Company Quick10K Filing
Kt
20-F 2020-12-31 Filed 2021-04-30
20-F 2019-12-31 Filed 2020-04-29
20-F 2018-12-31 Filed 2019-04-30
20-F 2017-12-31 Filed 2018-04-30
20-F 2016-12-31 Filed 2017-04-28
20-F 2015-12-31 Filed 2016-04-29
20-F 2013-12-31 Filed 2014-04-28
20-F 2012-12-31 Filed 2013-04-29
20-F 2011-12-31 Filed 2012-04-27
20-F 2010-12-31 Filed 2011-06-29
20-F 2009-12-31 Filed 2010-06-29

KT 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Managers and Advisers
Item 1.A. Directors and Senior Management
Item 1.B. Advisers
Item 1.C. Auditors
Item 2. Offer Statistics and Expected Timetable
Item 2.A. Offer Statistics
Item 2.B. Method and Expected Timetable
Item 3. Key Information
Item 3.A. Selected Financial Data
Item 3.B. Capitalization and Indebtedness
Item 3.C. Reasons for The Offer and Use of Proceeds
Item 3.D. Risk Factors
Item 4. Information on The Company
Item 4.A. History and Development of The Company
Item 4.B. Business Overview
Item 4.C. Organizational Structure
Item 4.D. Property, Plant and Equipment
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 5.A. Operating Results
Item 5.B. Liquidity and Capital Resources
Item 5.C. Research and Development, Patents and Licenses, Etc.
Item 5.D. Trend Information
Item 5.E. Off-Balance Sheet Arrangements
Item 5.F. Tabular Disclosure of Contractual Obligations
Item 5.G. Safe Harbor
Item 6. Directors, Senior Management and Employees
Item 6.A. Directors and Senior Management
Item 6.B. Compensation
Item 6.C. Board Practices
Item 6.D. Employees
Item 6.E. Share Ownership
Item 7. Major Shareholders and Related Party Transactions
Item 7.A. Major Shareholders
Item 7.B. Related Party Transactions
Item 7.C. Interests of Experts and Counsel
Item 8. Financial Information
Item 8.A. Consolidated Statements and Other Financial Information
Item 8.B. Significant Changes
Item 9. The Offer and Listing
Item 9.A. Offer and Listing Details
Item 9.B. Plan of Distribution
Item 9.C. Markets
Item 9.D. Selling Shareholders
Item 9.E. Dilution
Item 9.F. Expenses of The Issuer
Item 10. Additional Information
Item 10.A. Share Capital
Item 10.B. Memorandum and Articles of Association
Item 10.C. Material Contracts
Item 10.D. Exchange Controls
Item 10.E. Taxation
Item 10.F. Dividends and Paying Agents
Item 10.G. Statements By Experts
Item 10.H. Documents on Display
Item 10.I. Subsidiary Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Item 12.A. Debt Securities
Item 12.B. Warrants and Rights
Item 12.C. Other Securities
Item 12.D. American Depositary Shares
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
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
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
EX-1 d675607dex1.htm
EX-8.1 d675607dex81.htm
EX-12.1 d675607dex121.htm
EX-12.2 d675607dex122.htm
EX-13.1 d675607dex131.htm

Kt Earnings 2018-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d675607d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 30, 2019

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-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, 2018

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 number 1-14926

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-ro 3-Gil, Jongno-gu

03155 Seoul, Korea

(Address of principal executive offices)

Kyung-Keun Yoon

KT Gwanghwamun Building East

33, Jong-ro 3-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, 2018, there were 245,144,768 ordinary shares, par value 5,000 per share, outstanding

(not including 15,967,040 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-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.  

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 Rule 12b-2 of the Exchange Act).    Yes      No  

 

*

Not for trading, but only in connection with the registration of the American Depositary Shares.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Part I

     1  

Item 1.

  Identity of Directors, Senior Managers and Advisers      1  
  Item 1.A.   Directors and Senior Management      1  
  Item 1.B.   Advisers      1  
  Item 1.C.   Auditors      1  

Item 2.

  Offer Statistics and Expected Timetable      1  
  Item 2.A.   Offer Statistics      1  
  Item 2.B.   Method and Expected Timetable      1  

Item 3.

  Key Information      2  
  Item 3.A.   Selected Financial Data      2  
  Item 3.B.   Capitalization and Indebtedness      5  
  Item 3.C.   Reasons for the Offer and Use of Proceeds      5  
  Item 3.D.   Risk Factors      5  

Item 4.

  Information on the Company      23  
  Item 4.A.   History and Development of the Company      23  
  Item 4.B.   Business Overview      24  
  Item 4.C.   Organizational Structure      45  
  Item 4.D.   Property, Plant and Equipment      45  
Item 4A.   Unresolved Staff Comments      47  

Item 5.

  Operating and Financial Review and Prospects      47  
  Item 5.A.   Operating Results      47  
  Item 5.B.   Liquidity and Capital Resources      71  
  Item 5.C.   Research and Development, Patents and Licenses, Etc.      74  
  Item 5.D.   Trend Information      74  
  Item 5.E.   Off-balance Sheet Arrangements      74  
  Item 5.F.   Tabular Disclosure of Contractual Obligations      75  
  Item 5.G.   Safe Harbor      75  

Item 6.

  Directors, Senior Management and Employees      75  
  Item 6.A.   Directors and Senior Management      75  
  Item 6.B.   Compensation      80  
  Item 6.C.   Board Practices      81  
  Item 6.D.   Employees      83  
  Item 6.E.   Share Ownership      84  

 

i


Table of Contents

Item 7.

  Major Shareholders and Related Party Transactions      86  
  Item 7.A.   Major Shareholders      86  
  Item 7.B.   Related Party Transactions      86  
  Item 7.C.   Interests of Experts and Counsel      86  
Item 8.   Financial Information      86  
  Item 8.A.   Consolidated Statements and Other Financial Information      86  
  Item 8.B.   Significant Changes      88  

Item 9.

