 42.8% | 42.8% | December | |||||
KT Sports Co., Ltd | Management of sports group | Korea | 100.0% | 100.0% | December | |||||
KT Music Contents Fund No.1 | Music contents investment business | Korea | 80.0% | 80.0% | December | |||||
KT Music Contents Fund No.2 | Music contents investment business | Korea | 100.0% | 100.0% | December | |||||
KT-Michigan Global Content Fund | Content investment business | Korea | 88.6% | 88.6% | December |
KT Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2016, 2017 and 2018
Controlling percentage ownership1(%) | ||||||||||
Subsidiary | Type of Business | Location | December 31, 2017 | December 31, 2018 | Closing month | |||||
Autopion Co., Ltd. | Service for information and communication | Korea | 100.0% | 100.0% | December | |||||
KTCS Corporation2,4 | Database and online information provider | Korea | 30.9% | 30.9% | December | |||||
KTIS Corporation2,4 | Database and online information provider | Korea | 30.1% | 30.1% | December | |||||
KT M mobile | Special category telecommunications operator and sales of communication device | Korea | 100.0% | 100.0% | December | |||||
KT Investment Co., Ltd. | Technology business finance | Korea | 100.0% | 100.0% | December | |||||
Whowho&Company Co., Ltd. | Software development and supply | Korea | 100.0% | 100.0% | December | |||||
PlayD Co., Ltd. (N Search Marketing Co., Ltd.) | Advertising agency business | Korea | 100.0% | 100.0% | December | |||||
Next connect PFV | Residential building development and supply | Korea | — | 100.0% | December | |||||
KT Rwanda Networks Ltd. | Network installation and management | Rwanda | 51.0% | 51.0% | December | |||||
AOS Ltd. | System integration and maintenance | Rwanda | 51.0% | 51.0% | December | |||||
KT Belgium | Foreign investment business | Belgium | 100.0% | 100.0% | December | |||||
KT ORS Belgium | Foreign investment business | Belgium | 100.0% | 100.0% | December | |||||
Korea Telecom Japan Co., Ltd. | Foreign telecommunication business | Japan | 100.0% | 100.0% | December | |||||
KBTO sp.zo.o. | Electronic communication business | Poland | 94.3% | 96.2% | December | |||||
Korea Telecom China Co., Ltd. | Foreign telecommunication business | China | 100.0% | 100.0% | December | |||||
KT Dutch B.V. | Super iMax and East Telecom management | Netherlands | 100.0% | 100.0% | December | |||||
Super iMax LLC | Wireless high speed internet business | Uzbekistan | 100.0% | 100.0% | December | |||||
East Telecom LLC | Fixed line telecommunication business | Uzbekistan | 91.0% | 91.0% | December | |||||
Korea Telecom America, Inc. | Foreign telecommunication business | USA | 100.0% | 100.0% | December | |||||
PT. KT Indonesia | Foreign telecommunication business | Indonesia | 99.0% | 99.0% | December | |||||
PT. BC Card Asia Pacific | Software development and supply | Indonesia | 99.9% | 99.9% | December | |||||
KT Hongkong Telecommunications Co., Ltd. | Fixed line communication business | Hong Kong | 100.0% | 100.0% | December | |||||
KT Hong Kong Limited | Foreign investment business | Hong Kong | 100.0% | 100.0% | December | |||||
Korea Telecom Singapore Pte. Ltd. | Foreign investment business | Singapore | 100.0% | 100.0% | December |
KT Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2016, 2017 and 2018
Controlling percentage ownership1(%) | ||||||||||
Subsidiary | Type of Business | Location | December 31, 2017 | December 31, 2018 | Closing month | |||||
Texnoprosistem LLP | Fixed line internet business | Uzbekistan | 100.0% | 100.0% | December | |||||
Nasmedia Thailand Company Limited | Internet advertising solution | Thailand | — | 99.9% | December |
1 | Sum of the ownership interests owned by the Controlling Company and subsidiaries. |
2 | Although the Controlling Company owns less than 50% ownership in this entity, this entity is consolidated as the Controlling Company can exercise the majority voting rights in itsdecision-making process at all times considering the historical voting pattern at the shareholders’ meetings. |
3 | Although the Controlling Company owns less than 50% ownership in this entity, this entity is consolidated as the Controlling Company holds the majority of voting right based on an agreement with other investors. |
4 | The |
Changes in scope of consolidation in 2018 are as follows:
Controlling percentage ownership1(%) | ||||||||||
Subsidiary | Type of Business | Location | December 31, 2016 | December 31, 2017 | Closing month | |||||
KT Powertel Co., Ltd.2 | Trunk radio system business | Korea | 44.8% | 44.8% | December | |||||
KT Linkus Co., Ltd. | Public telephone maintenance | Korea | 91.4% | 91.4% | December | |||||
KT Submarine Co., Ltd.2,3 | Submarine cable construction and maintenance | Korea | 39.3% | 39.3% | December | |||||
KT Telecop Co., Ltd. | Security service | Korea | 86.8% | 86.8% | December | |||||
KT Hitel Co., Ltd. | Data communication | Korea | 67.1% | 67.1% | December | |||||
KT Service Bukbu Co., Ltd. | Opening services of fixed line | Korea | 67.3% | 67.3% | December | |||||
KT Service Nambu Co., Ltd. | Opening services of fixed line | Korea | 77.3% | 77.3% | December | |||||
KT Commerce Inc. | B2C, B2B service | Korea | 100.0% | 100.0% | December | |||||
KT New Business Fund No.1 | Investment fund | Korea | 100.0% | 100.0% | December | |||||
KT Strategic Investment Fund No.1 | Investment fund | Korea | 100.0% | 100.0% | December | |||||
KT Strategic Investment Fund No.2 | Investment fund | Korea | 100.0% | 100.0% | December | |||||
KT Strategic Investment Fund No.3 | Investment fund | Korea | 100.0% | 100.0% | December | |||||
KT Strategic Investment Fund No.4 | Investment fund | Korea | — | 100.0% | December | |||||
BC Card Co., Ltd. | Credit card business | Korea | 69.5% | 69.5% | December | |||||
VP Inc. | Payment security service for credit card, others | Korea | 50.9% | 50.9% | December | |||||
H&C Network | Call centre for financial sectors | Korea | 100.0% | 100.0% | December | |||||
BC Card China Co., Ltd. | Software development and data processing | China | 100.0% | 100.0% | December | |||||
INITECH Co., Ltd.4 | Internet banking ASP and security solutions | Korea | 58.2% | 58.2% | December | |||||
Smartro Co., Ltd. | VAN (Value Added Network) business | Korea | 81.1% | 81.1% | December | |||||
KTDS Co., Ltd.4 | System integration and maintenance | Korea | 95.5% | 95.5% | December | |||||
KT M Hows Co., Ltd. | Mobile marketing | Korea | 90.0% | 90.0% | December | |||||
KT M&S Co., Ltd. | PCS distribution | Korea | 100.0% | 100.0% | December | |||||
GENIE Music Corporation(KT Music Corporation)2 | Online music production and distribution | Korea | 49.9% | 42.5% | December | |||||
KT Skylife Co., Ltd.4 | Satellite broadcasting business | Korea | 50.3% | 50.3% | December | |||||
