KT Corp (KT) 2005 Q3 法說會逐字稿

Good morning and good evening. First, thank you for joining the conference call, and now we will begin the conference call of the 2005 third quarter earnings result for KT. This conference call will start with CFO’s opening remarks, followed by a Q&A session. An English translation will be provided for your convenience. [OPERATOR INSTRUCTIONS]. Now, we'd like to commence opening remarks by KT CFO, Mr. Haing-Min Kwon.

Good morning and good evening. I am Kwon Haing-Min, CFO of KT. Thank you for joining KT's earnings conference call for third quarter of 2005.

Let me first brief you on the 3Q performances. Although there were KRW16.2b year-on-year increase in revenue due to the increase in broadband and PCS resale subscribers, telephony and internet access revenue fell by KRW52b quarter-on-quarter. As a result, the revenue recorded is KRW2,938.7b.

Main reason behind the decrease in the internet connection revenue comes from the reduction in the sales of Nespot Swing handsets. Broadband revenue also slightly decreased because of discounts given to prime subscribers with long-term contracts, as well as reduction in the modern lease revenues. Such discount programs may compromise revenue on a short-term basis, but will definitely strengthen customer loyalty and retention through customer satisfaction.

As for the operating income, it fell by KRW58.6b due to the rise in labor cost on a year-on-year basis, but compared to the previous quarter, decreases in other operating expense line items, that is, marketing spend and Korea Fair Trade Commission's levy, we recorded an increase of KRW112.8b to achieve KRW452b.

Net income is about the same level of last year and last quarter due to the improvement on subsidiary performances and reduction in interest expense as a result of lower net liabilities.

KRW440b of additional expense was incurred as a result of wage negotiations in August, and penalties levied by Korea Fair Trade Commission brought about a KRW300b downward adjustment of our annual operating income guidance. The shortfall will be absorbed through the Company's determined efforts. To that end, we announced that market share in the mobile market will be maintained at 6.2% level, up to the year 2007.

Also we improved efficiency of our distribution network by setting up an internal distribution division, now controlling the sales commissions centrally, rather than delegating it to the regional offices. Moreover, all types of sales activities are strongly linked with strengthening service quality as we are implementing ways to maximize customer acquisition and retention vis-a-vis marketing expenditures.

However, we expect it will take some time for the new policies to translate into actual cost reductions, and we would like to lay out realistic targets. Annual operating profit guidance, therefore, will be adjusted from KRW1.8 trillion to KRW1.6 trillion. And considering the depreciation figures, we will adjust EBITDA targets from KRW4.1 trillion to KRW3.8 trillion.

Currently the CEO and the employees of KT are strenuously finding ways to show a better and improved KT mid to long term, as well as find ways to improve cost structure and finding out the right direction for the future, and we will be able to come back to you with the detailed action plan by the year's end.

Now let me talk about KT's new growth engine. On October 18 we had WiBro test set launching ceremony and successfully completed handover test during transit in the [Om Dong] City Hall in [Kwung Ha Moon]. We are also in the process of validating equipment performance and maximizing service completeness for a successful provision of WiBro services.

In the case of IPTV, as there is clear understanding by the Government and operators, that IPTV is crucial for national industry development, KT will continue to exert efforts to bring about a consensus amongst stakeholders. And through the pilot service dated for December, we will thoroughly prepare for this business.

And in October, we decided to make equity investment in [Sidus SNH Create Number One] film production house. We have therefore gained a stable foundation in providing high quality digital content, not only to KT's service platform such as broadband and WiBro platform, but also to our subsidiary services platform such as [SIM, Pyran and Skylife].

I believe WiBro IPTV and digital content will be the mainstream for future communications business and will be essential for promoting conversion, and will also be central to KT's new growth engine businesses.

This ends the brief presentation and we will be happy to take questions.

[OPERATOR INSTRUCTIONS]. The first question will be given by [Kwa Investment and Securities] from [Yang Jung Min].

