KT Corp (KT) 2008 Q1 法說會逐字稿

(Interpreted) Good afternoon, I am Maeng Soo-ho, CFO of KT. I would like to thank our shareholders, analysts and all those with great interest in KT for joining us via the phone and the Internet. And I would now like to start the presentation on the first quarter 2008 business performance, as well as business highlights. If you access webcasting through our website, you can listen in on the conference call and view the presentations as well.

Revenues for the first quarter 2008 is KRW2,967b which fell 1% on a quarter on quarter basis and 0.2% on a year on year basis due to the decline in Telephony and LM revenues. Operating profit fell KRW196.1b year on year due to increases in marketing expense caused by fierce competition and our efforts to ensure bigger subscriber base for new services for growth purposes and recorded KRW333b.

EBITDA increased KRW8.1b quarter on quarter but fell KRW191.1b year on year to KRW815.4b.

Net income increased KRW49.2b quarter on quarter but fell KRW233.2b year on year to mark KRW154.1b.

CapEx spent was KRW285b which is KRW4.5b increase on a year on year basis due to increased investments into growth areas such as MegaTV business. For more details please refer to the earnings document.

Next is business highlights for KT's Broadband Internet Megapass. Revenue dipped by 1.1% and 2.4% quarter on quarter and year on year respectively due to discounts given to long term contract customers and exemptions on modem usage fees.

In order to drive sound competition in the broadband market, based on quality and value and to lay the foundation for real time channel based IPTV commercialization, we at KT have expanded coverage of FTTH to 59.5% as of the first quarter's end. Thanks to the expansion of FTTH coverage, improvement of customer value and focused customer care activities, we have regained number one position in terms of net addition in the first quarter.

For the PCS business, despite the fact that new subscribers increased in the first quarter on a year on year basis, with the lifting of subsidies regulations forthcoming, operators engaged in a stronger competition which brought about a higher level of churn out of subscribers. And hence net adds was a mere 11,000. Revenue for the quarter is KRW419.9b which is an increase of KRW51.7b and KRW39.5b on a quarter on quarter and year on year basis.

Revenue fell for the Telephony business due to the continued downward trend for subscribers and traffic volume. We are defending against subscriber churns through the introduction of three different customized and selective pricing plans which was introduced last November. And from May by launching voice based SoIP, Service over IP, we will be able to respond to VoIP traction.

On MegaTV, after the full fledged service launch in the third quarter of last year, we broke 320,000 subscriber mark and as of the end of fourth quarter, cumulative subscriber number stands at 570,000. We are increasing the number and the quality of content through securing educational and children's contents as well as Hollywood contents. Also we are enhancing customer value by simultaneously improving service, infrastructure and the UI.

Thanks to such efforts in the first quarter, around 60% to 70% of customers who have tried the service free of charge during a set period of time, continued on to the paid services platform. As such, we are successfully gaining subscriber base. Also PPV, Pay Per View, usage per subscriber is continuously growing. So as the subscriber base expands we expect this will have a very positive impact on the revenue base. And when the IPTV business enforcement ordinance is enacted, we expect the business to take off at a much faster rate. And KT will thoroughly prepare in time for the real time broadcast services.

Next is on WiBro. Despite limited coverage, in the first quarter by expanding customer phasing distribution network we were able to acquire more than 20,000 new subscribers on a monthly basis. Going forward, through bundled packages with Megapass and affinity marketing with navigation and diverse interactive services, we will increase WiBro's usability. By the second quarter, we will secure in-building coverage in the Seoul area and expand to full coverage in 17 cities in the metropolitan area by the second half of the year.

As was previously mentioned, in the first quarter amid very fierce competition, at KT we have exerted our extensive efforts for early expansion of customer base. But due to factors we weren't able to anticipate when we drew up the business plan at the end of last year, we acknowledge that our results fall short of market expectations. The CEO very clearly and fully understands the market concern and the current situation. So in all areas starting in the second quarter, we are focusing all our efforts in reducing cost.

Therefore the CEO and the top executives are not only directly involved in corporate strategies, but also to the working of all activities that include cost control and resource allocation. And through such efforts we will do our best to meet the annual guidance that we have announced to you at the beginning of the year.