Skylife TV Co., Ltd. | TV contents provider | Korea | 92.6% | 92.6% | December | |||||
KT Estate Inc. | Residential building development and supply | Korea | 100.0% | 100.0% | December | |||||
KT AMC Co., Ltd. | Asset management and consulting services | Korea | 100.0% | 100.0% | December | |||||
NEXR Co., Ltd. | Cloud system implementation | Korea | 100.0% | 100.0% | December |
Changes | Location | Subsidiary | Reason | |||
Included | Korea | BC-VP Strategic Investment Fund No.1 | Newly established | |||
Korea | KT | Acquisition | ||||
Korea | KT MOS Nambu Co., Ltd. | Acquisition | ||||
Korea | Next connect PFV | Newly established | ||||
Thailand | Nasmedia Thailand Company Limited | Newly established | ||||
Excluded | Korea | KT New Business Fund No.1 | Liquidated |
KT Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2015, 2016, and 2017 and 2018
Summarized information for consolidated subsidiaries as at and for the years ended December 31, 2016, 2017 and 2018, follows:
(In millions of Korean won) | 2016 | |||||||||||||||
Total assets | Total liabilities | Operating revenues | Profit (loss) For the year | |||||||||||||
KT Powertel Co., Ltd. | ₩ | 113,725 | ₩ | 19,899 | ₩ | 81,390 | ₩ | 202 | ||||||||
KT Linkus Co., Ltd. | 64,318 | 56,953 | 117,587 | (3,830 | ) | |||||||||||
KT Submarine Co., Ltd. | 156,993 | 55,573 | 84,137 | 5,146 | ||||||||||||
KT Telecop Co., Ltd. | 265,553 | 132,344 | 315,948 | 143 | ||||||||||||
KT Hitel Co., Ltd. | 249,202 | 46,941 | 198,994 | 4,298 | ||||||||||||
KT Service Bukbu Co., Ltd. | 32,863 | 24,580 | 182,952 | 694 | ||||||||||||
KT Service Nambu Co., Ltd. | 32,621 | 24,282 | 218,602 | 772 | ||||||||||||
BC Card Co., Ltd.1 | 3,651,065 | 2,602,404 | 3,567,512 | 163,131 | ||||||||||||
H&C Network1 | 272,110 | 80,983 | 266,613 | 14,749 | ||||||||||||
Nasmedia Co., Ltd.1 | 263,925 | 159,502 | 70,037 | 11,972 | ||||||||||||
KTDS Co., Ltd.1 | 197,970 | 151,644 | 476,379 | 10,838 | ||||||||||||
KT M Hows Co., Ltd. | 28,539 | 18,466 | 19,922 | 2,865 | ||||||||||||
KT M&S Co., Ltd. | 247,854 | 227,507 | 724,144 | (12,955 | ) | |||||||||||
GENIE Music Corporation(KT Music Corporation) | 110,080 | 41,953 | 111,450 | 8,235 | ||||||||||||
KT Skylife Co., Ltd.1 | 777,948 | 231,452 | 668,945 | 68,863 | ||||||||||||
KT Estate Inc.1 | 1,734,729 | 375,341 | 405,417 | 46,815 | ||||||||||||
KTSB Data service | 20,075 | 759 | 5,136 | (1,983 | ) | |||||||||||
KT Innoedu Co., Ltd. | 6,477 | 7,259 | 15,599 | 103 | ||||||||||||
KT Sat Co., Ltd. | 744,653 | 253,041 | 144,594 | 36,266 | ||||||||||||
KT Sports | 16,925 | 13,573 | 48,476 | (198 | ) | |||||||||||
KT Music Contents Fund No.1 | 10,592 | 331 | 349 | 103 | ||||||||||||
KT-Michigan Global Content Fund | 16,250 | 163 | 133 | (514 | ) | |||||||||||
Autopion Co., Ltd. | 6,163 | 2,794 | 7,772 | (409 | ) | |||||||||||
KT M mobile | 131,446 | 20,369 | 112,532 | (40,041 | ) | |||||||||||
KT Investment Co., Ltd.1 | 39,506 | 23,123 | 10,130 | (1,832 | ) | |||||||||||
NgeneBio | 6,361 | 4,733 | 244 | (1,833 | ) | |||||||||||
KTCS Corporation1 | 322,768 | 166,642 | 955,050 | 7,892 | ||||||||||||
KTIS Corporation | 221,176 | 63,871 | 436,914 | 9,991 | ||||||||||||
Korea Telecom Japan Co., Ltd. | 3,592 | 5,374 | 5,122 | (1,391 | ) | |||||||||||
Korea Telecom China Co., Ltd. | 532 | 188 | 930 | 60 | ||||||||||||
KT Dutch B.V. | 34,197 | 73 | 166 | 85 | ||||||||||||
Super iMax LLC | 10,308 | 6,734 | 10,759 | (1,802 | ) | |||||||||||
East Telecom LLC | 31,885 | 16,554 | 27,492 | 3,257 | ||||||||||||
Korea Telecom America, Inc. | 4,464 | 1,306 | 7,113 | 181 | ||||||||||||
PT. KT Indonesia | 16 | — | — | (7 | ) | |||||||||||
KT Rwanda Networks Ltd. | 167,112 | 138,651 | 13,435 | (31,455 | ) | |||||||||||
KT Belgium | 79,391 | 7 | — | (67 | ) | |||||||||||
KT ORS Belgium | 2,013 | 23 | — | (46 | ) | |||||||||||
KBTO sp.zo.o. | 1,166 | 2,378 | 21 | (2,587 | ) | |||||||||||
AOS Ltd. | 10,025 | 3,179 | 14,481 | (1,123 | ) | |||||||||||
KT Hongkong Telecommunications Co., Ltd. | 1,571 | 956 | 1,568 | 120 |
KT Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2016, 2017 and 2018
(In millions of Korean won) | 2017 | |||||||||||||||
Total assets | Total liabilities | Operating revenue | Profit (loss) for the year | |||||||||||||
KT Powertel Co., Ltd. | ₩ | 115,125 | ₩ | 18,937 | ₩ | 69,234 | ₩ | 2,112 | ||||||||
KT Linkus Co., Ltd. | 59,344 | 51,516 | 112,043 | 725 | ||||||||||||
KT Submarine Co., Ltd. | 142,797 | 34,056 | 73,985 | 8,243 | ||||||||||||
KT Telecop Co., Ltd. | 264,353 | 131,633 | 317,591 | 2,885 | ||||||||||||
KT Hitel Co., Ltd. | 258,240 | 52,943 | 227,884 | 3,225 | ||||||||||||
KT Service Bukbu Co., Ltd. | 29,281 | 22,096 | 194,837 | 688 | ||||||||||||
KT Service Nambu Co., Ltd. | 36,076 | 26,412 | 232,996 | 875 | ||||||||||||
BC Card Co., Ltd.1 | 4,048,263 | 2,955,038 | 3,628,995 | 156,109 | ||||||||||||
H&C Network1 | 273,856 | 65,446 | 277,622 | 16,104 | ||||||||||||
Nasmedia Co., Ltd.1 | 315,967 | 188,197 | 120,667 | 26,676 | ||||||||||||
KTDS Co., Ltd.1 | 144,922 | 93,343 | 459,266 | 11,584 | ||||||||||||
KT M Hows Co., Ltd. | 42,738 | 28,489 | 24,610 | 4,097 | ||||||||||||
KT M&S Co., Ltd. | 242,388 | 231,151 | 734,420 | (9,707 | ) | |||||||||||
GENIE Music Corporation (KT Music Corporation) | 139,686 | 48,512 | 156,163 | (3,401 | ) | |||||||||||
KT Skylife Co., Ltd.1 | 792,893 | 210,550 | 687,752 | 57,314 | ||||||||||||
KT Estate Inc.1 | 1,869,194 | 502,915 | 428,446 | 52,416 | ||||||||||||
KTSB Data service | 18,306 | 605 | 4,950 | (1,651 | ) | |||||||||||
KT Sat Co., Ltd. | 742,391 | 220,804 | 147,649 | 29,601 | ||||||||||||
KT Sports | 11,131 | 7,805 | 53,357 | (199 | ) | |||||||||||
KT Music Contents Fund No.1 | 13,804 | 1,041 | 370 | (499 | ) | |||||||||||
KT Music Contents Fund No.2 | 7,500 | 11 | — | (11 | ) | |||||||||||
KT-Michigan Global Content Fund | 14,575 | 147 | 159 | (426 | ) | |||||||||||
Autopion Co., Ltd. | 6,306 | 3,530 | 6,679 | (618 | ) | |||||||||||
KT M mobile | 93,601 | 21,453 | 159,684 | (38,883 | ) | |||||||||||
KT Investment Co., Ltd.1 | 54,673 | 38,313 | 8,794 | (619 | ) | |||||||||||
KTCS Corporation1 | 348,334 | 188,764 | 968,186 | 7,385 | ||||||||||||
KTIS Corporation | 223,818 | 62,569 | 438,597 | 8,337 | ||||||||||||
Korea Telecom Japan Co., Ltd.1 | 1,554 | 2,788 | 2,772 | 536 | ||||||||||||
Korea Telecom China Co., Ltd. | 665 | 32 | 1,030 | 348 | ||||||||||||
KT Dutch B.V. | 30,312 | 50 | 206 | 169 | ||||||||||||
Super iMax LLC | 3,449 | 4,886 | 7,314 | (4,584 | ) | |||||||||||
East Telecom LLC1 | 11,672 | 11,748 | 19,663 | (9,118 | ) | |||||||||||
Korea Telecom America, Inc. | 3,694 | 791 | 6,783 | 109 | ||||||||||||
PT. KT Indonesia | 8 | — | — | (6 | ) | |||||||||||