Yes, I only have two questions. First with respect to your dividend policy. With your net income we do see the -- can you just paint us a broad picture as to what your dividend is going to look like come April next year and also your overall annual dividend planned for year 2006? Would you be able to pay out KRW3,000 per share? Would that be possible on an annual basis?

The second question is, the Government seems to have a plan to litigate the current subsidy-related regulation. I believe this works as an opportunity for KT, KT which is reselling PCS services. Would this give you more freedom in providing value-added services? I would like to ask whether you also consider this as an opportunity for KT. I believe it would also be of benefit when acquiring high-end subscribers of more than three years.

And also in line with that, can you just confirm whether WCDMA service is included in this voluntary market share limit of 6.2% that you have set for yourself?

First on the dividend policy and also our return to shareholder policy, I believe that that policy is a promise that we make to our shareholders from mid- to long-term standpoint. Therefore our position is clear in that we will return back to the shareholders more than 50% of the adjusted net income amount. And the way of doing that is either paying out dividend or buying back Treasury shares or cancellation of shares.

So just because our income level decreased, that doesn't make it right for us to change the policies, which means we do not have plans to change such shareholder return policies. But the key thing of 2004 and '05 is that because foreign ownership limits had been all used up, we were not able to cancel the shares. Therefore we had paid out a regular dividend payout of KRW2,000 and interim payout of KRW1,000.

With respect to, however, the dividend for next year, yes, there will be a dividend of KRW2,000, same as last -- previous years, however, with respect to the total amount of dividend that should be paid out, currently our new CEO is in the process of devising a mid- to long-term plan. And by the year's end that plan will be finalized. And at that point in time we will be able to show to you our official position.

Second, with respect to your question on the subsidies, subsidy has an effect of increasing marketing expenditures for the operators. Of course, as we have mentioned, there will be some positive aspects but we cannot also ignore the negative aspects. But, in light of our past experiences, we will exert all our efforts to make sure that competitive subsidy policy or -- competitive subsidy policies are not paid out into the market because that would be market disruptive. We will make sure that we have full flexibility in coming up with effective measures.

And you asked whether WCDMA subscriber is included in that limit of 6.2%. No, it is not.

The next question is by John Kim from Merrill Lynch.

Thank you for the opportunity. First of all would you please provide a little more color or detail with respect to which areas actually fell short of the management's expectations to prompt you to change or lower your guidance for the remainder of the year?

And second question is can you provide some guidance with respect to your WiBro service launch, if you have any expectations for the first year revenue as well as subscriber, that would be appreciated.

And finally -- my final question -- my final question is if the -- with KTF planning to offer HSDPA service and given that the average consumer will be unlikely to actually afford two different pieces of expensive consumer devices simultaneously, is KT actually working on plans to co-ordinate your marketing efforts with your affiliates? Thank you very much.

Yes, it is regrettable as the CFO of KT to once again down -- readjust our annual targets. But if you look back on our second quarter conference call, we did mention that there has been additional incurrence of expenditure in the amount of KRW430b due to the increases in labor cost and KFTC - Korea Fair Trade Commission's penalty. And at that point we did reflect that increases in the amount of KRW300b in our operating income target. And we have said that the remainder will be controlled based on the determined asset of our Company.

However, if you look at our sales expenditures, in responding to the competitive landscape, our sales expenditures were higher than what the management originally expected. And we weren't able to control those figures to the level that the management had wished.

On your second question, I take it that your question is about whether we will co-ordinate marketing efforts between KTF's HSDPA initiatives and KT's WiBro business initiatives. There is a fixed and wireless integration committee in Korea. And currently co-operation is taking place with respect to WiBro in terms of network as well as marketing activities.

And with respect to WiBro, we do have plans to start a pilot service during the APEC summit meeting period in Busan, and once that pilot service starts we will see how the market reacts and how the market responds to such services and we will come up with some revised plan with respect to the speed of the implementation as well as some of the projections with respect to number of subscribers and [indiscernible] [seekers].

The next question is by [Steve York] from Nomura Securities.