  The Offer and Listing      89  
  Item 9.A.   Offer and Listing Details      89  
  Item 9.B.   Plan of Distribution      89  
  Item 9.C.   Markets      89  
  Item 9.D.   Selling Shareholders      89  
  Item 9.E.   Dilution      89  
  Item 9.F.   Expenses of the Issuer      89  
Item 10.   Additional Information      89  
  Item 10.A.   Share Capital      89  
  Item 10.B.   Memorandum and Articles of Association      89  
  Item 10.C.   Material Contracts      96  
  Item 10.D.   Exchange Controls      96  
  Item 10.E.   Taxation      100  
  Item 10.F.   Dividends and Paying Agents      107  
  Item 10.G.   Statements by Experts      108  
  Item 10.H.   Documents on Display      108  
  Item 10.I.   Subsidiary Information      108  
Item 11.   Quantitative and Qualitative Disclosures About Market Risk      108  
Item 12.   Description of Securities Other than Equity Securities      111  
  Item 12.A.   Debt Securities      111  
  Item 12.B.   Warrants and Rights      111  
  Item 12.C.   Other Securities      111  
  Item 12.D.   American Depositary Shares      111  

Part II

     113  
Item 13.   Defaults, Dividend Arrearages and Delinquencies      113  
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds      113  
Item 15.   Controls and Procedures      113  

 

ii


Table of Contents
Item 16.   [Reserved]      114  
Item 16A.   Audit Committee Financial Expert      114  
Item 16B.   Code of Ethics      114  
Item 16C.   Principal Accountant Fees and Services      115  
Item 16D.   Exemptions from the Listing Standards for Audit Committees      115  
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers      116  
Item 16F.   Change in Registrant’s Certifying Accountant      116  
Item 16G.   Corporate Governance      116  
Item 16H.   Mine Safety Disclosure      117  
Part III      118  
Item 17.   Financial Statements      118  
Item 18.   Financial Statements      118  
Item 19.   Exhibits      118  

 

iii


Table of Contents

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, 1,208.5 to US$1.00, 1,071.4 to US$1.00 and 1,118.1 to US$1.00 on December 31, 2016, 2017 and 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, 2018 have been translated into United States dollars at the rate of 1,118.1 to US$1.00, the Market Average Exchange Rate in effect on December 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”), the Korea Communications Commission (the “KCC”) or the Korea Telecommunications Operators Association.

PART  I

Item 1.  Identity of Directors, Senior Managers and Advisers

Item 1.A.  Directors and Senior Management

Not applicable.

Item 1.B.  Advisers

Not applicable.

Item 1.C.  Auditors

Not applicable.

Item 2.  Offer Statistics and Expected Timetable

Item 2.A.  Offer Statistics

Not applicable.

Item 2.B.  Method and Expected Timetable

Not applicable.

 

1


Table of Contents

Item 3.  Key Information

Item 3.A.  Selected Financial Data

The selected financial data presented below should be read in conjunction with our consolidated financial statements as of January 1, 2017 and December 31, 2017 and 2018 and for each of the years in the three-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 2018 and for each of the years in the three year period ended December 31, 2018 were derived from our audited Consolidated Financial Statements included elsewhere in this annual report. Our Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we 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 Form 6-K. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS.”

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.

 

2


Table of Contents

Selected consolidated statement of operations data

 

     Year Ended December 31,  
         2014             2015             2016             2017             2018      
     (In billions of Won, except per share data)  

Continuing Operations:

          

Operating revenue

   22,619     22,715     23,164     23,547     23,436  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

     22,366       22,227       22,798       23,260       23,220  

Others

     253       488       366       287       216  

Operating expenses

     23,392       21,623       21,781       22,478       22,335  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     (773     1,092       1,383       1,069       1,101  

Finance income

     253       273       296       406       374  

Finance costs

     (792     (645     (515     (645     (436

Income from jointly controlled entities and associates

     19       6       3       (14     (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) from continuing operations before income tax

     (1,293     726       1,167       817       1,034  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

     (270     231       335       271       315  

Profit (loss) for the year from the continuing operations

     (1,023     495       832       546       719  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

          

Profit (loss) from discontinued operations

     86       141                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the year

   (937   636     832     546     719  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) for the year attributable to:

          

Equity holders of the parent company

   (1,026   557     745     462     645  

Profit (loss) from continuing operations

     (1,090     415       745       462       645  

Profit (loss) from discontinued operations

     64       142                    

Non-controlling interest

   89     79     87     85     74  

Profit from continuing operations

     66       80       87       85       74  

Profit (loss) from discontinued operations

     22       (1                  

Earnings per share attributable to the equity holders of the Parent Company during the period:

          

Basic earnings (loss) per share

   (4,194   2,275     3,043     1,884     2,634  

From continuing operations

     (4,456     1,694       3,043       1,884       2,634  

From discontinued operations

     262       581                    

Diluted earnings (loss) per share

   (4,194   2,275     3,041     1,883     2,634  

From continuing operations

     (4,456     1,694       3,041       1,883       2,634  

From discontinued operations

     262       581                    

 

3


Table of Contents

Selected consolidated statement of financial position data

 

     As of December 31,  
Selected Statement of Financial Position Data    2014     2015     2016     2017     2018  
     (In billions of Won)  

Assets:

          

Current assets:

          

Cash and cash equivalents

   1,889     2,559     2,900     1,928     2,703  

Trade and other receivables, net

     5,871       4,960       5,478       5,965       5,680  

Other financial assets

     333       293       721       973       995  

Current income tax assets

     4       4       2       9       4  

Inventories, net

     419       617       455       642       1,075  

Current assets held for sale

                       7       13  

Other current assets

     351       318       311       305       1,688  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     8,867       8,751       9,866       9,829       12,158  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-current assets:

          

Trade and other receivables, net

     1,759       704       709       829       843  

Other financial assets

     705       658       665       755       623  

Property and equipment, net

     16,468       14,479       14,312       13,562       13,068  

Investment property, net

     1,060       1,102       1,148       1,190       1,091  

Intangible assets, net

     3,544       2,600       3,023       2,633       3,407  

Investments in jointly controlled entities and associates

     339       270       284       279       272  

Deferred income tax assets

     1,077       840       701       712       465  

Other non-current assets

     73       103       106       107       546  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current assets

     25,025       20,756       20,948       20,067       20,315  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   33,892     29,507     30,815     29,896     32,474  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Equity:

          

Current liabilities:

          

Trade and other payables

   6,431     6,337     7,142     7,426     7,008  

Borrowings

     2,956       1,726       1,820       1,573       1,368  

Other financial liabilities

     24       44       0       37       1  

Current income tax liabilities

     48       83       103       83       250  

Provisions

     111       104       96       78       118  

Deferred income

     144       98       36       18       53  

Other current liabilities

     279       311       342       259       597  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     9,993       8,703       9,539       9,474       9,394  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-current liabilities:

          

Trade and other payables

     944       669       1,188       1,001       1,514  

Borrowings

     9,860       6,909       6,301       5,110       5,280  

Other financial liabilities

     191       104       108       149       163  

Retirement benefit liabilities

     594       524       378       395       561  

Provisions

     106       91       101       125       164  

Deferred income

     147       96       85       92       111  

Deferred income tax liabilities

     144       130       138       128       205  

Other non-current liabilities

     39       27       59       237       424  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current liabilities

     12,025       8,550       8,358       7,238       8,422  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   22,018     17,253     17,898     16,712     17,816  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to owners of the Parent Company:

          

Paid-in capital

          