KT Rwanda Networks Ltd.2 | 151,359 | 139,561 | 15,931 | (22,762 | ) | |||||||||||
KT Belgium | 86,455 | 8 | 49 | (2 | ) | |||||||||||
KT ORS Belgium | 1,769 | 14 | 10 | (10 | ) | |||||||||||
KBTO sp.zo.o. | 3,311 | 2,268 | 67 | (3,456 | ) | |||||||||||
AOS Ltd.2 | 9,437 | 4,519 | 8,952 | (682 | ) | |||||||||||
KT Hongkong Telecommunications Co., Ltd. | 2,578 | 1,497 | 7,304 | 494 |
KT Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2016, 2017 and 2018
(In millions of Korean won) | 2018 | |||||||||||||||
Total assets | Total liabilities | Operating revenue | Profit (loss) for the year | |||||||||||||
KT Powertel Co., Ltd. | ₩ | 124,064 | ₩ | 28,217 | ₩ | 65,620 | ₩ | (5,545 | ) | |||||||
KT Linkus Co., Ltd. | 54,147 | 44,895 | 106,337 | 1,216 | ||||||||||||
KT Submarine Co., Ltd. | 130,715 | 27,530 | 61,652 | (4,286 | ) | |||||||||||
KT Telecop Co., Ltd. | 272,492 | 140,314 | 328,262 | 166 | ||||||||||||
KT Hitel Co., Ltd. | 272,708 | 66,043 | 279,117 | 657 | ||||||||||||
KT Service Bukbu Co., Ltd. | 30,599 | 23,964 | 195,961 | (31 | ) | |||||||||||
KT Service Nambu Co., Ltd. | 37,452 | 27,939 | 230,088 | 160 | ||||||||||||
BC Card Co., Ltd.1 | 3,722,379 | 2,630,536 | 3,551,715 | 70,889 | ||||||||||||
H&C Network1 | 245,841 | 63,188 | 297,470 | (15,944 | ) | |||||||||||
Nasmedia Co., Ltd.1 | 303,112 | 161,164 | 106,805 | 20,596 | ||||||||||||
KTDS Co., Ltd.1 | 148,675 | 95,834 | 434,302 | 8,586 | ||||||||||||
KT M Hows Co., Ltd. | 60,197 | 42,386 | 26,673 | 3,691 | ||||||||||||
KT M&S Co., Ltd. | 228,073 | 207,740 | 791,652 | 11,408 | ||||||||||||
GENIE Music Corporation (KT Music Corporation) | 221,559 | 75,827 | 171,314 | 6,374 | ||||||||||||
KT MOS Bukbu Co., Ltd. | 14,121 | 10,571 | 16,543 | (782 | ) | |||||||||||
KT MOS Nambu Co., Ltd. | 14,313 | 8,927 | 14,941 | (2,418 | ) | |||||||||||
KT Skylife Co., Ltd.1 | 816,001 | 149,841 | 694,059 | 52,010 | ||||||||||||
KT Estate Inc.1 | 1,695,995 | 304,712 | 569,269 | 51,854 | ||||||||||||
KTSB Data service | 8,632 | 523 | 4,627 | (9,576 | ) | |||||||||||
KT Sat Co., Ltd. | 685,926 | 173,513 | 137,186 | 4,921 | ||||||||||||
KT Sports Co., Ltd. | 9,560 | 6,376 | 55,565 | (154 | ) | |||||||||||
KT Music Contents Fund No.1 | 14,092 | 1,035 | 559 | 294 | ||||||||||||
KT Music Contents Fund No.2 | 7,629 | 281 | 150 | (142 | ) | |||||||||||
KT-Michigan Global Content Fund | 12,741 | — | 869 | (670 | ) | |||||||||||
Autopion Co., Ltd. | 8,838 | 5,801 | 12,035 | 453 | ||||||||||||
KT M mobile | 146,334 | 35,335 | 172,674 | (10,085 | ) | |||||||||||
KT Investment Co., Ltd.1 | 74,580 | 58,040 | 8,095 | 247 | ||||||||||||
KTCS Corporation1 | 350,280 | 188,561 | 1,019,787 | 11,401 | ||||||||||||
KTIS Corporation | 229,246 | 68,997 | 451,532 | 7,900 | ||||||||||||
Next connect PFV | 385,769 | 34,370 | 143 | (12,449 | ) | |||||||||||
Korea Telecom Japan Co., Ltd.1 | 1,326 | 2,910 | 1,965 | (126 | ) | |||||||||||
Korea Telecom China Co., Ltd. | 661 | 22 | 681 | 10 | ||||||||||||
KT Dutch B.V. | 31,693 | 41 | 191 | 105 | ||||||||||||
Super iMax LLC | 4,150 | 4,528 | 4,845 | (424 | ) | |||||||||||
East Telecom LLC1 | 16,590 | 14,263 | 15,087 | 2,639 | ||||||||||||
Korea Telecom America, Inc. | 4,218 | 832 | 7,554 | 350 | ||||||||||||
PT. KT Indonesia | 8 | — | — | — | ||||||||||||
KT Rwanda Networks Ltd.2 | 144,129 | 162,801 | 15,150 | (29,238 | ) | |||||||||||
KT Belgium | 90,172 | 1 | 29 | (43 | ) | |||||||||||
KT ORS Belgium | 6,709 | 5 | — | (46 | ) | |||||||||||
KBTO sp.zo.o. | 1,364 | 217 | 202 | (3,771 | ) | |||||||||||
AOS Ltd.2 | 14,018 | 4,952 | 6,300 | (680 | ) | |||||||||||
KT Hongkong Telecommunications Co., Ltd. | 3,616 | 2,143 | 9,990 | 351 |
KT Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2016, 2017 and 2018
Controlling percentage ownership1(%) | ||||||||||
Subsidiary | Type of Business | Location | December 31, 2016 | December 31, 2017 | Closing month | |||||
KTSB Data service | Data centre development and related service | Korea | 51.0% | 51.0% | December | |||||
KT Sat Co., Ltd. | Satellite communication business | Korea | 100.0% | 100.0% | December | |||||
KT Innoedu Co | E-learning business | Korea | 96.8% | — | December | |||||
Nasmedia, Inc.3 | Online advertisement | Korea | 42.8% | 42.8% | December | |||||
KT Sports | Management of sports group | Korea | 100.0% | 100.0% | December | |||||
KT Music Contents Fund No.1 | Music contents investment business | Korea | 80.0% | 80.0% | December | |||||
KT Music Contents Fund No.2 | Music contents investment business | Korea | — | 100.0% | December | |||||
KT-Michigan Global Content Fund | Content investment business | Korea | 88.6% | 88.6% | December | |||||
Autopion Co., Ltd. | Service for information and communication | Korea | 100.0% | 100.0% | December | |||||
KTCS Corporation2,4 | Database and online information provider | Korea | 30.9% | 30.9% | December | |||||
KTIS Corporation2,4 | Database and online information provider | Korea | 30.1% | 30.1% | December | |||||
KT M mobile | Special category telecommunications operator and sales of communication device | Korea | 100.0% | 100.0% | December | |||||
KT Investment Co., Ltd. | Technology business finance | Korea | 100.0% | 100.0% | December | |||||
NgenBio | Medicine and Pharmacy development business | Belgium | 49.8% | — | December | |||||
Whowho&Company Co., Ltd. | Software development and supply | Korea | 100.0% | 100.0% | December | |||||
PlayD Co., Ltd. (N Search Marketing Co., Ltd.) | Advertising agency business | Korea | 100.0% | 100.0% | December | |||||
KT Rwanda Networks Ltd. | Network installation and management | Rwanda | 51.0% | 51.0% | December | |||||
AOS Ltd. | System integration and maintenance | Rwanda | 51.0% | 51.0% | December | |||||
KT Belgium | Foreign investment business | Belgium | 100.0% | 100.0% | December | |||||
KT ORS Belgium | Foreign investment business | Belgium | 100.0% | 100.0% | December | |||||
Korea Telecom Japan Co., Ltd. | Foreign telecommunication business | Japan | 100.0% | 100.0% | December | |||||
KBTO sp.zo.o. | Electronic communication business | Poland | 75.0% | 94.0% | December | |||||
Korea Telecom China Co., Ltd. | Foreign telecommunication business | China | 100.0% | 100.0% | December | |||||
KT Dutch B.V | Super iMax and East Telecom management | Netherlands | 100.0% | 100.0% | December | |||||
Super iMax LLC | Wireless high speed internet business | Uzbekistan | 100.0% | 100.0% | December | |||||
East Telecom LLC | Fixed line telecommunication business | Uzbekistan | 91.0% | 91.0% | December |
1 |
|
2 |
|
2. | Significant Accounting Policies |
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 | Basis of Preparation |
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The preparation of the consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.