I'm sorry, I didn't push any button. I don't have any questions, sorry.

The next question is by Mitchell Kim from Morgan Stanley.

Yes, hello. Thank you for holding this conference call. I have three questions. First, I just try to get a gauge on what your concerns are about. Are you more concerned about your top line declining at this point or are you more focused on controlling cost? And where would your future or long-term earnings growth will come from, is it more on the revenue side or is it on the cost side? That's the first question.

The second question is on your marketing cost. I just -- I want to try to understand why it is difficult to control marketing costs, especially when in PCS you have reduced the number of subscriber acquisitions. Is broadband a bigger portion of your marketing costs? Perhaps if you could add more color on why it is difficult to bring down marketing cost, that would be very helpful.

And third question is on HSDPA. Do you think that HSDPA could be a threat to your DSL business? The reason why I'm asking that is right now you're charging DSL monthly fee of KRW30,000. On top of that you have Nespot which could be KRW10,000 to KRW20,000. And then if you add WiBro, that's another KRW30,000. Now, instead of that can a mobile operator offer unlimited use of HSDPA at a single rate of, let's say, KRW20,000 to KRW30,000. Is that a threat to you in your mind? So if you could answer these three questions, that would be very helpful. Thank you.

I take it your question is with respect to where we place more focus, on the top line or -- on top line or in controlling the cost. If you are a fixed-line operator, like KT, you are interested in both of those aspects. And your strategies are geared towards maintaining those two aspects as well.

If the top line numbers start to fall, that's a bad signal for the sustainable growth of the Company. So KT as well as all other operators therefore work hard to find new growth engines so that they can find breakthroughs in growing and enhancing their top line revenues. However, based on our experience, finding that breakthrough is very difficult. That is why KT is also at the same time focusing on the cost control side as well.

This year, inevitably and unfortunately, we did have some difficulty with respect to the labor cost and marketing cost. Yes, there was increase in the labor cost in order for us to maintain a good relationship with the labor unions, and also there was increases in marketing cost due to the competitive landscape in the market.

So basically to recap, on the existing businesses, we will focus on controlling the cost, and on new businesses we will put in efforts to make sure that we can increase top line. You also asked why is it so difficult to control the marketing cost. We spent some time observing what is happening out in the field, trying to find out what expense items or cost items are really impacting our economic value. So it is true that we weren't able to control the cost as much as we would have wanted.

Third question with respect to whether HSDPA and WiBro will be a threat to DSL services, the bandwidth between fixed and wireless services is 20 to 1 so there is a big difference. Even if HSDPA becomes widespread, fixed-line broadband will continue to exist in the market for the purpose of providing high-quality services.

HSDPA is geared towards voice services and for mid- to small-capacity wireless data users. But for WiBro, it's data-dedicated, and it can also support higher -- large capacity and large size wireless data services. Therefore we believe WiBro has more competitive edge compared to HSDPA.

Could I just ask a follow-up clarification question regarding dividends? I know that you said that dividends were per share from next year, meaning -- I would assume you're meaning about for April next year, 2006, you said that was KRW2,000. If that is the case for the full year, including your interim dividend pay of KRW1,000 in July this year, you're talking about KRW3,000 in total which would indicate, based on our net profit forecast, about 67% payout. Is that something you are considering? Is that paying out of 67%, is that reasonable within your dividend policy?

KT's dividend policy is, as I have mentioned previously, more than 50% of the adjusted net income. So if the calculation is 67% payout ratio then it is within our stated policy, yes.

Thank you.

Our next question is by [Julius Kim] from JP Morgan.

Okay. The effective tax rate for the third quarter is quite low and I am wondering whether that same level is going to be maintained in the fourth quarter. Could you give us some estimated figures? Then also what is going to be the total effective tax rate for the year 2005 on an annual basis? Last year it was to go down 30% and I'm wondering what the figure is going to be this year.

