KT Corp (KT) 2006 Q2 法說會逐字稿

[Translated]. Good morning and good afternoon. First of all thank you all for joining this conference call. And now we’ll begin the conference call of the 2006 Second Quarter Preliminary Earnings Results of KT. This conference will start with the CFO’s opening remarks followed by a Q&A session.

[Translated] Good morning and good afternoon. I am Kwon Haing Min CFO of KT. Thank you for joining KT’s Earnings Conference Call for the second quarter of 2006. Let me first brief you on the second quarter’s performances.

Due to the intensified competition in the broadband market and reduction in fixed line traffic, we achieved KRW2,955.7t in revenue, a fall by KRW35b on a year-on-year basis. Operating income for the second quarter was KRW570.2b, a year-on-year increase of KRW231.1b due to the reduction in labour costs, marketing expenses and depreciation. Net income showed an increase of KRW118.5b and it [marked] KRW342.6b. However, when considering KRW140b of Korean Fair Trade Commission’s penalties reflected in the second quarter of 2005, and one off labor cost increase of KRW90b, operating income is similar to same period last year. And net income fell slightly due to the FX derivative losses coming from changes in the FX rate.

In the second half of the year we are expecting increases in CapEx as WiBro business takes off, and quality improvement activity so as to strengthen competitiveness of the existing businesses like the broadband business, as all this diversification of marketing activities is to respond to competition. Also, due to the studying of LN tariff and interconnection fees and recovery expenses for the recent flood that hit Korea, there will be more uncertainties compared to the first quarter. Therefore, we will maintain our original guidance, KRW11.7t for revenue, KRW1.6t for operating income, and KRW3.9t for EBITDA.

Let me now talk about the progress regarding the WiBro business. Through the pilot services that KT undertook we saw the potential for success for Korea’s wireless internet services. However, it is also true that because it is being commercialised for the first time in the world, there are many risks and uncertainties.

To minimise such risks KT will implement the business in four stages. Pilot service, commercialisation in limited areas, and then expand to Seoul and surrounding metropolitan cities, and then the nationwide expansion. Currently we are in the second phase as pilot service areas, such as [Shintoun, Chanung and Pundung] have transitioned to commercialisation services, providing the services under the promotion rates plan. Up until the end of the year we will expand the service area to entire Seoul and surrounding metropolitan areas. And we will continue to improve quality and provide sophisticated services.

Next on IPTV. With the inauguration of broadcasting and telecom conversions commissions we expect discussions on contentious issues which existed amongst regulators will finally under full swing. We also believe priorities will be placed on reviewing the IPTV service related bill. We also expect stakeholders to take active part in finalising the relevant laws by the year’s end, considering the fact that delay in IPTV will bring high opportunistic cost, as well as intangible losses to the people from not receiving the benefits of the services. And KT will spare no efforts in supporting this process.

Once the regulations are settled within the year, KT will commercialise IPTV in the first half of 2007. And we’ll do this all first to make sure that the technology and services attain level of perfection. This has been a brief presentation on our performances and issues. Now let us move on to the Q&A session.

[Translated]. Now Q&A session will begin. In order to give equal opportunities to each participant, we’d like to ask you to limit your questions to two. [OPERATOR INSTRUCTIONS]. The first question comes from [Chun Yin Yang] of [Korea Securities]. Thank you.

[Translated]. Thank you, I have two questions. The first question relates to the strategies regarding the second half of the year. We have seen your broadband market share drop to 49.5%. How strong are your plans or how strong are your determination to recover to the previous level? And also what are your strategies regarding phones, and fixed line phones, and resale.

Second question is on the bundling services. What are some of the discussions that are being conducted between KT and the government, and how does KT see the prospect for bundling services? Can you give us an update?

[Translated]. On the first question about the marketing strategies for the second half of the year. As you know in the broadband market has shown a very fierce competition, there has been significant marketing expenses incurred by all the operators. However, fortunately we expect that in the second half the impact of the SOs will be somewhat mitigated. And from KT’s perspective we want to make sure that we prevent any overseas [inaudible] of market competition. And through differentiated sales and distribution approach, and also through improvement of quality we plan to focus on the retention of the subscriber base. And we believe that this will help us maintain our market share level. And in the second half by asserting more efforts in quality improvement we will be able to recover our market share to a level that is higher than 49.5%.

And in the fixed line telephony market we are putting in efforts to maintain a stable level of subscriber base. We are seeing increases in revenue and the [Ong] phone and value added services. With respect to the [PC] at resale as you know, there is a very intensified competition to attract more subscribers. KT will respond to the market situation and we will also implement joint strategies together with KTF. For instance, we will focus on selling [CMB] phones and high end, high priced slim phones. And improving this strategy as a way to attract more subscribers.

The second question about the bundled services. Recently the government has loosened regulations with respect to bundling sales and also a service contract for the market dominant player. And with that change in the regulation KT is at a more advantageous position vis-à-vis marketing activities. So at this point we are changing our services remit, we’re preparing for the change in that service agreement, and also we are in the stage of coming up with details for the bundling services.

One more point to add is that the relationship between KT and the government is very close compared to any other period after privatization.