This marks the end of the first quarter earnings presentation. And we would now like to have a Q&A session. I would like to take any questions that you might have.

(Interpreted) Now our Q&A session will begin. (OPERATOR INSTRUCTIONS). In order to allow as many Q&A chances as possible within the restricted time, we would appreciate only two questions for each participant.

The first question will be provided by [Yang Jong Il] from Hankook Investment Securities and the following question will be presented by John Kim from Merrill Lynch. Mr. Yang, please go ahead, sir.

(Interpreted) I have two questions. The first is with respect to your year 2008 labor cost guidance. Let's just assume for the arguments sake that there is no increase in wages in year 2008. If that is the case, what do you expect to be the total labor cost for year 2008?

Second question is with respect to the Telephony market. In the second half if number portability is introduced to Internet phones or VoIP, what will the KT's strategy to respond to that?

And another curiosity that I have is that if you look at the total Telephony market, compared to the speed at which Internet phone subscribers are increasing, it seems the decline in the PSTN subscriber base is quite small compared to that very fast increase of Internet phone subscribers. Now is this because the market itself is very different or maybe there is some redundant subscribers who subscribe to both of these services? Can you shed some light on this?

(Interpreted) We understand that there is increased market concern on our labor cost increases. We are fully aware of that and we will try to find the ways to improve the situation based on the consensus agreed between the management and the labor union. We will do our best to find the right solution. But in terms of total labor cost, compared to last year's total labor expense, this year it will not increase at all.

With respect to your second question on the Telephony market, with respect to VoIP number portability, how are we going to respond to that, if you look at the first quarter numbers, the total subscriber for local fixed telephony services stood at 20,820,000. Now compared to the end of the previous year, it is a drop of about 100,000 subscribers. When number portability is introduced in the month of June, we do expect the subscriber base will decline. However, we will maintain the subscriber level at 20m which we announced at the beginning of the year.

And also we will provide various pricing plans for the fixed line subscribers like single price plan and also limitless call plans. And also there are some competitive edges and advantages that the telephony service, the fixed line telephony service provides, and we will utilize those advantages to defend the market. But if this VoIP market takes off and is very much facilitated, then we will respond to that by targeting the household service over IP market.

Another question of yours with respect to why the decline in PSTN is less compared to the extent of increase in VoIP, we of course do not have the definitive answer. But in the market what we see is that VoIP does have some other inherent weaknesses. And we believe that that is one of the reasons why.

Just to share with you the churn out numbers for the KT subscribers, out of the total churn, general or regular churn takes up about 64%. LMP churn is about 24% and 4% is the churn dictated by company. And at this point, despite these assessments, it's very difficult for us to match the VoIP -- the increase in the VoIP subscribers and the churn data that KT has. It's quite difficult to reconcile or match those two at this point.

(Interpreted) The following question will be presented by John Kim from Merrill Lynch and the next question will be provided by [Chung Yun Bae] from UBS. Please go ahead, Mr. John Kim.

Thank you. I have two questions. The first is on your guidance. Can KT still hit your KRW12 trillion revenue guidance if you start cutting your cost from 2Q? If you have to choose between top line and operating profit guidance, what is the management going to choose?

And can you articulate more about how you will deliver KRW1.5 trillion operating profit guidance to offer more comfort to the market?

Second question is on your monthly operational data disclosure. I think KT's level of monthly operational or fact sheet in disclosure makes it quite difficult for the market to anticipate your quarterly results. Can the management consider providing at least the churn rates or gross adds for each of your key businesses? And if not, could you share with us why?

(Interpreted) On your first question regarding the guidance, in the first quarter operating income due to various factors did decline in quite a bit extent compared on a year on year basis. The first reason is because the revenue against the expectation was more stagnant than we anticipated. And number two, we have, in the first quarter, concentrated marketing spending in order to secure our customer base so that we can turn around in terms of growth going forward. The third is with respect to other expense items that include activation and installation expenses and labor expenses.

And especially in the first quarter, we have very strategically put in our efforts to expand the subscriber base in order to attain the annual revenue target. As a result it created significant amount of expenses. But we believe that impact from such expanded subscriber base is going to start to show in the second half of the year. So going forward we can anticipate increase in revenue and reduction in costs.