The second question is with respect to the fact that you've mentioned that you were able to make your distribution channel more efficient, thereby reducing the marketing cost or marketing commission. Is that trend also going to continue into the fourth quarter as well as next year? And what do you mean when you say that you are now better placed to control distribution channel and make it more efficient? Can you share with us with respect to the details of what you mean by that?

And come December, you have mentioned the pilot service for IPTV will be launched. As you know, there is a big controversy over this IPTV initiative. Currently the broadcasting stations and cable TV [SOs] are against KT launching IPTV services. So I'm wondering as to what type of pilot service plans you have at this point and how do you plan to promotionalize it and also what is your target for year '06. And how do you plan to create value add for these services and what do you expect the revenue is going to be like?

And also you mentioned there is going to be an official management plan that is going to be announced come December. Can you give us a hint as to what that plan is going to look like, how that plan is going to look?

On your first question, in the first half of the year there was a penalty levied by Korea Fair Trade Commission in the amount of KRW140b. That is quite large. And that, based on the corporate tax law, cannot be captured as an expense line item. Therefore the tax rate was quite high. But that impact is going to disappear -- that impact has disappeared in the third quarter.

And also with the lapse of time, CapEx expenditures have also increased and also we were able to receive temporary tax credits on that. So the effective tax rate fell to 17.2%. And we believe that impact will continue through the fourth quarter as well. However, because the effective tax rate was significantly high in the second quarter, we believe on an annual basis we will be around 27.5% which is about the statutory effective tax rate.

And your question with respect to the distribution channel and marketing cost, before the change in the organization, our distribution channel was run on a regional basis and operated on a local basis. So with the new organization, now we have a nationwide distribution channel which is centrally controlled or operated, a very integrated distribution channel emerged. Therefore, corporate-driven strategies can be much better and well implemented -- more effectively implemented.

With respect to the marketing expenditure for next year, as you know, marketing spend varies depending on the situation that we are in. So we believe that it's not going to be more than this year's figure.

You asked a question about IPTV. In December KT will provide, and I correct myself, it’s not pilot services but test services. KT will provide test services in December. And yes, you are correct in saying that IPTV initiative has triggered a lot of controversy and KT is trying to wisely overcome that difficulty. We will garner and get co-operation from the Government in this process of implementing IPTV initiatives.

You asked for a hint with respect to the master plan that the CEO will announce in December. Let me reiterate his direction. KT will move away from focusing on short-term sales increases, from a mid- to long-term basis. We will gear more towards strengthening KT's basic strength and fundamentals, and rather than being bogged down by the [red ocean], where growth is stagnant, we will pioneer and look for more opportunities, thereby growing the telecom market pie as a whole.

With respect to the distribution channel, this adoption and integration of the nationwide distribution network, you have said that you have gained benefit from that in the third quarter. So I'm wondering, the decrease -- the margin of decrease that took place in third quarter, now is there further room for your marketing commissions to further decrease compared to the decrease in the 3Q?

And also with respect to IPTV, I understand that you are trying hard to get co-operation from the Government, but what I am more curious about is the fact that you have plans to launch commercial service in the second quarter. That means you must have at least a big picture as so how you are going to provide this service. Can you enlighten us on that?

The integration of the distribution channel and the impact coming from it will take some time for it to actually play out. However, we are still -- we are seeing an impact to the level of the impact that we felt in the third quarter. But the performance-linked commission level is still relatively quite high. So we are not yet seeing very -- actual cost reduction from that sense.

So what KT is doing is that it is transforming the basic distribution management system. We believe only after there has been an overhaul of that then can we really improve on the marketing expenditures. So we will continue to do that until the end of the year and we will be able to transform and change KT's distribution channel structure.

On IPTV, we have plans to commercialize that in April next year. And you have asked what the basic picture is like. But I would like to ask for your understanding that we are currently in the process of discussing with the Government and co-operating with the Government, so it's a little premature for me to give you a detailed picture.

The next question is by [Bill Sun] from UBS.