Share capital

   1,564     1,564     1,564     1,564     1,564  

Share premium

     1,440       1,440       1,440       1,440       1,440  

Retained earnings

     8,568       9,147       9,779       9,961       11,256  

Accumulated other comprehensive income (expense)

     112       14       (1     31       50  

Other components of equity

     (1,261     (1,233     (1,218     (1,205     (1,181

Total equity attributable to owners of the parent company

     10,425       10,934       11,564       11,792       13,130  

Non-controlling interest

     1,449       1,320       1,353       1,392       1,529  

Total equity

     11,874       12,254       12,917       13,183       14,658  

Total liabilities and equity

   33,892     29,507     30,815     29,896     32,474  

 

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Table of Contents

Selected consolidated statement of cash flow data

 

     Year Ended December 31,  
     2014     2015     2016     2017     2018  
     (In billions of Won)  

Net cash generated from operating activities

   1,916     4,230     4,771     3,878     4,010  

Net cash used in investing activities

     (3,171     (2,402     (3,485     (3,483     (2,704

Net cash provided by (used in) financing activities

     1,072       (1,164     (943     (1,363     (532

Operating Data

 

     As of December 31,  
     2014      2015      2016      2017      2018  

Lines installed (thousands) (1)

     23,930        23,607        24,858        24,343        23,660  

Lines in service (thousands) (1)

     13,713        12,440        11,871        11,220        10,655  

Lines in service per 100 inhabitants (1)

     26.7        24.6        23.0        21.7        20.6  

Mobile subscribers (thousands)

     17,300        18,038        18,892        20,015        21,120  

Broadband Internet subscribers (thousands)

     8,129        8,328        8,516        8,758        8,729  

 

 

(1)

Including public telephones.

Item 3.B.  Capitalization and Indebtedness

Not applicable.

Item 3.C.  Reasons for the Offer and Use of Proceeds

Not applicable.

Item 3.D.  Risk Factors

You should carefully consider the following factors.

Risks Relating to Our Business

Competition in each of our principal business areas is intense.

We face significant competition in each of our principal business areas. In the markets for mobile services, fixed-line services and media and content services, we compete primarily with SK Telecom Co., Ltd. (“SK Telecom”) and LG Uplus Corp. (“LG U+”) (including their affiliates). In 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 interest in CJ HelloVision Co., Ltd. (“CJ HelloVision”). In February 2019, SK Telecom announced its plan to merge with t-broad Co., Ltd. (“t-broad”). To a lesser extent, we also compete with various value-added service providers and 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

 

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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 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.

In the financial services market, our credit and check cards issued under the “BC Card” brand pursuant to co-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 issue co-branded credit or check cards include Woori Card, NH Card, Industrial Bank of Korea and KB Kookmin Card. We also compete with service providers that provide outsourcing services related to business operations of credit card companies. Competition in the credit card and check card businesses has increased substantially as existing credit card companies, consumer finance companies and other financial institutions in Korea have made significant investments and engaged 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 outsourcing services.

Our inability to adapt to 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.

Failure to renew existing bandwidth licenses, acquire adequate additional bandwidth licenses 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 allocated to a service provider. We have acquired a number of licenses to secure bandwidth capacity to provide our broad range of services, for which we typically make an initial payment as well as pay usage fees during the license period. We made bandwidth license payments of 416 billion in 2016, 271 billion in 2017 and 573 billion in 2018. For our outstanding payment obligations relating to our bandwidth licenses as of December 31, 2018, see “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Overview—Acquisition of New Bandwidth Licenses and Usage Fees.” For more information on our bandwidth licenses, see “ Item 4. Information on the Company—Item 4.D. Property, Plant and Equipment—Mobile Networks.”

The growth of our mobile telecommunications business and the increase in usage of wireless data transmission services have significantly increased the utilization of our bandwidth, because

 

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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 licenses, receiving additional bandwidth allocation or cost-effectively implementing technologies that enhance the efficiency of our bandwidth usage, 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 make substantial payments 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 5G mobile services 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 telecommunications services to maintain our competitiveness. For example, we have been building more advanced mobile telecommunications networks based on 5G technology and commenced providing commercial 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. 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 provide a variety of services with enhanced speed, latency and connectivity. Furthermore, we are also continually upgrading our broadband network to enable better fiber-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 cable extending from the telecommunications operator’s switching equipment to homes or offices. 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 services that require high bandwidth with stability, such as IPTV and other digital media and content services.

No assurance can be given that our new services will gain broad market acceptance such that we will be able to derive revenue from such services to justify the license fees, capital expenditures and other investments required to provide such services. For example, we discontinued our wireless broadband Internet access (“WiBro”) services in the fourth quarter of 2018, following a steady decrease in its subscriber base in recent years reflecting an increase in popularity of 4G LTE services. If our new services do not gain broad market acceptance, our business, financial condition and results of operations 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 businesses. For example, we have pursued investment opportunities in the financial sector in the past decade that we believe provide attractive growth opportunities. In October 2011, we acquired a controlling interest in BC Card Co., Ltd.

 

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(“BC Card”), a leading credit card solutions provider in Korea in which we hold a 69.54% interest. We also acquired 10.00% of the common shares of K Bank Inc. (“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.

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 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.

The Korean telecommunications and Internet-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 in Korea. The MSIT and the KCC also have the authority to regulate the pay TV industry under the Korea 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 Company—Item 4.B. Business Overview—Regulation.” The MSIT’s policy is to promote competition through measures designed to prevent the dominant service provider in any such market from exercising its market power in a way that would prevent the emergence and development of viable competitors. Under such 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, such 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 than one-third of the market 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 wireless telecommunications by an auction process or by a planned allocation.

We and SK Telecom have been designated as market-dominating business entities in the local telephone and mobile markets, respectively, and the MSIT, in consultation with the Ministry of Economy 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 services 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

 

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to freely set our local telephone service rates may hurt profits from such businesses and impede our ability to compete effectively against our competitors. In addition, the MSIT may periodically announce policy guidelines that we may be recommended to take into consideration in our telecommunications 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 certain low-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 our low-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 may pursue additional measures to regulate the markets in which we compete. 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 value added tax (“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 future to comply with regulatory requirements or the Government’s policy 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. From time to time, we have been imposed fines for violation of regulations imposed by MSIT and KCC, including an imposition of a fine of 12.5 billion in January 2018 by the KCC for violation of regulations relating to handset sales. There is no guarantee that the laws and regulations to which we are or become subject will not have a material adverse effect on our business, financial condition or results of operations.

The legal cases against Mr. 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.