Controlling percentage ownership1(%) | ||||||||||
Subsidiary | Type of Business | Location | December 31, 2016 | December 31, 2017 | Closing month | |||||
Korea Telecom America, Inc. | Foreign telecommunication business | USA | 100.0% | 100.0% | December | |||||
PT. KT Indonesia | Foreign telecommunication business | Indonesia | 99.0% | 99.0% | December | |||||
PT. BC Card Asia Pacific | Software development and supply | Indonesia | 99.9% | 99.9% | December | |||||
KT Hongkong Telecommunications Co., Ltd. | Fixed line communication business | Hong Kong | 100.0% | 100.0% | December | |||||
KT Hong kong Limited | Foreign investment business | Hong Kong | 100.0% | 100.0% | December | |||||
Korea Telecom Singapore Pte.Ltd. | Foreign investment business | Singapore | 100.0% | 100.0% | December | |||||
Texnoprosistem LLP. | Fixed line internet business | Uzbekistan | 100.0% | 100.0% | December |
Correction | (“revision”) of prior financial statements
(1) New and amended standards adopted by the Group The Group has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2018, and the application has following impacts on the consolidated financial statements. - Amendments to IAS 28Investments in Associates and Joint Ventures When an investment in an associate or a joint venture is held by, or is held indirectly through, an entity that is a venture capital organization, or a mutual fund, unit trust and similar entities KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
including investment-linked insurance funds, the entity may elect to measure each investment separately at fair value through profit or loss in accordance with IFRS 9. The amendment does not have a significant impact on the financial statements because the Group is not a venture capital organization. - Amendments
- Amendments to IFRS 2Share-based Payment Amendments to IFRS 2 clarify accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. Amendments also clarify that the measurement approach should treat the terms and conditions of a cash-settled award in the same way as for an equity-settled award. The - According to - The Group has applied IFRS 9Financial Instruments on January 1, 2018, the date of initial application. In accordance with the transitional provisions in IFRS 9, comparative figures have not been restated, and the differences between previous book amounts and book amounts at the date of initial application are recognized to retained earnings. See Note 41 for further details on the impact of the application of the standard. - IFRS 15Revenue from Contracts with Customers The Group has applied IFRS 15Revenue from Contracts with Customers. In accordance with the transition provisions in IFRS 15, comparative figures have not been restated. The Group elected the modified retrospective approach, and recognized the cumulative impact of initially applying the revenue standard as an adjustment to retained earnings as at January 1, 2018, the period of initial application. See Note 41 for further details on the impact of the application of the standard. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 (2) New standards and interpretations not yet adopted by the Group Certain new accounting standards and interpretations that have been published that are not mandatory for annual reporting period commencing January 1, 2018 and have not been early adopted by the Group are set out below. - Amendments to IFRS 16Leases IFRS 16Leases issued on May 22, 2017 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. This standard will replace IAS 17Leases Under the new standard, with implementation of a single lease model, lessee is required to recognize assets and liabilities for all lease which lease term is over 12 months and underlying assets are not low value assets. A lessee is required to recognize aright-of-use asset and a lease liability representing its obligation to make lease payments. The Group performed an impact assessment to identify potential financial effects of applying IFRS 16. The Group is analyzing the effects on the financial statements based on available information as at December 31, 2018 to identify effects on 2019 financial statements. The Group will adopt IFRS 16Leases effective January 1, 2019 using a modified retrospective method and will not restate comparative periods. The Group will carry forward the assessment of whether our contracts contain or are leases, classification of our leases and remaining lease terms. Based on the Group’s portfolio of leases as at December 31, 2018, approximately KRW 616,759 million of lease assets and liabilities will be recognized on the consolidated statement of financial position upon adoption. In the statement of cash flows, the repayment portion of the lease payments from existing operating leases will reduce net cash from/used in financing activities and no longer affect net cash from operating activities. Only the interest payments will remain in net cash from operating activities, the total of which will rise. - Amendments to IFRS 9Financial Instruments The narrow-scope amendments made to IFRS 9 Financial Instruments enable entities to measure certain prepayable financial assets with negative compensation at amortized cost. When a modification of a financial liability measured at amortized cost that does not result in the derecognition, a modification gain or loss shall be recognized in profit or loss. These amendments will be applied for annual periods beginning on or after January 1, 2019, with early adoption permitted. - Amendments to IAS 19Employee Benefits The amendments require that an entity shall calculate current service cost and net interest for the remainder of the reporting period after a plan amendment, curtailment or settlement based on updated actuarial assumptions from the date of the change. The amendments also require that a reduction in a surplus must be recognized in profit or loss even if that surplus was not previously recognized because of the impact of the asset ceiling. The amendments are effective for plan amendments, curtailments and settlements occurring in reporting periods that begin on or after January 1, 2019. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The amendments clarify that an
- Enactment to IFRIC 23Uncertainty over Income Tax Treatments The Interpretation explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment, and includes guidance on how to determine whether each uncertain tax treatment is considered separately or together. It also presents examples of circumstances where a judgement or estimate is required to be reassessed. This - Annual Improvements to IFRS 2015 – 2017 Cycle:
The amendments clarify that when a party to a joint arrangement obtains control of a business that is a joint operation, and had rights to the assets and obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a business combination achieved in stages. In such cases, the acquirer shall remeasure its entire previously held interest in the joint operation. These amendments will be applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early adoption permitted.
The amendments clarify that when a party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business. In such cases, previously held interests in the joint operation are not remeasured. These amendments will be applied to transactions in which an entity obtains joint control on or after the beginning of the first annual reporting period beginning on or after January 1, 2019, with early adoption permitted.
The amendment is applied to all the income tax consequences of dividends and requires an entity to recognize the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events. These amendments will be applied for annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The Group has prepared the consolidated financial statements in accordance with IFRS 10Consolidated Financial Statements. (1) Subsidiaries Subsidiaries are all entities (including special purpose entities (“SPEs”)) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred is measured at the fair values of the assets transferred, and identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognizes anynon-controlling interest in the acquired entity on anacquisition-by-acquisition basis either at fair value or at thenon-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. All othernon-controlling interests are measured at fair values, unless otherwise required by other standards. Acquisition-related costs are expensed as incurred. The excess of consideration transferred, amount of anynon-controlling interest in the acquired entity and acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (2) Changes in ownership interests in subsidiaries without change of control Any difference between the amount of the adjustment tonon-controlling interest that do not result in a loss of control and any consideration paid or received is recognized in a separate reserve within equity attributable to owners of the Controlling Group. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 (3) Disposal of subsidiaries When the Group ceases to consolidate for a subsidiary because of a loss of control, any retained interest in the subsidiary is remeasured to its fair value with the change in carrying amount recognized in profit or loss.
