KT Corp (KT) 2006 Q1 法說會逐字稿

[Translated]. [technical difficulty] three quarters and therefore we will maintain our earlier guidance of -- earlier annual sales guidance at KRW11.7 trillion, Operating income at KRW1.6 trillion and EBITDA at KRW3.9 trillion.

This is because of the growing uncertainties we expect in the business environment. Dynamics of broadband business is drastically changing with more than 100 players in the market. VoIP market is expected to continue to grow and introduction of handset subsidies all makes it very difficult to forecast the level of competition in the mobile market with a strong confidence. But we will continue to improve profitability and promote new growth engines.

Let me now talk about an area where there is high level of interest, the WiBro private services. Currently pilots of this is provided to subways and highways linking [inaudible] and [inaudible] areas. Users are enjoying high-speed wireless data service at an average speed of one to three mega-BPS.

The purpose of the pilot service is to conduct a prior check-up for the equipment and services to make them more sophisticated so that we can ensure a stable commercial service. We are in the process of selecting information about areas with [inaudible] frequencies that cause call drop and areas with insufficient coverage and we are also sharing ideas with the customers of the pilot service to make appropriate improvements and eventually to optimize the service level. Pilot service is currently smoothly underway and we expect to meet the performance levels defined by KT, and commercialization in the pilot areas will happen as planned in the month of June.

Next is our IPTV, the passport scheme on telecom and broadcast reorganizations launched last year has recently restarted its activities and has begun active discussion on reorganization. So we believe convergence in IT will soon be inaugurated and relevant laws and regulations will be sorted out by the end of the year. However, against the current schedule we won't be able to launch the service as per our original plan, which was within this year. Realistically it will more likely be in the first half of 2007.

Despite difficult business environment, KT is doing its utmost to improve its intrinsic value by looking after its fundamentals. As a leading market player we will not engage in destructive competition but focus on profit orientated competition and establish a competitive landscape of virtuous cycles that could lead to a creation of the blue ocean.

This has been a brief overview on our performance and a number of issues. Let us now move on to the Q&A session.

[Translated]. Now the Q&A session will begin. [OPERATOR INSTRUCTIONS]. The first question comes from [inaudible] of Morgan Stanley. Please go ahead.

Actually sorry, this is Mitchell Kim. I have -- I'm going to limit my questions to two. First, I'd like to say that KT certainly showed a solid result demonstrating the potential profitability if costs could be controlled. But given your -- given the fact that you have an early change to your guidance and I'm assuming that you still plan to spend incremental KRW300b on new businesses, can you be -- at this point, can you be a little bit more specific on where you think that incremental KRW300b will be spent? For example, whether it will be WiBro and whether they will be spent on subsidies of promotions or advertisement? Any color on that would be very much appreciated.

And secondly, on revenues, with first quarter revenue already coming in about KRW88b less than our first quarter last year, and why -- do you think that achieving a revenue of KRW11.7 trillion this year is still possible? What are some other areas where you expect to see less decline throughout the remaining three quarters? Those are the two questions. Thank you.

[Translated]. I will tackle the question on the sales and I will pass on the first part of your question to the Managing Director in charge. In the first quarter as you know the market competition was extremely fierce, however KT was able to make its distribution channels more efficient both from internal and external perspective, and we were able to save a significant amount of marketing costs and we were very cautious in approaching the market. Based on such strengths, we are going to continue to exert our efforts and focus our efforts on increasing the revenues coming in from the broadband and PCS business.

Yes, if -- but if you look at our first quarter performance, even if you look at our first quarter performance I still think it's too premature for us to make any adjustments to our annual guidance. Q1 numbers show that we have done quite well in controlling our costs, however in the second half of the year, there are still many risk factors that exist. And also in terms of revenue, we are planning to exert more emphasis so that we can increase our revenue. So I ask you to bear with us.

Hi Mitchell, it's Thomas Kim. I wanted to clarify your question. Are you asking about the CapEx of KRW3 trillion?

No I'm talking about the incremental operating expenses of KRW300b.

Operating expense of KRW3b.

That was what you stated at the fourth quarter conference call if I remember correctly.

Oh, right, right. That has to do with this year’s falling -- overall falling operating expense, yet we have some increasing portion of our new business. Is that what you're talking about?