In April 2014, the Seoul Central District prosecutor’s office charged Mr. Suk-chae Lee, a former chief executive officer who resigned in November 2013, with embezzlement and breach of fiduciary duty. Mr. Il Yung Kim, a former standing director and former president of the KT Corporate Center, was charged as a co-conspirator in the breach of fiduciary duty by Mr. Lee, and Mr. Yu-yeol Seo, a former president of Home Business Group, was charged as a co-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 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 two years, for having embezzled and created off-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

 

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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 involving Ms. Soon-sil Choi, a confidante of former President Geun-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 us, made donations to two non-profit foundations, Mir Foundation and K-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 to K-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 and Ms. Hye-Sung 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 which Ms. 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 contracts to Playground since September 2016, and Mr. Lee and Ms. Shin resigned 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 August 24, 2018, the Seoul High Court sentenced the former President to a prison term of 25 years and a monetary fine of 20 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 and K-Sports Foundation by us and other Korean corporations. The prosecution appealed the appellate court’s decision to the Supreme Court of Korea.

On January 18, 2018, the Korean prosecution indicted Mr. Byung-Hun Jun, a former member of the National Assembly, for charges of bribery, corruption and coercion, among others. One of the allegations was 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

 

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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 matter 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 indicted 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.

Cybersecurity breaches may expose us to significant legal and financial exposure, damage to our reputation and a loss of confidence of our customers.

Our business involves the storage and transmission of large amounts of confidential information of our subscribers and cardholders, and cybersecurity breaches expose us to a risk of loss of this information, which may lead to improper use or disclosure of such information, ensuing potential liability and litigation, any of which could harm our reputation and adversely affect our business. Even though we strive 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 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

 

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8.7 million of our mobile phone subscribers. The individuals in question stole personal information through a series of hackings into our mobile customer information 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. If we experience additional significant cybersecurity breaches or fail to detect and appropriately respond to significant cybersecurity breaches, we could be subject to additional government enforcement actions, regulatory sanctions and litigation in the future. In addition, our 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, our 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

 

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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 on non-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 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

 

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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 and non-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

 

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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 of non-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.

 

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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. 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. 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 have a material impact on 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

 

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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. 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 6,648 billion total book value of debentures and borrowings outstanding as of December 31, 2018, 2,392 billion was denominated in foreign currencies. Upon identification and evaluation of our currency risk exposures, we, having considered various circumstances, enter into derivative financial instruments to try to mitigate 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 a bi-monthly, quarterly or biannual basis.

 

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In December 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 if 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 in January 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 the sub-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 deteriorate, our current business and future growth could be materially and adversely affected.

We are incorporated in Korea, and we generate most of our operating revenue in Korea. As a result, we are subject to economic, political, legal and 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. Any future deterioration of the Korean economy, as a result of unfavorable global economic conditions or otherwise, could adversely affect our business, financial condition and results of operations and the market price of our ADSs.

Developments that could have an adverse impact on Korea’s economy include:

 

   

declines in consumer confidence and a slowdown in consumer spending;

 

   

deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy (such as the controversy between Korea and China regarding the deployment of a Terminal High Altitude Area Defense system in Korea by the United States and the economic and other retaliatory measures imposed by China against Korea in 2017);

 

   

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;

 

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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 delinquencies and credit defaults by retail and small- and medium-sized enterprise borrowers in Korea;

 

   

social and labor unrest;

 

   

the economic impact of any pending or future 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 or decreases in economic productivity due to the declining population size in 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 or man-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 sudden increase in the price of oil;

 

   

increased reliance on exports to service foreign currency debts, which could cause friction with Korea’s trading partners;

 

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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 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 have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and ballistic 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 Nuclear Non-Proliferation Treaty in January 2003 and has conducted six rounds of nuclear tests since October 2006, including claimed detonations of hydrogen bombs, which are more powerful than plutonium bombs, and warheads that can be mounted on ballistic missiles. Over the years, North Korea has also conducted a series of ballistic missile tests, including missiles launched from submarines and intercontinental ballistic missiles that it 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. In February 2016, the Government also closed the inter-Korea Gaesong Industrial Complex (in which we provided certain telecommunications services prior to its closure) in response to North Korea’s fourth nuclear test in January 2016. Internationally, the United Nations Security Council has passed a series of resolutions condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea, most recently in December 2017 in response to North Korea’s intercontinental ballistic missile test in November 2017. Over the years, the United States and the European Union have also expanded their sanctions applicable to North Korea.

 

   

In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges, which may further aggravate social and political pressures within North Korea.

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 tensions affecting the Korean peninsula will not

 

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escalate in the future. Any increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between Korea or the United States and North Korea break down or further military hostilities occur, could have a material adverse effect on the Korean economy and on our business, financial condition and results of 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. However, foreign private issuers, including us, are exempt from certain corporate governance standards required under 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 or non-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

 

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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 certain restrictions.

Under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 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, 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 Telecommunications Business Act restricts the ownership and control of network service providers by foreign shareholders. Foreigners, foreign governments and “foreign invested companies” may not own more than 49.0% of the issued shares with voting 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—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

 

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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. These forward-looking statements include, but are not limited to, those statements using words such as “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project,” “aim,” “plan,” “likely to,” “target,” “contemplate,” “predict,” “potential” and similar 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 Government’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.

 

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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 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, 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.B. Business Overview—Competition.”

We 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-ro 3-gil, Jongno-gu, 03155, Seoul, Korea, our telephone number is +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.

Item 4.B.  Business Overview

We are the leading integrated telecommunications service provider in Korea and one of the most advanced in Asia. Our principal services include:

 

   

mobile voice and data telecommunications services based on 4G LTE and 3G W-CDMA technology, as well as 5G mobile services commercially launched in April 2019;

 

   

fixed-line services, which include:

 

  Ø  

(i) fixed-line telephone services, including local, domestic long-distance and international long-distance services, (ii) Voice over Internet Protocol (“VoIP”) telephone services (i.e., provision of communication services over the Internet, and not over the fixed-line PSTN) and (iii) interconnection services to other telecommunications companies;

 

  Ø  

broadband Internet access services; and

 

  Ø  

data communication services, including fixed-line and satellite leased line services and dedicated broadband Internet connection service to institutional customers;

 

   

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;

 

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various business activities that extend beyond telecommunications and financial services, including information technology and network services and satellite services as well as rental of real estate by KT Estate Inc. (“KT Estate”); 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 Estate.

Leveraging our dominant position in the fixed-line telephone services market and our established customer base in Korea, we have successfully pursued new growth opportunities and obtained strong market positions in each of our principal lines of business. In particular:

 

   

in mobile services, we achieved a market share of 31.8% with approximately 21.1 million subscribers as of December 31, 2018;

 

   

in fixed-line and VoIP telephone services, we had approximately 15.0 million subscribers, consisting of 11.7 million PSTN subscribers and 3.4 million VoIP subscribers as of December 31, 2018. As of such date, our market share of the fixed-line local telephone and VoIP services was 65.1%; and

 

   

we are Korea’s largest broadband Internet access provider with approximately 8.7 million subscribers as of December 31, 2018, representing a market share of 41.0%.