(4) Associates Associates are all entities over which the Group has significant influence, and investments in associates are initially recognized at acquisition cost using the equity method. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. If there is any objective evidence that the investment in the associate is impaired, the Group recognizes the difference between the recoverable amount of the associate and its book amount as impairment loss. (5) Joint arrangement A joint arrangement, wherein two or more parties have joint control, is classified as either a joint operation or a joint venture. A joint operator recognizes its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. A joint
Information of each operating segment is reported in a manner consistent with the business segment reporting provided to the chief operating decision-maker (Note
(1) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which (2) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognized in profit or loss. They are deferred in other comprehensive income if they relate to qualifying cash flow hedges and qualifying effective portion of net investment hedges, or are attributable to monetary part of the net investment in a foreign operation. Foreign exchange gains and losses are presented in the statement of profit or loss, within finance costs. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences onnon-monetary assets and liabilities such as equities held at fair value through profit or loss are recognized in profit or loss as part of the fair value gain or loss and translation differences onnon-monetary assets such as equities classified as
(3) Translation to the presentation currency The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the reporting period,
income and expenses for each statement of profit or loss are translated at average exchange rates for the period,
equity is translated at the historical exchange rate, and
all resulting exchange differences are recognized in other comprehensive income.
Cash and cash equivalents include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of less than three months.
(1) Classification
those to be measured at fair value through profit or loss those to
those to be measured at amortized cost. The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows. For financial assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. For investments in debt instruments, this will depend on the business model in which the investment is held. The Group reclassifies debt investments when, and only when its business model for For investments in equity instruments that KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 (2) Measurement At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Hybrid (combined) contracts with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest. A. Debt instruments Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. The Group classifies its debt instruments into one of the following three measurement categories: Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the asset is derecognized or impaired. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method. Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income. Movements in the carrying amount are taken through other comprehensive income, except for the recognition of impairment loss (and reversal of impairment loss), interest income and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss. Interest income from these financial assets is included in ‘finance income’ using the effective interest rate method. Foreign exchange gains and losses are presented in ‘finance income or finance costs’ and impairment loss in ‘finance costs or operating expenses’. Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss B. Equity instruments The Group subsequently
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 Changes in the fair value of financial assets at fair value through profit or loss are recognized in ‘finance income or finance costs’ in the statement of profit or loss
The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at
(4) Recognition and Regular way purchases and sales of financial assets
If
Financial assets and liabilities are offset and the net amount reported in the statements of financial position where there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the assets and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the Group or the counterparty.
Derivatives are initially recognized at fair value on the date hedges of a particular risk associated with the cash flows of recognized assets and liabilities and highly probable forecast transactions (cash flow hedges) At inception of the hedge relationship, the Group documents the economic relationship between hedging instruments and hedged items including whether changes in the cash flows of the hedging instruments are expected to offset changes in the cash flows of hedged items. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The full fair value of a hedging derivative is classified as anon-current asset or liability when the
Amounts of changes in fair value of effective hedging instruments accumulated in When a hedging instrument expires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria for hedge accounting, any accumulated cash flow hedge reserve at that time remains in equity until the forecast transaction occurs, resulting in the recognition of anon-financial asset such as inventory. When the forecast transaction is no longer expected to occur, the
Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less loss allowance. See Note 6 for further information about the Group’s accounting for trade receivables and Note 2.7 (3) for a description of the Group’s impairment policies.
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the moving average method, except for inventoriesin-transit which is determined using the specific identification method.
Non-current assets (or disposal group) are classified as
Property and equipment are stated at KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Depreciation of all property, plant and equipment, except for land, is calculated using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives as follows:
The depreciation method, residual values and useful lives of property and equipment are reviewed at the end of each reporting period and, if appropriate, accounted for as changes in accounting estimates.
Investment property is a property held to earn rentals or for capital appreciation. An investment property is measured initially at its cost. After recognition as an asset, investment property is carried at cost less accumulated depreciation and impairment losses. Investment property, except for land, is depreciated using the straight-line method over their useful lives from 10 to 40 years.
(1) Goodwill Goodwill is measured as explained in Note 2.3 For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or group of CGUs, that is expected to benefit from the synergies of the combination. Goodwill is monitored at the operating segment level. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying amount of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed. (2) Intangible assets except goodwill Intangible assets, except for goodwill, are initially recognized at its historical cost, and carried at cost less accumulated amortization and accumulated impairment losses. Membership rights (condominium membership and golf membership) KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 expected to be utilized. The Group amortizes intangible assets with a limited useful life using the straight-line method over the following periods:
General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. Other borrowing costs are expensed in the period in which they are incurred.
Grants from the government are recognized at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants related to assets are presented in the statement of financial position by setting up the grant as deferred income that is recognized in profit or loss on a systematic basis over the useful life of the asset. Grants related to income are presented as a credit in the statement of profit or loss within ‘other income’.
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs
These amounts represent liabilities for goods and services provided to the Group prior to the end of reporting period which are unpaid. Trade and other payables are presented as current liabilities, unless payment is not due within 12 months after the reporting period. They are recognized initially at their fair value and subsequently measured at amortized cost using the effective interest method. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
(1) Classification and measurement The Group’s financial liabilities at fair value through profit or loss are financial instruments held for
The Group classifiesnon-derivative financial liabilities, except for financial liabilities at fair value through profit or loss, financial guarantee contracts and financial liabilities that arise when a
transfer of financial assets does not qualify for derecognition, as financial liabilities carried at amortized cost and Preferred shares that (2) Derecognition Financial liabilities are removed from the statement of financial position when it is
Financial guarantee contracts are recognized as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value, subsequently at the higher of following and recognized in the statement of financial position within ‘other financial liabilities’.
(1) Post-employment benefits The Group operates both defined A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The contributions are recognized as employee benefit expenses when an employee has rendered service. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 A defined benefit plan is a pension plan that is not a defined contribution plan. Generally, post-employment benefits are payable after the completion of employment, and the benefit amount
depended on the employee’s age, periods of service or salary levels. The liability recognized in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the period in which they occur, directly in other comprehensive income. Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognized immediately in profit or loss as past service costs. (2) Termination benefits Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits at the earlier of the following dates: when the entity can no longer withdraw the offer of those benefits or when the entity recognizes costs for a restructuring. (3) Long-term employee benefits Certain entities within the Group provide long-term employee benefits that are entitled to employees with service period for ten years and above. The expected costs of these benefits are accrued over the period of employment using the same accounting methodology as used for defined benefit pension plans. The Group recognizes service cost, net interest on other long-term employee benefits and remeasurements as profit or loss for the year. These liabilities are valued annually by an independent qualified actuary.
Equity-settled share-based payment is recognized at fair value of equity instruments
Provisions for service warranties, make good obligation, and legal claims are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of management’s best estimate of the KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
(1) Lessee A lease is an agreement, whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time. Leases where all the risks and rewards of ownership are not transferred to the Group are classified as operating leases. Lease payments under operating leases are recognized as expenses on a straight-line basis over the lease term.
Leases where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized as lease assets and liabilities at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. (2) Lessor A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership at the inception of the lease. A lease other than a finance lease is classified as an operating lease. Lease income from operating leases is recognized in income on a straight-line basis over the lease term. Initial direct costs incurred by the lessor in negotiating and arranging an operating lease is added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income.
The Group classifies ordinary shares as equity. Where the Controlling Company purchases its own shares, the consideration paid, including any directly attributable incremental costs, is deducted from equity until the share are cancelled or reissued. When these treasury shares are reissued, any consideration received is including in equity attributable to the equity holders of the Controlling Company.