That's correct.

Right. Right. That -- it totals as we mentioned earlier, it's around KRW300b and to date it's still a bit slow right now but again, our comment by our CFO did state that we are going to balance our expenditure so that we meet our guidance of KRW1.6 trillion for our annual number for operating profit. To go into the detail at this time is too early.

Can you just clarify what you mean by balanced spending so that you will meet your operating profit of 1.6?

One second. Is that okay?

So, in other words what I'm hearing is that you do expect to spend more in the remaining three quarters so for that reason you are not ready to revise up your operating profit target. Is that -- ?

We’ll let her -- she'll translate first. Yes I would assume that would be correct at this time. Sure, again, as you -- as Mr. -- our CFO mentioned that there are many uncertainties upcoming in the next three quarters to come, especially in light of the broadband market as well as the OIP and as well as even the subsidy issue with our PCS resale business. So there's many, many dynamics involved in our guidance and at this time we don't feel comfortable enough to increase our numbers. So that is the assumption that you will have to take.

Yes, great, thank you.

Next question is by Mr. Andrew Hoskins of HSBC.

Hello, can you hear me?

Yes, we can.

Thank you. I would like to ask two questions please. Firstly, could you remind us of your CapEx target for this year and give us a rough breakdown of that please? And secondly, in the light of your unchanged revenues and earnings guidance for this year, could you comment please on the outlook for the dividend? Thank you.

Hi, as we stated earlier, our CapEx for this year will be roughly KRW3 trillion. To give a breakdown I guess I would break it down to three major categories. One is service related, which will be close to KRW1.6 trillion. Info related is about KRW1.1 trillion, and support that would be about KRW1.6 trillion. And to break down the service a little more, I guess internet related will be roughly KRW1b and then the remaining is broken up into telephony and data, and that will be about as detailed as I can get down.

Could you possibly say how much you plan to spend on WiBro -- remind us of the targets for that?

I'll let the translator go first. Thank you. Yes, let me make a quick correction, I'm sorry. The support is not KRW1.6 trillion, it's KRW160b. I'm sorry about that error there. And regarding your question on WiBro, we have slated for WiBro KRW500b for this year and we have no change in our policy at this time.

[Translated]. Yes, your question with respect to the dividend. KT once again will maintain and keep to its original dividend policy of returning back to the shareholders. Specifically, we are determined to return back more than 50% of the adjusted net income back to the shareholders. So once again year 2006 is going to be mired with various different risk factors. So please understand that we will be able to give you a confirmed number after our performance numbers are confirmed.

Thank you very much.

[Translated]. The next question is from Jim Sanders of S&P.

Hi. Good afternoon. I just have three questions. The first is your response to the loss of market share on the broadband side, your market share has come off and Telecoms has risen and [Hinaro’s] has come off as well. Going forward into the rest of 2006, any specific plans to recoup that market share?

Second question, could you give some more detail on the sales commission and sales promotion costs? I understand you -- as you said, you've adopted a fairly cautious policy in the first quarter, could you give an outlook for what you expect in the rest of 2006 on those two expense lines?

And then the third question is, on your interconnection revenues and costs, have you assumed a change and made an appropriate accrual for the change in your first quarter results? Thank you.

[Translated]. Let me first talk about the market share issue on broadband business. In the first quarter if you look at KT's numbers on broadband, yes it is lower than our original level, however if you consider the fact that the market was extremely competitive in the first quarter and if KT had taken part in that competition that would have meant significant increase of our marketing costs.

In the second half of the year the SOs are going to be categorized as basic telecommunications service provider and they will enter the overall framework of their competition, so from KT's perspective, we will be able to more effectively defend our market share as well as attack some others. So that is why we have the intention to maintain our annual guidance on broadband business.

Hi Jim. Could you elaborate on your question on the sales commission?

Yes. Hi Thomas. Yes, in the first quarter the sales commission and the sales promotion costs they just -- in particular I guess the sales promotion costs -- that was one of the big losers, down 70% year-on-year. And I'm just wondering what's the outlook for that line going forward -- do you think it's going to trend at about the same level as the first quarter or are you going to be seeing an increase in the rest of the year?