For the year ended December 31, 2018, our operating revenue was 23,436 billion, our profit for the year was 724 billion and our basic earnings per share was 2,654. As of December 31, 2018, our total assets were 32,474 billion, total liabilities were 17,811 billion and total equity was 14,663 billion.

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.

 

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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 Services

We provide mobile services primarily based on 4G LTE and 3G W-CDMA technology. We began offering 4G LTE services in the Seoul metropolitan area in January 2012, and we completed the expansion of our coverage nationwide in October 2012. 4G LTE technology enables data to be transmitted faster than 3G W-CDMA technology, generally providing a downloading speed of approximately 50 Mbps per 10 MHz. Since our launch of 4G LTE services, we have acquired additional bandwidth licenses that have enabled us to further enhance the quality of our LTE services.

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.

 

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Revenue related to mobile service accounted for 29.1% of our operating revenue in 2018. 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,  
             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, 2018, we had approximately 21.1 million subscribers, or a market share of 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, 2018, there were approximately 2,550 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. 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.

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. As of December 31, 2018, we operated approximately 200 customer plazas that engage in mobile service sales activities as well as provide a one-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 of non-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 a pre-paid card.

Fixed-line Services

We provide a variety of fixed-line services, including various telephone services, broadband Internet access 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 and land-to-mobile

 

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interconnection services. Our fixed-line telephone network includes exchanges, long-distance transmission equipment and fiber optic and copper cables. We 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 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,  
     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, 2018:

 

     Year Ended December 31,  
     2014      2015      2016      2017      2018  
     (In millions of billed minutes)  

Incoming international long-distance calls

     549.4        390.5        352.3        286.4        221.1  

Outgoing international long-distance calls

     212.2        179.0        155.1        125.9        101.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     761.6        569.5        507.4        412.3        322.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 Telecom and LG U+ (offering local, domestic long-distance and international long-distance services, and transmitting calls to and from their mobile networks). We recognize as

 

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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.

Broadband Internet Access Services

Leveraging on our nationwide network of 784,088 kilometers of fiber optic 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 principal Internet access services are offered under the “KT Internet” and “KT GiGA Internet” brand names. We also offer WiFi services under the “KT WiFi” brand name, which is designed to integrate fixed-line and wireless services by offering high speed wireless Internet access to laptops and smartphones in hot-spot zones and KT Internet service in fixed-line environments. Our broadband Internet access services accounted for 9.0% of our operating revenue in 2018.

As of December 31, 2018, we had approximately 8.7 million broadband Internet subscribers, including approximately 4.9 million KT GiGA Internet service subscribers with enhanced data transmission speeds of up to 1.0 Gbps. In addition, we had approximately 4.0 million KT WiFi subscribers as of such date. We also sponsored approximately 107,000 hot-spot zones nationwide for wireless connection as of December 31, 2018.

Our KT Internet services 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 and low-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. We are continually upgrading our broadband network to enable better FTTH connection, which further enhances data transmission speed 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 services that require high bandwidth, such as IPTV, and other digital media contents with higher stability.

Data Communication Services

Our data communication services involve offering exclusive lines that allow point-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 connection to our Internet backbone network, as well as rent to our customers and install necessary routers to ensure reliable Internet connection and enhanced security. We provide discount rates to qualified customers, including small- and medium-sized enterprises, businesses engaging in Internet access services and government agencies. Data communication services accounted for 4.5% of our operating revenue in 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 also lease satellite capacity from other satellite operators to offer satellite services to both domestic and international customers.

 

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Table of Contents

Media and Content Services

We offer a variety of media and content services, including IPTV, satellite TV, TV home shopping, digital content distribution, ICT platform consulting, digital music streaming and downloading and online advertising. Media and content services accounted for 13.6% of our operating revenue in 2018.

IPTV

We offer high definition video-on-demand and real-time broadcasting IPTV services under the brand name “olleh TV” as well as ultra-high-definition (“UHD”) IPTV services under the brand name “olleh GiGA UHD 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 a pay-per-view basis. Through a digital set-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. A set-top box provides two-way communications on an IP network and decodes video streaming data. We had approximately 7.9 million IPTV 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, 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 addition, we provide a wide range of consulting services related to build-out of information and communication technology platforms.

Digital Music Services

We operate Genie, our platform for music contents as well as subscription-based access to online music streaming and downloading services, through our subsidiary Genie Music Corporation, in which we hold a 35.97% interest. As of December 31, 2018, 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 music, 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 mobile and other connected devices, PCs and TVs.

Online Advertising Consulting

We provide strategic advertising consulting services for the online advertising industry through our subsidiary Nasmedia, Co., Ltd. (“Nasmedia”), in which we hold a 42.75% interest. We provide a variety of services for advertising agencies, online media companies and their clients, ranging from market studies to advertising campaign planning as well as analysis of such campaign’s effectiveness. Our proprietary data analysis tools enable us to define specific advertising targets for the clients as well as to evaluate the effectiveness of various marketing channels to provide an optimal advertising campaign strategy.

 

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Financial Services

As part of our overall strategy, we selectively pursue new business opportunities in the financial sector that complement our telecommunications business. In October 2011, we acquired a controlling interest in BC Card, a leading credit card solutions provider in Korea in which we hold a 69.54% interest. We also acquired 10.00% of 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, accounted 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 is owned by various financial institutions in Korea, many of which are member companies that enter into co-branding agreements with us and issue credit cards and check cards under the “BC Card” brand. Our member companies that issue co-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-branding agreements. However, we typically do not assume credit risks related to the inability of cardholders to make payments on their card usage, which are typically assumed by the member companies. As of December 31, 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 issue co-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 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 common shares of K Bank, which is one of two Internet-only banks in Korea. Internet-only banks generally operate without branches and conduct their operations primarily through electronic means, which enable them to minimize costs and offer customers higher interest rates on deposits as well as lower lending rates. As of December 31, 2018, K Bank had approximately 0.86 million holders of deposit accounts, with total deposits of 1,862 billion and outstanding loans of 1,264 billion. K bank has 22 shareholders including Woori Bank, NH Investment & Securities, Co., Ltd., GS Retail Co., Ltd., Hanwha Life Insurance Co., Ltd. and us.

Pursuant to the Act 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 FSC in order to become its largest shareholder.

 

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Other Businesses

We also engage in various business activities that extend beyond telecommunications and financial services, including information technology and network services, real estate development and satellite services. Our other businesses accounted for 7.8% of our operating revenue in 2018.