(1) Identification of The Group
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
With the application of IFRS 15, the Group identifies performance obligations with a customer such as mobile and fixed-line service, Media and content services, financial services and sale of goods. Accordingly, the Group will recognize revenue when, or to the extent that, it satisfies the performance obligations by transferring the goods or services that were promised to the customer. Mobile and fixed-line service Telecommunication service revenues include mobile and fixed-line(e.g., fixed-line and VoIP telephone, broadband internet access services and data communication services). These services represent a series of distinct services that is Media and content services Revenue from media and content services primarily consists of installation fees and basic monthly charges of IPTV and satellite TV services, as well as revenue Media and contents services revenue are recognized when services are provided, based upon either usage or period of time. Financial services Financial services primarily include commissions for merchant fees paid by merchants to
Sale of goods Revenue from sale of goods, primarily handsets related to
With the application of IFRS 15, the Group allocates the transaction price to each performance obligation identified in the contract based on a relative stand-alone selling prices of the goods or services being provided to the customer. The Group To allocate the transaction price to each performance obligation on a KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Group sells that good or service separately in similar circumstances and to similar customers. The Group recognizes the allocated amount as contract assets or contract liabilities, and amortizes it through the remaining period which is adjusted in operating income. The adoption of the new revenue standard in some cases resulted in the early recognition of revenue from the sale of handsets, which are usually recognized upon the transfer of control to the customer, basically due to the allocation of discounts between the performance obligations arising from the sale of plans that include mobile services as well as handsets. The difference between the carrying value of sales of handsets, and the amount received from the customer is recorded as a contractual asset and/or liability at the beginning of the contract. Revenue from telecommunication services, in turn, will be recognized in the statement of income based on the allocation of the transaction price, and to the extent that services are being provided to customers in monthly basis. (4) Incremental contract acquisition costs The Group pays the commission fees to authorized dealers when new customer subscribe for telecommunication services. The incremental contract acquisition costs are those commission fess that the Group incurs to acquire a contract with a customer that it would not have incurred if the contract had not been acquired. According to IFRS 15, the Group recognizes as an asset the incremental contract acquisition costs and amortize it over the expected period of benefit. However, as a practical expedient, the Group may recognize the incremental contract acquisition costs as an expense when incurred if the amortization period of the asset is one year or less.
The tax expense for the period consists of current and deferred tax. The tax expense is Management periodically evaluates tax policies that are applied in tax returns in which applicable tax regulation is subject to interpretation. The Group recognizes current income tax on the basis of the amount expected to be paid to the tax authorities. Deferred income tax is Deferred tax assets are recognized only if it is probable that future taxable amount will be available to utilize those temporary differences and losses.
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 investments to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets The Group adopts the consolidated corporate tax return and calculates income tax expenses and income tax liabilities of the Group based on systematic and reasonable methods.
Dividend distribution to the Group’s shareholders is recognized as a liability in the financial statements in the period in which the dividends are approved by the Group’s shareholders.
The
March 29, 2019.
The preparation of financial statements requires the Group The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are
The Group tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of cash-generating units (CGUs) is determined based onvalue-in-use calculations (Note
If certain portion of the taxable income is not used for investments or increase in wages or dividends in accordance with theTax System For Recirculation of Corporate Income, KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period (Note
The
each reporting period.
The present value of net defined benefit liability depends on a number of factors that are determined on an actuarial basis using a number of assumptions including the discount rate (Note
As described in Note
The property and equipment, intangible assets, and investment properties, excluding land, goodwill, condominium memberships,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Financial instruments by category as at December 31, 2017 and 2018, are as follows:
Gains or losses arising from financial instruments by category for the years ended December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
Restricted cash and cash equivalents as
Cash and cash equivalents in the statement of financial position equal to cash and cash equivalents in the statement of cash flows.
Trade and other receivables as at December 31, 2017 and 2018 are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of changes in allowance for doubtful accounts the years ended December 31, 2016, 2017 and
Provisions for impairment on trade and other receivables are recognized as operating expenses Details of
The maximum exposure of trade and other receivables to credit risk is the carrying amount of each class of receivables mentioned above as A portion of the trade receivables is classified as financial assets at fair value through other comprehensive income considering the trade receivables business model for managing the asset and the cash flow characteristics of the contract. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of other financial assets and liabilities as
The Investment in Korea Software Financial Cooperative amounting to₩1,136 million is provided as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of financial asset at fair value through other comprehensive income as
₩257,819 million ofavailable-for-sales was classified as financial assets at fair value through other comprehensive income in the prior year. Upon disposal of these equity investments, any balance within the accumulated other comprehensive income for these equity investments is not classified to profit or loss, but to retained earnings. Upon disposal of debt investments, remaining balance of the accumulated other comprehensive income of debt instruments is reclassified to profit or loss Derivatives used for hedge as
The full value of a hedging derivative is classified as anon-current asset or liability if the remaining maturity of the hedged item is more than 12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months.
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The valuation gains and losses on the derivatives contracts for the years ended December 31, 2016, 2017 and 2018, are as follows:
The ineffective portion recognized in profit or loss on the cash flow hedge is valuation gain of₩ Details of
Cost of
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Other assets and liabilities as
The Group decided to sell total shares of PT Mitra Transksi Indonesia, investments in associates, with the approval of the Board of Directors and shareholders. At the end of the reporting period, the associated asset amounting to₩13,035 million is presented as held for sale. After classifying the asset as held for sale, share of net profit or loss from the associate is not recognized. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Changes in property
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of property
The borrowing costs capitalized for qualifying assets amount to₩
Changes in investment properties for the years ended December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The fair value of investment properties is₩ Rental income from investment properties is₩ Details of investment properties provided as collateral as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Changes in intangible assets for the years ended December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The carrying amount of membership rights and others, excluding goodwill, with indefinite useful life not subject to amortization is₩239,619 million (2017:₩238,053) as at December 31, 2018. The Group won a portion of the 3.5GHz and 28GHz bands at an auction in June 2018 under Article 11 (Assignment of Radio Frequencies for Consideration) of the Radio Waves Act. The purchase consideration for the right to use a radio frequency of the 3.5GHz and 28GHz bands are₩968,000 million and₩207,800 million, respectively. The group made down payments for the 3.5 GHz and 28 GHz bands in November 2018, and the remaining consideration for the 3.5 GHz and 28GHz bands will be paid in installments annually for 10 years and 5 years, respectively. Goodwill is allocated to the Group’s cash-generating unit which is identified by operating segments. As
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
As a result of the impairment test, the Group recognized the impairment losses of₩ 78,200 million on goodwill allocated to Satellite TV segment and₩ 29,325 million on indefinite-lived intangible assets, and recognized the losses as operating expenses in the consolidated statement of profit or loss for the year ended December 31, 2017. It was resulted from intense competition between internets, IPTV, Cable TV service providers.