Yes, I guess you can take a look at that in two folds, some are related. Sales commission does increase with more new subscribers, but again we will continue to try to lower the per head cost as much as we can but looking forward in the second half, I guess it’s -- if we stick to our guidance of taking roughly 50% of new market business, I think you can see that trend increasing over towards the second half.

[Translated]. You asked a question about the interconnections and revenues and costs, well the Government will make the decision come June of this year, but this interconnection fee is an item that is negotiated by different parties, so it's very difficult for an operator to make a certain comment on that. So I ask for your understanding and the fact that we cannot make any detailed or specific comment.

Okay, thank you.

[Translated]. [OPERATOR INSTRUCTIONS]. And the next question is by Matt Evans of CLSA.

Good afternoon. Thanks for the call. Under the labor costs line, there's something mentioned about the fact that bonuses were lower, is that partly a lagging effect from the poor results last year? In other words if results are better this year the bonuses will be higher next year?

And secondly, on the IPTV question, what concessions do you think will need to be made to the SOs before the regulator allows you to roll out passive multi-channel IPTV, and specifically, do you expect the rule that currently limits system operator coverage to 20% of the country, do you think that that will be lifted before they allow you to offer IPTV?

Can you hold on one second please?

[Translated]. Yes the first quarter's incentive levels were lowered, that is because last year our performance was not as good. I'm sure you know that. And so there had been management evaluation and that evaluation score was low so based on that low score, incentives were tiered and that's why you see a lower figure there.

Hi Matt, it's Tom. Can you elaborate on your question regarding IPTV? We didn't get the gist of what you wanted to hear.

Well, under the current regulations the system operators, the cable companies, cannot cover more than 20% of the country and so they're -- so the industry is extremely fragmented.

Right.

And KT having a national network would be -- would make it extremely difficult for them to compete. So, one of the discussions is, before you are allowed to offer IPTV service that that regulation might change to allow them to consolidate and be a stronger competitor? So does KT think that this is something that will happen in the second half of the year? You made reference to regulations changing and they are rolling out next year and I'm interested in this specific regulation.

Okay we'll let her translate first. Yes your comments are in line with what we think as well. I think the fragmented market has limited possibilities of competing with KT when we go nationwide with our IPTV, so we do believe that perhaps that kind of a regulation may be eased up, so that the SOs can actually have a better competing field, and we're not too against it because it's time that we hurry on with this regulatory issue so we can move on and not be stumbled and blocked by these regulations.

Okay thanks very much.

[Translated]. There are currently four participants with questions. And the next question comes from Bill Sun of UBS.

Thank you. Two questions please. First regarding your broadband subs. I guess you had net loss of about 47,000 in the quarter up until March. I understand that some of that was driven by deliberate subscriber clean-up but can you give us a breakdown of that 47,000 net add decline or reduction in subscriber between clean-up versus true churn out to other competitors?

And secondly, you mentioned about VoIP pressures for the remainder of the year, can you be a little bit more specific? Are you seeing line losses to other VoIP carriers? Are you losing airtime traffic? Is pricing being affected and is there any costs involved in protecting your customers? So as now we're getting a little bit more developing in terms of VoIP, if you could provide a bit more color that would be great, thanks.

Some comments on the broadband business. We -- the figures do show a net loss but as you mentioned there's some clean-up so this is all in efforts to find out the true value of our customers and this will show truly so ARPU are higher although it's none of our doing at this time, but it will show higher to which -- we see it as a base to go forward. I can't comment exactly -- one second. Yes, let her translate first.

As an overall comment on our broadband side, as I mentioned, we will -- our efforts to show or go towards the target of 50% of new business in the whole business are now kind of falling behind but we still have many more months left and we'll go on.

Secondly, a comment on your question regarding where our subscribers are going. That is a -- to us a bit too detailed for us to reveal, so I'm afraid I will have to sustain from giving you the answer on that one.

And the question regarding VoIP?

[Translated]. On VoIP, it is true that the VoIP penetration is expanding quite rapidly in the corporate market side. So we are doing our utmost to protect our subscribers from leaving us -- to protect our subscribers and also employing various different working strategies to keep our market share.

In the case of individuals and household subscribers, they are still quite reluctant because they have to change to different number system, 070, and also there is very little difference in tariffs compared to PSTN and also there is high entry barrier considering the high terminal handset cost. So the market itself is not yet too promoted so KT will concert its efforts to conduct its side of the business until the market gets fully promoted.