[Translated]. The next question comes from Mitchell Kim of Morgan Stanley. Go ahead sir.

Good evening. I first wanted to ask you on your CapEx, I know you touched upon but I hope you could add a little bit more color. Given that first half you only spent about KRW750b in CapEx and your target is KRW3t. What are the chances that you may actually have CapEx -- not actually spending all of that KRW3t this year? Especially in light of the fact that your WiBro launch is being done more shrewdly in steps instead of on a full scale, and the fact that IPTV is something that you have not fully launched.

And if I recall last year the CapEx, if I’m correct, for IPTV was somewhere in the range of KRW150b – KRW200b, as well as WiBro being about KRW500b in CapEx. So if you could add some color as to what the chances of CapEx spending this year actually being much lower than KRW3t I would appreciate that.

And secondly, I want to just ask you on impact of Gibun zone by LG TeleCom as well as some of the VoIP. I notice that in second quarter you did have about 38,000 line losses, whereas in first quarter you had much fewer line losses, about 8,000. And I’m also seeing your local volumes, volume falling about 8% year-on-year basis, so I’m just wondering whether you’re seeing any more significant impact coming from either Gibun zone or VoIP, I’d appreciate that.

[Translated]. First of all, your question on CapEx. Yes this is correct that in the first half of the year we used KRW750b in CapEx. Originally at the beginning of the year our plans for CapEx expenditure on WiBro was KRW500b, and for IPTV it was [KRW60b]. And I believe your question is pointing to the fact that as WiBro and IPTV are being pushed back, will the actual amount used for CapEx, will it not decrease? Now the other questions about decisions regarding investment, but we are in the position that we wish to maintain the original guidance regarding CapEx.

In the second half of the year we believe there is going to be investment in the WiBro business area as manufacturers have attained a level of performance improvement and enhancement, and I believe that signal, for us, to make full fledged investment into the field, in order to prepare for next year’s business.

And for IPTV, it does not take up a significant portion of our original CapEx budget, so our position is that we wish to maintain the target of KRW3t for CapEx. However, I also want to emphasize that at KT when we make decisions regarding investment we are very prudent and we want to make sure that we are always aligned with the market.

With respect to your question about LG TeleCom’s Gibun zone services, it is not really an integrated and new services that brings together fixed and wireless services. It’s actually a product that targets a niche in the market which comes from the difference between the interconnection fees amongst the operators. So once that interconnection fee is readjusted then Gibun zone cannot continue to enjoy the advantage that it currently has. So Gibun zone is a service and product that exists on a temporary basis, according to the assumption that the current level of interconnection fee will continue.

We have raised this issue with the regulatory body on a number of occasions, saying that Gibun zone actually it distorts the competition in the telecom market. And as the interconnection fee adjusts then Gibun zone service loses the foundation for sustained provision of services. Therefore we do not believe that its impact on our fixed line telephony services is significant.

Regarding your question of VoIPs, a couple of comments. Our view on the VoIP’s world strategy remains the same. We believe that there are some barriers to entry for home usage. There are some advantages for, possibly, corporate type usage. But again this idea is getting a little bit bigger, but at this point we are ready to respond to any kind of need for the corporate side if need be.

Regarding your comment on the line losses, we don’t attribute that to be VoIP, more so that’s migration towards our broadband for some of the uses in those other areas.

Since I have the mic can I just ask clarification on the previous person’s question about bundling. I think Haing-Min Kwon said that you are preparing in case the bundling will be allowed. If it is allowed what are the services that you think you could provide and if, I guess a big part of it, if you could offer a discount is it possible to think about KT offering both fixed line services and broadband as well as throwing in KT [inaudible] wireless into a single package and offering [deep] discount. Is that a possibility?

[Translated]. Currently our marketing division is in the process of designing the product. However, I ask for your understanding in that we are unable to disclose any details because of competition and regulation related issues. I ask for your understanding.

[inaudible] I’ll let this one go.

[Translated] [OPERATOR INSTRUCTIONS]. The next question comes from [Bill Sark] of UBS. Go ahead.

Sorry I have three questions if possible. Could you give us a status update on your labor negotiations and first in terms of when we may see the outcome, and also whether it is possible for a scenario of a zero wage increase, i.e., a wage freeze?

The second regards if you could elaborate a little bit more specifically on the impact of the broadband SO reclassification. Your competitor, Hanaro, talks very optimistically about seeing an improvement in marketing environment almost immediately in the second half, as SOs become reclassified. Is KT as optimistic as that outlook, and specifically if you could talk a little bit about the impact of reclassification.

The third question is something you mentioned in reference to the home zone product of LGT. It did sound like you were expecting a sizeable change in the interconnect regime specific to the mobile rates. It’s quite clear that the gap is quite sizeable, so if you could just elaborate a little bit on whether you’re seeing a little bit more clarity in terms of the interconnect rate adjustments, particularly on the mobile side, that’s probably over the next month or so. Thanks very much.