Details of associates as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
Changes in investments in associates and joint ventures for the years ended December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Summarized financial information of associates and joint ventures as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of a reconciliation of the summarized financial information to the carrying amount of interests in the associates and joint ventures as
Due to discontinuance of equity method of accounting, the Group has not recognized loss from associates and joint ventures of₩
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of trade and other payables as at December 31, 2017 and 2018, are as follows:
Details of other payables as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of borrowings as at December 31, 2017 and 2018, are as follows: Debentures
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
Short-term borrowings
Long-term borrowings
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Repayment schedule of the Group’s borrowings including the portion of current liabilities as
Changes in provisions for the years ended December 31, 2017 and 2018, are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The amounts recognized in the statements of financial position are determined as follows:
Changes in the defined benefit obligations for the years ended December 31, 2017 and 2018, are as follows:
Changes in the fair value of plan assets for the years ended December 31, 2017 and 2018, are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Amounts recognized in the statement of profit or loss for the years ended December 31, 2016, 2017 and
Principal actuarial assumptions used are as follows:
The sensitivity of the defined benefit obligations as
A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings. The above sensitivity analyses are based on an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. The sensitivity of the defined benefit obligation to changes in principal actuarial assumptions is calculated using the projected unit credit method, the same method applied when calculating the defined benefit obligations recognized on the statement of financial position. The Group actively monitors how the duration and the expected yield of the investments match the expected cash outflows arising from the pension obligations. Expected contributions to post-employment benefit plans for the year ending December 31, The expected maturity analysis of undiscounted pension benefits as at December 31,
The weighted average duration of the defined benefit obligations is
Recognized expense related to the defined contribution plan for the year ended December 31, KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
As
As
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
As
The Controlling Company is jointly and severally obligated with KT Sat Co., Ltd. to pay KT Sat Co., Ltd.’s liabilities incurred prior tospin-off. As For the year ended December 31, As
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
According to the financial and other covenants included in certain debentures and borrowings, the Group is required to maintain certain financial ratios such asdebt-to-equity ratio, use the funds for the designated purpose and report to the creditors periodically. The covenant also contains restriction on provision of additional collateral and disposal of certain assets. At the end of the reporting period, the Group is offering construction completion guarantee agreement to development of Nonsan Hwagidong apartment complex. If a contingent event occurs in between November 24, 2017 and to August 9, 2019, the Group collaterally guarantees the debt of AbleNS 1st Co. up to₩ At the end of the reporting period, the Group participates in Algerie Sidi Abdela new town development consortium (percentage of ownership: 2.5%) and has joint liability with other consortium participants. At the end of the reporting period, contract amount of property
The Group’snon-cancellable lease arrangements as at December 31, 2018, are as follows:
Details of finance lease assets as
As Details of future minimum lease payments as at December 31, 2017 and 2018, under finance lease contracts are summarized below:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of future minimum lease payments
Operating lease expenses incurred for the years ended December 31,
As
Details of retained earnings as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
As
Changes in accumulated other comprehensive income for the years ended December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
As
Treasury stock is expected to be used for the stock compensation for the Group’s directors and employees and other purposes.
Details of share-based payments as
Changes in the number of stock options and the weighted-average exercise price as at December 31, 2017 and 2018, are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
The Group has recognized the following amounts relating to revenue in the statement of profit or loss:
Operating revenues for the years ended December 31, 2018, are as follows:
Mobile and fixed-line service Telecommunication service revenues include mobile and fixed-line(e.g., fixed-line and VoIP telephone, broadband internet access services and data communication services). These services represent a series of distinct services that is considered a separate performance obligation. Service revenue is recognized when services are provided, based upon either usage (e.g., minutes of traffic/bytes of data processed) or period of time (e.g., monthly service fees). Media and content services Revenue from media and content services primarily consists of installation fees and basic monthly charges of IPTV and satellite TV services, as well as revenue from digital content distribution, digital music streaming and downloading. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 Media and contents services revenue are recognized when services are provided, based upon either usage or period of time. Financial services Financial services primarily include commissions for merchant fees paid by merchants to credit card companies for processing transactions. Revenue from the commission is recognized when the service obligation is performed. Sale of goods Revenue from sale of goods, primarily handsets related to our mobile services is recognized when a performance obligation is satisfied by transferring promised goods to customers. The contract assets and liabilities recognized in relation to the revenues from contracts with customers are as follows:
The contract costs recognized as assets are as follows:
The Group recognized₩1,397,318 million of operating expenses in the current reporting period which relates to contract cost assets. In 2018, the recognized revenue arising from carried-forward contract liabilities from prior year is as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Operating
Details of employee benefits for the years ended December 31, 2016, 2017 and 2018, are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of
The analysis of deferred tax assets and deferred tax liabilities as at December 31, 2017 and 2018, is as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The gross movements on the deferred income tax account for the years ended December 31,
The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The tax impacts recognized directly to equity as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of income tax expense for the years ended December 31, 2016, 2017 and 2018, are calculated as follows:
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the entities as follows:
Basic earnings per share is calculated by dividing the profit from operations attributable to equity holders of the Group by the weighted average number of ordinary shares outstanding during the period, excluding ordinary shares purchased by the Group and held as treasury stock. Basic earnings per share from operations for the years ended December 31,
Diluted earnings per share from operations is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Controlling Company has dilutive potential ordinary shares from convertible preferred stocks, stock options and other share-based payments. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Diluted earnings per share from operations for the years ended December 31,
The dividends paid by the Group in 2018, 2017 and 2016 were₩245,097 million (₩1,000 per share),₩195,977 million (₩800 per share) and₩122,425 million (₩500 per share), respectively.
Cash flows from operating activities for the years ended December 31, 2016, 2017 and 2018, are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The Group made agreements with securitization specialty companies and disposed of its trade receivables related to handset sales (Note KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 Significant transactions not affecting cash flows for the years ended December 31,
Changes in liabilities arising from financial activities for the periods ended December 31, 2017 and 2018, are as follows:
The Group’s operating segments are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of each segment for the years ended December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Operating revenues for the year ended December 31, 2016, 2017 and 2018 andnon-current assets as at December 31, 2017 and 2018 by geographical regions, are as follows:
35. Related Party Transactions The list of related party of the Group as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Outstanding balances of receivables and payables in relations to transactions with related parties as at December 31, 2017 and 2018, are as follows:
Significant transactions with related parties for the years ended December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Key management compensation for the years ended December 31,
Fund transactions with related parties for the years ended December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
(1) Financial Risk Factors The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk The Group’s financial policy is set up in the long-term perspective and annually reported to the Board of Directors. The financial risk management is carried out by the Value Management Office, which identifies, evaluates and hedges financial risks. The treasury department in the Value Management Office considers various finance market conditions to estimate the effect from the market changes. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 1) Market risk The Group’s market risk management focuses on controlling the extent of exposure to the risk in order to minimize revenue volatility. Market risk is a risk that decreases value or profit of the Group’s portfolio due to changes in market interest rate, foreign exchange rate and other factors. (i) Sensitivity analysis Sensitivity analysis is performed for each type of market risk to which the Group is exposed. Reasonably possible changes in the relevant risk variable such as prevailing market interest rates,
currency rates, equity prices or commodity prices are estimated and if the rate of change in the underlying risk variable is stable, the Group does not alter the chosen reasonably possible change in the risk variable. The reasonably possible change does not include remote or ‘worst case’ scenarios or ‘stress tests’. (ii) Foreign exchange risk The Group is exposed to foreign exchange risk arising from operating, investing and financing activities. Foreign exchange risk is managed within the range of the possible effect on the Group’s cash flows. Foreign exchange risk (i.e. foreign currency translation of overseas operating assets and liabilities) unaffecting the Group’s cash flows is not hedged but can be hedged at a particular situation. As
The above analysis is a simple sensitivity analysis which assumes that all the variables other than foreign exchange rates are held constant. Therefore, the analysis does not reflect any correlation between foreign exchange rates and other variables, nor the management’s decision to decrease the risk. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of financial assets and liabilities in foreign currencies as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
(iii) Price risk As
The above analysis is based on the assumption that the equity index had increased/decreased by 10% with all other variables held constant and all the Group’s marketable equity instruments had moved according to the historical correlation with the index. Gain or loss on equity securities classified as financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income can increase or decrease equity. (iv) Cash flow and fair value interest rate risk The Group’s interest rate risk arises from liabilities in foreign currency such as foreign currency debentures. Debentures in foreign currency issued at variable rates expose the Group to cash flow interest rate risk which is partially offset by swap transactions. Debentures and borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group sets the policy and operates to minimize the uncertainty of the changes in interest rates and financial costs. As
The above analysis is a simple sensitivity analysis which assumes that all the variables other than market interest rates are held constant. Therefore, the analysis does not reflect any correlation between market interest rates and other variables, nor the management’s decision to decrease the risk. 2) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s trade receivables from customers, debt securities and others. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
Credit risk is managed on the Group basis with the purpose of minimizing financial loss. Credit risk arises from the normal transactions and investing activities, where clients or other party fails to discharge an obligation on contract conditions. To manage credit risk, the Group considers the counterparty’s credit based on the counterparty’s financial conditions, default history and other important factors.
Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as outstanding receivables. To minimize such risk, only the financial institutions with strong credit ratings are accepted.
For some trade receivables, the Group may obtain security in the form of guarantees or letters of credit, etc. which can be called upon if the counterparty is in default under the terms of the agreement.