If I may ask just a quick follow-up question related on VoIP, I guess the Government's current or past policy has been to prohibit price discounting below PSTN for VoIP as well a high interconnection related cost which somewhat has stalled the economics of the deploying VoIP. But we have a new MIT minister. At the same time the cable SOs are going to be allowed to move into the telephony space and clearly they will be pure VoIP players. So does KT sense that there is some possibility that the Government, the new regulatory regime under the new minister, could revisit that regulatory framework? And is that part of KT's concerns regarding VoIP through the remainder of the year or into next year?

[Translated]. Policy decisions are up to the Government so it is difficult for KT to make any comment one way or the other on this issue. However, as long as VoIP is officially adopted by the market and also we are making requests to the Government about not allowing the callers to arbitrarily change the number. And so we are putting in our efforts and as long as all the players can participate fairly and we are putting in efforts to balance the VoIP market.

Thank you.

Our next question is by Hu Chang of Goldman Sachs. Hu Chang, are you there?

[Translated]. I have two questions and I may be asking some questions because I missed the front part of the conference call. But my question is about WiBro. You have started WiBro test services and I'm wondering what the reaction is like and what is your future strategy regarding WiBro?

And also is bundled product allowed? How would WiBro fit in to that approach?

And another question about a sales promotion expense line item. There was significant decline in this line item and according to the earnings release it's because you have outsourced some of the internal work that was done in the past. So where is this outsourcing expense line item included?

I'm an employee at KT and I'm in charge of portable internet [services]. We have started the pilot service and it is going as planned and even the media has acknowledged that this test is going in a very stable fashion at the providing speed of 1.5 mega BPS. And [inaudible] is also taking place and there is a very positive evaluation of this pilot service.

And even after the network is [long term] we do need monitoring in order to analyze the frequency of a certain region and also we do need to build the most optimized usage environment. There is a period that is needed for that optimization.

So based on the data we have collected from the pilot service we will be able to improve stability of the network and we believe that we can achieve the performance level that we are targeting by June as was our original plan for commercialization.

And regarding the [inaudible] services or combined services, the Government has stated that it will look at it from a very positive perspective and we expect a positive policy decision on this issue. So if that happens it will truly help facilitate WiBro business.

Regarding your question on outsourcing, it would be under sales commission in our release there so you'll see an increase of KRW58b for the first quarter versus last quarter of last year.

[Translated]. Can you provide us some guidance on number of subscribers and business models for WiBro?

[Translated]. At this stage we are in the pilot stage -- pilot testing stage in the market so we are not at a point in time where we will be able to provide you with that level of detailed information and I ask for your understanding on that.

The next question is by John Kim of Merrill Lynch.

Yes. Can you hear me okay?

Yes we can.

Okay thank you. Thank you for the opportunity. A couple of questions. First pertains to your new services. I understand that it might be difficult to share the details of your WiBro commercial services but is it at all possible for the management to share any expectations for operating targets? Like for example the number of subscribers or number of handset types for the service, particularly in light of some rumors that there has been some problems associated with procuring handsets for WiBro.

And related to this, we'll be -- given the expected commercial launch for WiBro, does KT plan to take an aggressive or less aggressive approach towards marketing KTF's HSDPA service through its resale operations?

Second question will be -- is on the share repurchase program for KT and KTF. Given that both companies' stock prices have risen materially over the past month or so, has that affected your share purchasing strategies or do you have any concerns or issues if any? Thank you.

[Translated]. On your first question about the possibility of share buyback by KT and KTF, yes according to our decision made in the past we will acquire 5,222,000 shares and the price will be slightly more than our original expectation of KRW200b but we will go ahead with the buyback.

When it comes to strategies for buying back our treasury shares, there is no unique strategy. If the premium in the market is good and of course the buyer will want to buy it at a low price. So we are looking at the market and we are buying at point low and the stock price is low.

With respect to buying KTF shares, currently the amount is under the amount written back with respect to the convertible bond. And right now the share prices has increased so that's given -- it's a factor for a bit of a concern. However we would want to purchase this at the price that is lower than the convertible bond.

With respect to your KTF purchases, could your buying strategy include a potential block purchase from one of the strategic investors in KTF, just for clarification?