Because I believe that many investors would have a lot of questions on this, I just want to share with you and provide you with some more detailed numbers. For Broadband, if you compare fourth quarter of '07 to first quarter of '08, you will see that in the fourth quarter of '07 we were minus 6,539 cases. But if you look at net adds for Broadband, it stood at 111,634 as of first quarter of '08. Then if you look at our PCS resales at the end of fourth quarter of '07, the number was 46,000. But as of first quarter of year 2008, the number is 11,000. It was minus 46,000, excuse me in the end of fourth quarter and in the first quarter of '08 the net add number is 11,000.

And from the second quarter based on the subscriber base that we secured in the first quarter, we will conduct various activities for each of the business lines to make up for the revenue so that we can attain KRW12 trillion in revenue, which was our annual revenue guidance. And also, the marketing spend which was concentrated in the first quarter will be cooled down. And from an enterprise- wide perspective we will conduct activities to improve our cost structure through which we can save costs and we will do our utmost to attain operating profit target of KRW1.5 trillion which we shared with you at the beginning of the year.

And also to elaborate, in order to attain KRW1.5 trillion of OP target, and we do acknowledge that currently the achievement rate is quite low compared to the previous years, so in order to attain the OP target internally we are going to strengthen a more efficient control of our cost and expense items. And by providing bundled services we will be able to acquire not only new subscribers, but we will strengthen the lock in effect of the existing subscriber base.

And also we believe that in the market, when it comes to the wireless communications or mobile communications, there is going to be an introduction of mandatory contract system. And with that introduction we believe that the market competition will be somewhat mitigated.

Of course in the second quarter and in the second half of the year, there could be some unexpected factors -- unexpected variables that arise in the market. But at this point we do not feel the need to adjust the guidance.

Regarding your request for more information on the fact sheet, we understand your situation and we will review and take under consideration and hopefully we'll let you know if anything does change.

(Interpreted) The following question will be presented by Chung Yun Bae from UBS and the next question will be provided by Jeff Kang from Credit Suisse Securities. Please go ahead Mr. Bae.

Yes, thank you. My first question is on your LM revenue. It seems to have decreased over 10% year over year. What are your thoughts on what drove this decline and what trend do you expect to see in the coming quarters?

Secondly, when do you expect the full fledged IPTV business to be launched? And also when do you expect the VoIP number portability to be launched? I ask because I am a little concerned about the impact this would have on your plans to cut costs in the coming quarters.

(Interpreted) First on the reason why LM revenue is declining, the reason is because number one, first of all, the subscribers for fixed line telephony are declining. Second reason is the on-net discount that mobile service providers are providing to the market. The third reason is people's habit of using mobile phones even when they are at home. So due to these FTSs the traffic is declining.

But these trends were already captured in our business plan. It's just that the extent of decline seems to be a little higher than what we had expected. Because we had expected around 5% or 5.7% and we believe that other than VoIP and SMS there is the impact of on-net discount. The on-net discount provided by mobile service providers had a bigger impact than we had originally expected.

Therefore, because of these factors, we think that the decline in downward trend for LM revenue is going to continue into the future. However, we will respond to this by developing various pricing plans and promoting the advantage of the fixed line telephony and also very tightly managing our corporate cost image. We will do our best to defend the subscribers as far as traffic volume.

The second question with respect to IPTV, currently DCC has set -- laid down a target to commercialize IPTV by September of 2008. And in the first half of the year they want to announce the enforcement ordinance and from June to August they have a schedule to select the providers to grant licenses. And currently the enforcement decree and the ordinance is being devised.

So at DCC they are making -- they are going through due processes for reporting with respect to IPTV legislation. And they are going through administrative and legislative process for the commercialization of IPTV. And they are going through the licensing processes and the various different permits etc. So in the fourth quarter -- so KT is preparing for full fledged IPTV forthcoming in the fourth quarter.

And we expect number portability for VoIP to be adopted at the end of June. But KT had already factored in IPTV commercialization and number portability of VoIP into its business plan. So we do not expect any significant -- any impact on the cost control measures.