Information Technology and 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 throughout Korea. Technological developments have enhanced the coverage area of telecommunications facilities, which enable us to better utilize our existing land and other real estate holdings. Through our wholly-owned subsidiary KT Estate, we engage in the planning and development of residential complexes and commercial buildings 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 recognize revenue related to sale 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 developed by KT Estate. We purchase handsets primarily from Samsung Electronics, Apple and 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 online tool designed to help our customers select a plan that is customized to their needs. Our service rates are typically charged on a monthly basis and are due at the end of the month. Our customers are also assessed a 10.0% VAT.

Our rates for business customers are tailored to the specific needs of the business customers.

 

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Mobile Services

We offer a wide range of mobile service plans that vary depending, among others, on mobile technology (5G, LTE or W-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 and text messaging as well as addition of value-added services. Our premium packages offer unlimited voice calling, data transmission and text messaging as well as additional media content. We also provide plans specially designed for elderly and young subscribers as well as special discounts to subscribers with physical 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 typically 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 bank unused data transmission quota of the current month to the following month, or borrow quota allocated to the following month if the current monthly 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  

 

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In addition to our mobile service plans, we offer value-added services for additional monthly fees that can be added to the subscription such as media packages, mobile TV packages, additional data transmission 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 and expenses. For a call initiated by a mobile subscriber of one of our competitors to our mobile subscriber, the competitor collects from its subscriber its normal rate and remits to us a mobile-to-mobile interconnection charge. In addition, for a call initiated by our mobile subscriber to a mobile subscriber of one of our competitors, we collect from our subscriber our normal rate and remit to the competitor a mobile-to-mobile interconnection charge.

The following table shows the interconnection charges we paid per minute (exclusive of VAT) to our competitors, and the charges received per minute (exclusive of VAT) from mobile operators for mobile to mobile calls:

 

     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 and Domestic Long-distance. Our standard usage-based fixed-line telephone service plan consists of a base monthly rate of 5,720 and usage fees for local and domestic long-distance calls, as well as calls to VoIP phones and mobile phones. We charge 42.9 per three-minute increment for local calls, 15.95 per ten second increment for domestic long-distance calls, 53.9 per three-minute increment for calls to VoIP phones and 15.95 per ten second increment for calls to mobile phones. All usage-based fees are subject to discounts during certain low-usage periods of the day and on national holidays. The rates we charge for local calls are subject to approval by the MSIT after consultation with the MOEF. For our subscribers who are initiating fixed-line telephone services, we charge a one-time nonrefundable activation fee of 60,000, which 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 free 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 are included as part of the free 50 hours.

Until April 2001, we collected refundable service activation deposits for our fixed-line telephone services, which were refunded upon termination of service. As of December 31, 2018, we had 316 billion in refundable service activation deposits outstanding and 1.4 million subscribers enrolled under the deposit plan, each of whom are eligible to switch to a no-deposit plan and receive a refund of their service activation deposit, less the non-refundable service activation fee.

International Long-distance. For our international long-distance services, fees for out-going calls vary based on the destination country and whether the user has subscribed to an international

 

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long-distance services plan, which can be customized based on the type of telecommunication device (mobile or fixed-line), destination countries and other customer preferences. Usage is typically measured in one-second increments. We pay a settlement fee to the relevant foreign carrier for such calls under a bilateral agreement with the foreign carrier. For incoming calls (including calls placed in Korea by customers of the foreign carriers for home country direct-dial services), we receive settlement payments from the relevant foreign carrier at the applicable settlement rate specified under the relevant bilateral 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 the land-to-mobile usage charge and remit to the mobile service provider a land-to-mobile interconnection charge. We recognize as land-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 VAT) to mobile operators for landline to mobile calls:

 

     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 and Mobile-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 a land-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 a mobile-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  
     January 1, 2016      January 1, 2017      January 1, 2018  

Local access (1)

   10.9      9.7      8.7  

Single toll access (2)

     12.0        10.9        10.0  

Double toll access (3)

     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.

VoIP 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 a one-time nonrefundable activation fee of 10,000, which is waived with a one-year subscription commitment.

 

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Broadband Internet Access Services

We offer various broadband Internet access service plans based on data transmission speed and data 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 our customers a one-time installation fee per site of 27,500. We also charge a modem rental fee ranging from 4,400 to 22,000 per year that varies depending on the 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 Internet access service plans that 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 Content Services

Our IPTV and satellite TV service plans vary based on the package of media channels provided, availability of UHD channels and the inclusion of other value-added services. In addition to monthly rates for subscription, we charge a one-time installation fee of 27,500 per set-top box and a digital set-top box rental fee ranging from 2,200 to 9,900 per year that varies depending on the type of set-top box required for the service plan, which is also subject to discounts and waivers based on length of subscription commitment period. We also offer various video-on-demand contents for streaming and downloading for a fee. In addition to offering service plans that enable TV viewing at home as well as access on mobile devices, we provide separate mobile TV plans at lower rates that are specifically designed for mobile devices.

The following table summarizes the terms of our representative IPTV and satellite TV service plans that we currently offer:

 


Plan

   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 20,000 video-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 for video-on-demand.

TV Slim

   16,500      13,200        199  (5)   

 

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Bundled Rate Plans

In order to provide 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 combination of our services, as 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 two 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 payments collected pursuant to our bundled rate plans are allocated to each service.

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 our 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 broadband Internet access as well 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 four additional members).

Competition

We face significant competition in each of our principal business areas. In the markets 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 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 interest in CJ HelloVision. In February 2019, SK Telecom announced its plan to merge with t-broad. To a lesser extent, we also compete with various value-added service providers and specific service providers as classified under the Framework Act on Telecommunications and the Telecommunications Business Act, including 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 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

 

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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 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.

In the financial services market, our credit and check cards issued under the “BC Card” brand pursuant to co-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 issue co-branded credit or check cards include Woori Card, NH Card, Industrial Bank of Korea and KB Kookmin Card. We also compete with service providers that provide outsourcing services related to business operations of credit card companies. Competition in the credit card and check card businesses has increased substantially as existing credit card companies, consumer finance companies and other financial institutions in Korea have made significant investments and engaged 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 outsourcing services.

The following tables show the market shares in our principal markets in terms of subscribers as of the dates indicated:

Mobile Services

 

     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.

 

(1)

Includes subscribers of MVNOs that lease mobile networks of the respective mobile service provider.

Fixed-line Local Telephone and VoIP Services

 

     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 Services

 

     Market Share (%)  
     KT Corporation      SK Broadband      LG U+      Others  

December 31, 2016

     41.4        25.3        17.6        15.7  

December 31, 2017

     41.4        25.7        18.0        14.9  

December 31, 2018

     41.0        25.4        18.9        14.7  

 

Source: The MSIT.