Yes, we couldn't comment on that. Thank you.

[Translated]. With the second question on WiBro, I believe your question was regarding our expected sales per different types of the handset. Well at this point we will not be able to give you a detailed answer to that. We will have to go through the pilot service and based on the information we learn from that phase we will be able to then provide you with some detailed projections.

With respect to the types of WiBro handsets, we are currently thinking about PC card type which gets mounted onto mobile PCs. And also PDA with voice functionality and smart phone.

With respect to your comment about the rumor on the fact that there's some problem with the procurement of WiBro handsets, we haven't heard anything of that sort and I believe this is not true.

And your last question about the HSDPA of KTF and KT’s WiBro. With once again respect to HSDPA KTF and WiBro of KT, we are in the process of devising strategies to make sure that these two technologies are mutually complementary and so that we can get a win-win out of this approach.

Currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. The next question comes from [inaudible] of [inaudible]. Thank you.

[Translated]. Recently LG Telecom has launched a service dubbed [Cable Zone]. I believe this service is quite similar to KT's OnePhone service. What is the impact of LGT's launch of this new service and what is KT's countermeasure to address LG Telecom?

Second question is, KT has about 50% market share in the broadband market but with the increase in the number of other operators, and other operators increasing their market share, I have seen a press release that said that KT wants to move away from the current dominant player -- the current dominant status in the market. So have you made this intention known to the Government and what was Government's response to that?

[Translated]. On LGT's Cable Zone service, their service is limited to termination areas, so local and long distance, that is. And yes they are vying to provide low levels of tariffs to the mobile phone users. However, they still need to have all the members of the family change their handsets and still the basic fee is applied to the mobile telephony service. So I believe that the impact that their service has on KT's service is very much limited.

KT has experience in providing this OnePhone service and conducting the OnePhone business. We did not get as much out of this business as was expected and as was originally expected, compared to our original expectations, that is. So we believe that with LGT's Cable Zone service as to how much impact it would have on the market would have to wait -- we will have to wait and see how the market reacts. We will take a very closer look at the market, and KT and KTF will work together to come up with effective countermeasures on this.

Because our market share in the megapass business is declining, I believe your question was whether we have intention to break away from our designation as a dominant market player, and dominant market player at this. Of course KT wants to move away from being applied -- move away from always being subject to certain regulations. But determining whether a certain operator is a dominant player or not, that is the Government's role and we have not yet taken any type of action towards that end.

The last question is by Jeff Kung of Credit Suisse. Thank you.

[Translated]. Yes, I have two questions. Recently there is a lot of talk around real estate development. I don't know how possible this is and how realistic this is. But does KT have an official position on -- not on the immediate future but at least on mid to long-term plans with regards to real estate development?

My second question is about seasonality. If seems like if you look at KT's earnings numbers there were a lot of seasonality factors and you have mentioned that you have put in a lot of efforts to get rid of this [business] seasonality factor and that you will improve on it. So in this -- for this year, are these seasonality factors well adjusted for this year compared to last year or previous quarters? I don't know if you can answer that question but I would appreciate it if you could.

Hi Jeff, let me make a comment on the real estate business. We ended up last year on KRW90b and this year we forecast up to KRW150b in real estate business revenue. It is broken down into capital gains from initial business as well as rental fees. We do foresee this business increasing, or slightly increasing throughout the years. We will try to make use at best of our real estate as much as possible. But as you know, and as many people know, that a lot of our real estate, though they are in prime real estate area, they are not developable. So I think the market may have an over-expectation of what KT's real estate business may be. But we will continue to increase our real estate revenue as long as the land prices keep increasing.

[Translated]. Yes we have continuously said that we would [make] efforts to get rid of the seasonality factor but for this year as you can see we were not able to get rid of them completely. In the case of fixed and recurring expense line items like labor costs, we were able to evenly spread them over the year. However, when it comes to depreciation, which was investment in marketing costs which were linked to competition, because it varies depending on the investment in competition strategies, we weren't able to totally eliminate the seasonality factor there.

Currently there are no participants with questions.

[Translated]. Once again thank you very much for joining us today at KT's earnings conference call. We are always very grateful for your support and interest. We will do better and next time we meet we hope to bring you better performance. Thank you.