The Group has four types of financial assets that are subject to the expected credit loss model: trade receivables for sales of goods and provision of services, contract assets relating to provision of services, debt investments carried at fair value through other comprehensive income, and other financial assets carried at amortized cost. While cash equivalents are also subject to the impairment requirement, the identified impairment loss was immaterial. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 As at December 31, 2017 and 2018, maximum exposure to credit risk is as follows.
(i) Trade receivables and contract assets The Group applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. (ii) Cash equivalents (except for cash on hand) The Group is also exposed to credit risk in relation to financial assets that are measured at fair value through profit or loss. The maximum exposure at the end of the reporting period is the carrying amount of these investments. (iii) Other financial assets at amortized costs Other financial assets at amortized cost include time deposits, other long-term financial instruments and others. All of the financial assets at amortized costs are considered to have low credit risk, and the loss allowance recognized during the period was, therefore, limited to 12 months expected losses. Management consider ‘low credit risk’ for other instruments when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term. (iv) Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income includeavailable-for-sale recognized in the prior financial year. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 All of the debt investments at fair value through other comprehensive income are considered to have low credit risk, and the loss allowance recognized during the period was, therefore, limited to 12 months expected losses. Management consider ‘low credit risk’ for other instruments when they have a low risk of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term. The Group is also exposed to credit risk in relation to financial assets that are measured at fair value through other comprehensive income. The maximum exposure at the end of the reporting period is the carrying amount of these investments. (v) Financial assets at fair value through profit or loss The Group is also exposed to credit risk in relation to financial assets that are measured at fair value through profit or loss. The maximum exposure at the end of the reporting period is the carrying amount of these investments. 3) Liquidity risk The Group manages its liquidity risk by liquidity strategy and plans. The Group considers the maturity of financial assets and financial liabilities and the estimated cash flows from operations. The table below analyzes the Group’s liabilities (including interest expenses) into relevant maturity groups based on the remaining period at the date of the end of each reporting period to the contractual maturity date. These amounts are contractual undiscounted cash
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 Cash outflow and inflow of derivatives settled gross or net are undiscounted contractual cash flow and can differ from the amount in the financial statements.
(2) Management of Capital The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other shareholders and to maintain an optimal capital structure to reduce the cost of capital. The Group’s capital structure consists of liabilities including borrowings, cash and cash equivalents, and shareholders’ equity. The treasury department monitors the Group’s capital structure and considers cost of capital and risks related each capital component. Thedebt-to-equity ratios as
The Group manages capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as ‘equity’ in the statement of financial position plus net debt. The gearing ratios as at December 31, 2017 and 2018, are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
(3) Offsetting Financial Assets and Financial Liabilities Details of the Group’s recognized financial assets subject to enforceable master netting arrangements or similar agreements are as follows:
The Group’s recognized financial liabilities subject to enforceable master netting arrangements or similar agreements are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
Carrying amount and fair value of financial instruments by category as at December 31, 2017 and 2018, are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Assets measured at fair value or for which the fair value is disclosed are categorized within the fair value hierarchy, and the defined levels are as follows:
Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, prices) or indirectly (that is, derived from prices) (Level 2).
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Fair value hierarchy classifications of the financial assets and financial liabilities that are measured at fair value or its fair value is disclosed as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
There are no transfers between Level 1 and Level 2 of the fair value hierarchy for the recurring fair value measurements.
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Valuation techniques and inputs used in the recurring,non-recurring fair value measurements and disclosed fair values categorized within Level 2 and Level 3 of the fair value hierarchy as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The Group uses external experts that perform the fair value measurements required for financial reporting purposes. External experts report directly to the chief financial officer (CFO), and discusses valuation processes and results with the CFO in line with the Group’s reporting dates.
In the case that the Group values derivative financial instruments using inputs not based on observable market data, and the fair value calculated by the said valuation technique differs from the transaction price, then the fair value of the financial instruments is recognized as the transaction price. The difference between the fair value at initial recognition and the transaction price is deferred and amortized using a straight-line method by maturity of the financial instruments. However, in the case that inputs of the valuation techniques become observable in markets, the remaining deferred difference is immediately recognized in full in profit for the year. In relation to this, details and changes of the total deferred difference for the years ended December 31,
Details of information about its interests in unconsolidated structured entities, which the Group does not have control over, including the nature, purpose and activities of the structured entity and how the structured entity is financed, are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Details of scale of unconsolidated structured entities and nature of the risks associated with an entity’s interests in unconsolidated structured entities as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
Profit or loss allocated tonon-controlling interests and accumulatednon-controlling interests of subsidiaries that are material to the Group for the years ended December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The summarized financial information for each subsidiary withnon-controlling interests that are material to the Group before inter-company eliminations is as follows: Summarized consolidated statements of financial position as
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
The effect of changes in the ownership interest on the equity attributable to owners of the Group during
Details of the business combination are as
Fair value of the purchase consideration from the business combination is as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31,
Fair value of the assets and liabilities recognized as a result of the acquisition at the acquisition date are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
As at December 31, 2018, details of the recognized goodwill as a result of the business combination are as follows:
Details of cash outflows as a result of acquisition are as follows:
Since the unmanned security business acquired from SG Safety Corporation is incorporated into the Group’s main business segment, the security services business, it is difficult to identify revenue and net profit generated from business combination during the reporting period. Since KT MOS Bukbu Co., Ltd. and KT MOS Nambu Co., Ltd. are incorporated into the network business, it is difficult to identify revenue and net profit generated from business combination during the reporting period. According to the contract, KT Telecop Co., Ltd. has the right to be reimbursed from SG Safety Corporation in the amount equivalent to 35 times the difference between the target revenue and monthly security business revenue as at December 31, 2023. However, as at the end of the reporting period, related reimbursement asset is not recognized since it is reasonably expected that the revenue will meet its target.
As explained in Note 2, the Group has applied IFRS 15Revenue from Contracts with Customers from January 1, 2018. In accordance with KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 figures have not been restated. Financial statement line items affected by the adoption of the The impact on the financial statements due to the application of
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 The effect of adoption of IFRS 15 on
With the implementation of IFRS 15, the Group KT Corporation Notes to the December 31, 2016, 2017 and 2018 promised goods or services separately to the customer. The best evidence of In relation to this, as at December 31, 2018, contract assets and contract liabilities are increased by₩398,797 million (January 1, 2018:₩421,131 million) and₩347,461 million (January 1, 2018:₩282,836 million), respectively.
The Group pays the commission fees when new customer subscribe for telecommunication services. The incremental costs of obtaining a contract are those commission fees that the Group incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. According to IFRS 15, the Group recognizes as an asset the In relation to this, prepaid expenses are increased by₩1,444,822 million as at December 31, 2018 (January 1, 2018:₩1,285,443 million).
The application of IFRS 15 has no material impact on cash flows from operating, investing and financing activities on the statements of cash flows. KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
The Group has IFRS 9 replaces IAS 39,Financial Instruments: Recognition and Measurement, relating to the recognition of financial assets and financial liabilities, classification, measurement and elimination of financial instruments, impairment of financial assets and hedge accounting. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7Financial Instruments: Disclosures.
Details of the Group’s beginning balance of retained earnings after adjustment due to application of IFRS 9, are as follows:
On the date of initial application of IFRS 9, January 1, 2018, the Group’s management has assessed which business models apply to the financial assets held by the Group and has classified its financial instruments into the appropriate IFRS 9 categories. The main effects resulting from this reclassification are as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
The impact on these changes on the Group’s equity as at January 1, 2018, is as follows:
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018
Subsequent to the reporting period, public bonds issued are as follow:
The Group revised the prior period financial statements to correct errors in relation to the under-statement of revenue due to omission of data transferring from billing system to finance system, and the details are as follows: Consolidated Statements of financial position
KT Corporation and Subsidiaries Notes to the Consolidated Financial Statements December 31, 2016, 2017 and 2018 Consolidated Statement of operations & Comprehensive Income
Consolidated Statements of changes in equity
The increase in retained earnings due to revision of prior period financial statements before January 1, 2016 is₩97,496 million. F-112 |