Just first question relates to marketing cost. Is there any rough guestimate roughly how much of your marketing costs relate to broadband? And specifically is anything that you're doing here in terms of your target guidance related to the impact, whether it be past or future, related to [TowerCom]?

The second question relates to labor expense. It seems that was one of your key bottlenecks this year. Can you comment on whether you are thinking of addressing this more proactively via headcount reduction in '06? You did a headcount reduction at the back end of year 2003, but at that time you gave a very big handout to early retiring employees voluntarily. Can you give us some thought process as to whether you are considering a headcount reduction in '06?

And finally, CapEx. Can you restate your expectation for full-year CapEx? And although you haven't announced CapEx for '06, is there -- can you just guide whether it will be about the same level, higher, lower?

And finally, on your IPTV strategy, I guess in Asia there is two IPTV strategies people are looking at. One is PCCW which has been relatively successful in gaining scale. The other one is Chunghwa Telecom in Taiwan where they've actually been very unsuccessful. They've only got about 67,000 subscribers after about 18 months since launch. So what gives you so much confidence that this IPTV will be a growth engine, particularly in terms of subscriber take-up and revenue per user on your IPTV strategy? Thank you.

The first question regarding the marketing cost for broadband specifically, I would have to say that because this figure -- this is closely related to our sales activities, I can not disclose the exact figure. But I can say that quite a bit of amount of marketing spend is geared towards broadband, telephony and PCS resale business. But I would like to once again ask for your understanding on that that there is a confidentiality issue.

And also, with respect to the impact of TowerCom and the extent of its impact, once again, there has been some impact on the retention side -- subscriber retention side. But once again, I cannot disclose the exact figure for that.

On labor costs, you asked whether we have plans to cut our workforce. The Company, at this point, does not have any plans to cut our workforce. Labor cost is an issue that cannot be resolved -- overcome overnight. Our mid-term target is to maintain sales to labor cost ratio at 20%. But once our new growth engine businesses become a reality, we believe we will be able to control those percentages much tighter.

And once again, labor cost is an important item where there needs to be a consensus between the union and the employees and the management. So we will take our time in addressing that issue.

And your question on CapEx, next year's CapEx is going to be slightly higher than this year's figure.

On our IPTV strategy, KT's intention is not to just increase a large amount of sales to IPTV business, but by combining IPTV with our existing broadband business, our wish is to not only retain but also expand the broadband market that we play in. Currently KT has a slightly more than 50% of market share in this broadband market. And if you look at all of the fixed-line markets, this is the only segment where we have such low market share.

So by combining IPTV services with broadband, we are going to aggressively expand our market share in this segment. And I believe also it's an important issue and factor -- important platform in helping us gain and move towards the ubiquitous age.

Thank you very much. Can I just clarify the last statement? Did you state that you plan to raise your market share in broadband from the current level? I just want to clarify if that's the correct understanding.

Not only just merely increasing the market share of broadband, but our intention is to develop value-added services, thereby increasing ARPU. That would be our major objective.

Thank you very much.

[OPERATOR INSTRUCTIONS]. The next question is for [Jeff Kung] from CSFB.

On IPTV, if we assume that IPTV commercialization is possible, what kind of impact would that have on Sky TV? Are you planning a full marketing or will Sky TV shift its service from broadcasting to IPTV business?

Second question is with respect to what Bill had already asked, you have mentioned that by combining IPTV with broadband, you intend to also increase market share for broadband. Then should we not be concerned about maybe -- from a regulatory perspective and [MIT] including additional regulations? Should we not be concerned about that?

And then the third question is I understand that it would be difficult for you to share with us the marketing cost for each of the businesses, but after you have announced that you will maintain market share at 6.2% for the mobile business, your net addition number for September had also decreased. So is that also impacting the decreases in marketing cost?

IPTV -- the purpose of this IPTV business is, yes, to some extent it is about keeping our broadband market, maintaining our broadband market, but eventually it is to increase customer value. And with Skylife we are in the process of considering various different arrangements and we will be able to share and announce some detailed plans after the master plan comes in December.