 

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Pay TV Services

 

     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 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

 

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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 pay TV market, including IPTV services. Under the Internet Multimedia Broadcasting Services Act, anyone intending to engage in the Internet multimedia broadcasting business must obtain a license from the MSIT. The ownership of the shares of an Internet multimedia broadcasting company by a newspaper, a news agency or a foreigner is limited. Furthermore, under the Internet Multimedia Broadcasting Services Act, an IPTV service provider, together with its affiliates providing IPTV services, is restricted from having more than one-third of the market share of all paid broadcasting subscribers in 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. 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 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.

The Government has also imposed regulations to restrict the amount of 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. In October 2014, the Handset Distribution Reform Act was implemented, with the primary objectives of reducing overall mobile service expenses to consumers, encouraging handset manufacturers to reduce retail prices and restricting discriminatory subsidy practices. 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, 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. The MSIT may periodically announce additional policy guidelines that telecommunications companies are recommended to take into consideration. In recent years, the MSIT has announced policy guidelines 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 applicable to certain low-income subscribers, which was implemented by mobile service providers in December 2017.

 

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Other Activities

A network service provider, such as us, must obtain the permission of the MSIT in order to:

 

   

modify its licenses;

 

   

discontinue, suspend or spin off all or a part of the business for which it is licensed;

 

   

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 certain low-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 certain low-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 certain low-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 to permit other fixed-line communications service providers to co-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 the co-use system, as follows: (i) we should permit not only fixed-line telecommunications service providers, but also mobile service providers such as SK Telecom and LG U+ to co-use our telecommunications infrastructure necessary for provision of 5G mobile services, (ii) the Government determined that we,

 

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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, Plant 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. Revenue from local loop unbundling, if any, are recognized as revenue 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. For purposes of the Telecommunications Business Act, the term “foreign invested company” means a company in which 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 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, the calculation of the above-referenced 49% ceiling will apply to: (x) any foreign entities that have entered into a major management-related agreement with a network service provider or the shareholder(s) thereof; and (y) foreign entities that have entered into an agreement pertaining to the settlement of fees relating to the handling of international electronic telecommunications services. As of December 31, 2018, 48.5% of our common shares were owned by foreign investors. 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.

In addition to the 49.0% limit referenced above, under the Telecommunications Business Act, a foreign shareholder who holds 5.0% or more of our total shares is prohibited from becoming our largest shareholder. However, any foreign shareholder who held 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.

 

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Customers and Customer Billing

We typically charge residential subscribers and business subscribers similar rates for services provided. On a case-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 86.3% of our subscribers as of December 31, 2018 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 for non-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 minimum paid-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 a one-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 by Won-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).

 

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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 provide co-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 business support system, called KT One System (“KOS”), was 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.

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.

 

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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, Plant 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, 2018, the net book value of our property, plant and equipment was 13,068 billion, of which 3,289 billion is accounted for the net book value of our land, buildings and structures. As of December 31, 2018, the net book value of our investment properties, which is accounted for separately from our property and equipment was 1,091 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, Ericsson, Nokia and Cisco 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 number of bandwidth licenses to secure additional bandwidth capacity to provide our broad range of services, for which we typically make an initial payment as well as pay usage fees during the license period. See “Item 5. Operating and Financial Review and Prospects—Item 5.A. Operating Results—Overview—Acquisition of New Bandwidth Licenses and Usage Fees.”

Exchanges

Exchanges include local exchanges and “toll” exchanges that connect local exchanges to long-distance transmission facilities. We had approximately 23.6 million lines connected to local exchanges and 2.2 million lines connected to toll exchanges as of December 31, 2018.

All of our exchanges are fully digital and automatic in order to provide higher speed and larger volume services. In addition, all of our lines connected to toll exchanges are compatible to IP platform.

 

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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 15.7 Tbps as of December 31, 2018. We have set up contingent plans to prepare against various incidents that could affect reliable Internet access service. Our IP premium network enables us to more reliably support IPTV, VoIP and other IP-related services. As of December 31, 2018, our IP premium network had 3,112 lines installed to provide mobile data services, 1,556 lines installed to provide IPTV services and a total capacity to handle up to 3.2 Tbps of IPTV, voice, mobile data and virtual private network (“VPN”) service traffic.

Access Lines

As of December 31, 2018, we had 21.9 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 ADSL and FTTH technology. As of December 31, 2018, we had approximately 21.4 million broadband lines with speed of at least 50 Mbps that enable us to deliver broadband Internet access and multimedia contents to our customers.

Transmission Networks

Our domestic fiber optic cable network consisted of 784,088 kilometers of fiber optic cables as of December 31, 2018 of which 119,468 kilometers of fiber optic cables are used to connect our backbone network and 664,620 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. Our transmission backbone network connecting major cities in Korea utilize optical cross-connectors (“OXC”), and we access such network through multi-service provisioning platform (“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, 2018.

International Networks

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 various points-of-presence in the United States, Asia and Europe. In addition, as of December 31, 2018, our international telecommunications networks were directly linked to 228 telecommunications service providers in various international destinations and are routed through our three international switching centers in Seoul, Daejeon and Busan.

 

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As of December 31, 2018, our international Internet backbone with capacity of approximately 1,500 Gbps is connected to approximately 280 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.

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

Item 5.A.  Operating Results

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 voice and data telecommunications services, fixed-line services (consisting of fixed-line telephone, VoIP telephone, broadband Internet access and data communication services) and media and content services (including IPTV and satellite TV). The principal factors affecting our revenue 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—Our Rates.” In addition, we derive revenue from credit card processing and 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 information technology and network services, real estate development and satellite services.

Our operating segments for financial reporting purposes are organized as the following:

 

   

the marketing/customer segment, which engages in providing various telecommunications services to individual and household customers and the convergence business;

 

   

the 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;

 

   

the satellite TV segment, which engages in satellite TV services; and

 

   

the others segment, which includes (i) security services, (ii) satellite service, (iii) information technology and network services, (iv) global business services that provide 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.

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

 

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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 deteriorate, our current business and future growth could be materially and adversely 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 bandwidth licenses and usage fees;

 

   

researching and implementing technology upgrades and additional telecommunications 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

One of the principal limitations on a wireless network’s subscriber capacity is the amount of bandwidth 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 contents are likely to put additional strain on the bandwidth capacity of mobile service providers. We have acquired a 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 usage fees during the license period.

We made bandwidth license payments of 416 billion in 2016, 271 billion in 2017 and 573 billion in 2018. The following table sets forth our outstanding payment obligations relating to our bandwidth licenses as of December 31, 2018.