[Translated]. First on the labor costs. Currently the labor negotiations or wage negotiation has not yet started. Right now we're at a phase where we are coordinating the opinions of both parties. The labor union has their proposals and the company has their proposals but we have not entered into the negotiation phase. So this year we believe that this wage negotiation is going to require a lot of time and effort. The company is very clearly aware of this labor cost issue so the company wishes to persuade the labor union to make sure that we can minimize the impact coming from labor cost. With respect to your question as to when we will see the results and will it be a wage level freeze it's very difficult to say at this point.

Regarding your question on SO I really can't state as to how much we agree or disagree with what Powercom or Daycom is saying regarding SO but what we can mention is this much. I think SOs were operating under different environment in the past and now since they're under the umbrella of the MIC there will be some regulatory issues that they will have to deal with. Mainly there will be issues of pricing, protection of users, concern quality control. So basically I guess if you want to look at it from a standpoint of is it going to be operating the same as before, no, obviously it's going to be a little bit different. They will have some cost issues increasing as well. So it's still too early to tell exactly how much impact it's going to have. We look at it in a positive light because they are now under the MIC but overall we have just to wait and see how much their marketing efforts and various other regulations really kick in and slow them down if they were behaving in a different manner.

[Translated]. With respect to interconnection regime as you know MIC annually adjusts the interconnections rate and we expect a decision to be rendered somewhere around after August but please understand we can't really mention the details before this because it is sensitive and also it requires some policy.

Just a very quick follow-up question on the labor negotiations. How much of the negotiation process considers, usually you do the labor negotiation in the third quarter after seeing the first half results performance. Is it important in the negotiation process how strong your profits are in a given first half in prelude to the decision or the negotiations or is that not a meaningful consideration. To be fair your results in the first half are above market expectations so to some extent they could be viewed as quite positive and I'm just wondering if that could work against KT in a collective negotiation process with the union.

[Translated]. Of course the unions will look at the first half performances, but when we decide on a wage level it is not based on a half year performance and not even one year performance. You have to have a long term perspective, three years, five years down the road. And in Korea wage structures it's impossible to adjust them downwards. Therefore it's very important how one decides the wage level in a certain period and it will impact the future as well. So even if the first half performances were good we will talk to the labor union and we will together think about what KT wants to become five years down the road. We will put emphasis on that and we will do our best to persuade and co-operate with the labor unions.

Thank you.

The next question comes from [Dong Xiao Play] from [Ka-Shing Securities]. Go ahead, sir.

Thank you. [Translated]. Yes I can see that your marketing expenses and sales costs are on a downward trend. But are you achieving this from a systematic perspective? Are you reducing costs from a systematic perspective or are you just trying to save bits from here and there? If it's the latter then I believe it's only going to have a temporary effect. Can you be more specific?

[Translated]. With respect to our reduction in the marketing expenses we were able to reduce expenses that were revenue based. To elaborate what that means is that through our regional offices and subsidiaries we made sure that if the revenue did not increase that the costs must be controlled so this perspective is a very systematic approach and we've been working very hard to cut corners in every area.

[Translated]. If that's the case then we should expect that if the revenue does not increase then the costs should not increase as well but is this sustainable? Is it possible at all? And also even underlying items other than marketing expenses. Is this also true for other items?

[Translated]. With respect to the marketing expenditures it is directly linked to competitive landscape. In the first half of the year KT placed a lot of efforts to stabilize the market and we will continue to do so in the second half as well. Operating costs include depreciation and this hinges on how much we invest. In the second half of the year we expect significant investment in the WiBro and IPTV therefore in terms of operating expenses we will not be showing better results compared to the first half of the year.

The next question comes from [inaudible] of Credit Suisse. Go ahead, sir.

[Translated]. According to a news article today Korea Broadcasting Commission said that it decided to regulate the TV portal for service that is being provided by Hanaro. It decided to regulate the broadcasting content that it provides through its TV portal. Now is this also applicable then to KT's home and services, and Hanaro TV has also announced that they are getting 1,500 subscribers per day basis. Do you think this number is over-rated compared to what you've seen on your home and services or do you think that the scene is picking up and is as fast as the numbers suggest because under the assumption that IPTV will be delayed for some time this type of services is interim services before IPTV is fully introduced so I would like to know how you see these measures.

[Translated]. I'm sorry about that. We had some internal discussion because this was the news that was released today and we needed to make sure. With respect to KBC, the Korea Broadcasting Commission decision regulation. Now on this issue KT will have to wait and see how things play out. Of course there is a difference in the service that Hanaro TV provides and our service which is home end so people may think that our service could evade the regulations or be not applicable under that regulation but we have to wait and see how the regulatory body decides. This is a rumor that exists in the market therefore we will come up with right countermeasures after seeing how the market moves and what type of action the regulatory agency comes up with.

There are no participants with questions. We will take one more participant to ask question. [OPERATOR INSTRUCTIONS].

[Translated]. KT, under very difficult business environment characterized by continuous increase in competition, will continue to place efforts to strengthen its fundamentals in order to enhance its business's intrinsic value as well as to activate next generation growth engine so that we can solidify our position in the market as a market leader. Based on our efforts we will do our utmost to further promote and develop the telecom market in Korea and to achieve shareholder value. Thank you for joining us today at KT's conference call.