On your second question, if we were to increase market share in the broadband market, would the Government not adopt or apply tighter regulations. That was your question. In broadband market you will see few number of major players, and there are as many as those in this space, and this is an area where we are faced with very fierce competition. But economy of scale is really effective and it works in this market. Therefore, even if government regulation exists, we believe that KT has ability to expand its market share, even in the presence of such regulation because economy of scale works.

And your third question on limiting the mobile -- limiting the market share in the mobile space, has that not impacted the mobile marketing cost. Yes, according to our internal figures, yes, we are seeing that impact. PCS resale marketing expenditures did fall and that did impact the total reduction in the marketing expenditures.

The next question is by [Hu Chang] from Goldman Sachs.

There has been significant increase in the repair and maintenance line items. Can you be specific as to what is attributable to that increase and how do you plan to reduce that figure going forward?

Second question is you have said that you have earmarked about KRW1 trillion for WiBro CapEx. Is there a change on that trend or on that figure? And can you just remind us how much you will be actually spending next year with respect to WiBro CapEx?

The third question is coming back to the broadband market share issue, you have said that there are a couple of major players and many SOs. If you were to increase your market share, who would you specifically target, meaning who would you take market share from? And, for instance, if you were to target certain companies, are you not concerned that industry-wide marketing spending will all rise? If you to target Hanaro, their voice services, are you not concerned about the problems and issues it might trigger?

Your first question on repairs and maintenance. Repairs and maintenance expenditure goes in line with the revenue and sales trend. So there has been quite a bit of expenditure in the telephony and our internet business, and this is mostly due to the improvements on QoS area - quality of service - our efforts to improve QoS. So it's hard to predict that this figure is going to fall going forward. We believe there will be about the same level of repair and maintenance expenditures going forward.

On WiBro CapEx, there is no change on that KRW1 trillion figure. In the year 2005 we have invested about KRW100b. And for the year 2006 our target will be set after we complete the pilot service during the APEC summit meetings in year 2005.

The third question is with respect to which competitor we are going to target in the broadband space. As you know, IPTV initiative is closely linked with the Government's policies, so things are quite sensitive during the progression of it. And so I ask for your understanding that we cannot disclose the strategies that we have envisioned.

The next question is by [Tung Son Lee] from [Beijing] Securities.

With your acquisition of the [Sidus] company, I believe your competitiveness in the contents provision area has also been strengthened. So I'm wondering what your strategy is for the wireless portal. Are you planning to just organically or internally grow that asset or are you also looking outwards for that capability?

Your question is about comprehensive strategy on the contents business. Yes, we are reviewing those options, looking outward and also looking inside internally to grow that capability. KT, because it's a private company, we will find the most effective and most competitive way.

The final question is by [Haniyava Wi] from Morgan Stanley.

Thank you very much. I actually have just a couple of follow-up questions. First on your labor expense for next year. Could you give us a little bit of color on when the next time you will be sitting down for a collective bargain agreement with the union and what your expectations are for increases either in base salaries or bonuses?

Secondly, you talked a lot about IPTV on this call. Can you give us an overall budget for IPTV that you plan to spend, including -- well, if you can separate out content that would be very helpful also and I'm looking for CapEx.

And my third question is have you had the opportunity to, at least at a preliminary level, think through guidance for 2006 for operating income and EBITDA and, if so, can you share that with us? Thank you.

You asked for the timeline -- for timing of the collective bargaining of year '06. Not only KT but all companies in Korea go through a collective bargaining process between the labor union and the management for determining the wage level. At KT, generally, collective negotiations, bargaining, starts around May or June and it lasts about two months. And next year we will be following a similar schedule.

And the estimates for next year on IPTV CapEx and operating income, I would like to ask for your understanding on waiting until the end of the year after -- when the master plan is announced. I hope you understand that we, at this point, cannot give you a specific figure on those.

Currently there are no participants with questions.

Thank you for joining us today. We will reflect your valuable comments after reviewing them. Thank you.