 

Spectrum

  

Bandwidth

  

License Acquisition
Date

   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
Usage

Fee Payment
Term

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 Telecommunications 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 network

 

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upgrades and launching additional telecommunications services to maintain our competitiveness. In recent years, we have made extensive efforts to continually develop 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 further enhances data transmission speed 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 services that require high bandwidth with stability, such as IPTV and other digital media content. 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. Including such contributions, total expenditures (which include capitalized expenses) on research and development were 215 billion in 2016, 435 billion in 2017 and 273 billion in 2018. We plan to continue to invest in researching and implementing network upgrades, which will entail additional operating expenses as 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. 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 revenue 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 offer 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, IPTV and satellite TV services. For our mobile services, we offer family plans that provide discounts of up to 11,000 per mobile phone subscription. We also offer various bundled rate plans that combine our fixed-line 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 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. 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 may 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 and promoting transparency in the decision making of telecommunications service providers. Specific policy guidelines include monthly rate reductions applicable to certain low-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 our low-income mobile subscribers on government welfare programs. We also increased the maximum discount rate

 

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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 may pursue additional measures to regulate the markets in which we compete. 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 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—Our Rates.”

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. For example, we have pursued investment opportunities in the financial sector in the past decade that we believe provide attractive growth opportunities. In October 2011, we acquired a controlling interest in BC Card, a leading credit card solutions provider in Korea in which we hold a 69.54% interest. We also acquired 10.00% of 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. 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.

Marketing Activities

We engage in marketing activities to promote our new, as well as existing, products and services and to further strengthen our marketing efforts 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 and mobile handset sales, and our advertising expenses relate primarily to our utilization of television commercials and Internet and mobile advertising as well as promotional events.

While we believe that our large subscriber base as well as the brand power of our products and services will remain key drivers of our growth, we expect to continue to invest significantly in marketing activities, particularly in connection with launching of new products and services such as our next generation 5G mobile services launched in April 2019. Our marketing expenses may not directly correspond to our revenue in the same period, and our quarterly marketing expenses have fluctuated in the past and are expected to continue to fluctuate in the future.

 

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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 revenue 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 an on-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 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 apply the simplified approach, which requires expected lifetime credit losses to be recognized from the initial recognition of 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, 2018 are summarized as follows:

 

     Year Ended December 31,  
     2016     2017     2018  
     (In millions of Won)  

Balance at beginning of year

   719,583     612,487     523,799  

Provision

     92,711       44,697       113,065  

Reversal or written-off

     (189,156     (131,341     (185,117

Changes in the scope of consolidation

     271       (142      

Others

     (10,922     (1,902     1,999  
  

 

 

   

 

 

   

 

 

 

Balance at end of year

   612,487     523,799     453,746  
  

 

 

   

 

 

   

 

 

 

 

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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.

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 6.24% to 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.

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 13 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.

 

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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 is recognized in the cash flow hedge reserve within equity, and recognized as finance income (costs) for the periods when the corresponding transactions affect profit or loss.

For financial assets, 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 equity investments, we make all subsequent measurements at fair value. For debt instruments carried at amortized cost and 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 lease receivables, we apply the simplified approach, which requires the expected lifetime credit losses to be recognized from the initial recognition of the receivable.

The provision for impairment for financial assets are based on assumptions about risk of default and expected loss rates. Significant management judgment is involved in making 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 estimates 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.

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

 

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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 17 to the Consolidated Financial Statements.

Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS

In addition to preparing financial statements in accordance with IFRS as issued by the IASB included in this annual report, we prepare financial statements in accordance with K-IFRS, which we are required to file with the Financial Services Commission and the Korea Exchange under the FSCMA.

K-IFRS differs in certain respects from IFRS as issued by the IASB in the presentation of operating profit. Additionally, under K-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. Primarily due to such differences, our consolidated statements of comprehensive income and our consolidated statements of financial position prepared in accordance with IFRS as issued by the IASB included in this annual report differ from our consolidated statements of comprehensive income and consolidated statements of financial position prepared in accordance with K-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, 2016, 2017 and 2018 to our operating profit and net income or loss in our consolidated statements of operations prepared in accordance with K-IFRS, for each of the corresponding years, taking into account such differences:

 

     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 under K-IFRS

   1,483,303      1,375,286      1,261,522  
  

 

 

    

 

 

    

 

 

 

 

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     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 under K-IFRS

   834,572     561,526     762,305  
  

 

 

   

 

 

   

 

 

 

Adoption of IFRS 15

The IASB issued IFRS 15 Revenue 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 2018, and which have not been adopted early by us, see Note 2.2 to the Consolidated Financial Statements.

 

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Operating Revenue and Operating Expenses

Operating Revenue

Our operating revenue primarily consists 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 revenue 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 are one-time or monthly fixed charges primarily consisting of (i) non-refundable activation fees; and (ii) monthly fixed charges from local telephone services (or monthly fixed charges for discount plans);

 

  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 revenue, (primarily (a) amounts we bill to our customers for outgoing calls made to foreign countries, (b) amounts we bill to foreign telecommunications carriers for connection to the domestic telephone network in respect of incoming calls at the applicable settlement rate, and (c) other revenue, including revenue from international leased lines); (iii) land-to-mobile and land-to-land interconnection revenue; and (iv) interconnection fees we charge to fixed-line and mobile service providers and voice resellers for their use of our local, domestic long-distance and international networks in providing their services; and

 

  Ø  

other revenue from (i) value-added services, local telephone directory assistance, call waiting and caller identification services; and (ii) local, domestic long-distance and international calls placed from public telephones.

 

  Ø  

broadband Internet access service revenue, primarily consisting of installation fees and basic monthly charges; and

 

  Ø  

data communication service revenue, primarily consisting of installation fees and basic monthly charges for our fixed-line and satellite leased line services and Kornet Internet connection service;

 

   

revenue from media and content services, primarily consisting of installation fees and basic monthly charges of IPTV and satellite TV services, as well as revenue from TV home shopping, digital content distribution, ICT platform consulting, digital music streaming and downloading and online advertising;

 

   

financial service revenue, primarily consisting of fees from credit card services provided by BC Card, our consolidated subsidiary in which we hold a 69.54% interest;

 

   

revenue from our miscellaneous business activities that extend beyond telecommunications and financial services, including information technology and network services and rental of real estate; and

 

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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 developed by KT Estate.

Operating Expenses

Our operating expenses primarily include:

 

   

purchase of inventories, primarily consisting of (i) inventories purchased for our sale of mobile handsets and (ii) development expenses of KT Estate for real estate units to be sold, and changes of inventories, which reflects increases or decreases of inventories of handsets, phones and for-sale real estate units during the applicable period;

 

   

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, including fees paid to member credit card companies in our network for marketing 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 in connection with our intangible assets; and

 

   

interconnection charges, which are interconnection payments to telecommunication service providers for calls from landline users and our mobile subscribers to our competitors’ subscribers.

 

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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.

 

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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.

 

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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, the per-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,

 

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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:

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