(Interpreted) The following question will be presented by Jeff Kang from Credit Suisse Securities and the next question will be provided by Kim Hongseek, NH Investments Securities. Please go ahead, Mr. Kang.

Thanks for the opportunity. My first question is related with your Mobile resale business. I want to get a sense of what you want to achieve with Mobile resale businesses. Just looking at 1Q numbers, it seems that a lot of the part of rise in marketing costs was driven by resale. If that is the case, and you are at the same time trying to merge with KTF, hopefully in the future rather in the longer term, then I wanted to get a sense why you seem to be focusing on maintaining market share and in particular client expansion. Even looking at your numbers, it seems that you're even looking at increasing your market share. I just want to get a sense of what direction -- strategic direction that you are thinking in terms of the PCS resale, particularly given your plans to merge KTF.

My second question is related with your effort to generate synergies with KTF. You mentioned earlier in the year that you want to integrate distribution channels with KTF. I just want to get an update on your efforts and how potentially that's going to help save cost in the second half? Thank you.

(Interpreted) On PCS resale in the first quarter, despite the fact that new subscribers increased on a year on year basis, because of the anticipated lift of subsidy regulation there was mandatory contract arrangement that was adopted. And there was very fierce competition among service providers. So net add only recorded 11,000.

KT regardless of potential mergers and change in the corporate structure, we will continue on with the resale business and we will do our best to attain the annual targets.

With respect to potential synergies with KTF's distribution network currently what is under progress is integration of the sales side as well as the CS side.

And when I say integration of sales, what that means is laying the foundation so that at KTF stores fixed line products and bundled products could be sold even through KTF stores. So from the second quarter we would see an increased sales performance through this channel.

When I say CS integration what that means is that at KTF stores we could provide CS customer service and customer sales related activities for KT's fixed line products. And currently at KTF stores pilot projects are being undertaken.

And in order to maximize Group synergy we will make use of KTF M&S which is a company that manages KTF stores. And we are even thinking of equity investment.

(Interpreted) The following question will be presented by Kim Hongseek from NH Investment Securities and the next question will be provided by Sam Min from BNP Paribas. Please go ahead, Mr. Kim.

(Interpreted) I have two questions regarding IPTV. The first is if you look at cable TV operators and the commercial advertisement income, it is divided up between content providers and MS ET20. That's how the income or the profit is allocated between the two parties. As time goes by advertisement revenues and income from IPTV is going to continue to increase. What do you think is the allocation or the ratio with which the content provider nemesis will enjoy those income? What will be the percentage?

And also when it comes to terrestrial broadcast services COD it seems like it is going to be made a paid service. If that is the case and the consumers will probably turn their interest away from these terrestrial broadcast content. If that is the case, what would be some other tele-contents that we may expect in -- under this?

(Interpreted) On your first question about how the advertisement revenue is going to be divided up between the IPTV operator and the content provider, at this point if you look at the IPTV legislation, they say that they will adopt -- that they will apply mutatis mutandis to the Broadcasting Act when it comes to advertising and commercials. But we do expect that there will be stream of commercial and advertising income from IPTV services. But at this point it is not determined and not finalized as to what that percent -- what the allocation is going to be between the two parties namely the IPTV operators and the content providers.

On your second question about the terrestrial broadcast and the fact that it will be provided at a fee, we understand that terrestrial broadcast content is a very important and crucial part of IPTV as the viewership is about 60%. And, according to the IPTV legislation, for TVS1 and EBS, these are categorized as mandatory retransmission stations.

If you look at provision, Article 20 of IPTV legislation, they do state the equal access requirement when it comes to content, but, for instance, if you look at SkyLife and other parties, we believe that there will need to be renegotiations before they come to a certain conclusion.

And compared to other SOs, KT currently has a massive amount of VOD content and we will further strengthen our educational and children's contents. And we will develop them into killer content.

And at this point, despite the fact that we are not providing real time broadcast content, as I've mentioned previously, 60% to 70% of our trial customers are becoming real subscribers and converting to paid platform. So we believe that with more, stronger contents -- we believe that making our contents more stronger is very important.

(Interpreted) The following question will be presented by Sam Min from BNP Paribas. And the next question will be provided by Mitchell Kim from Morgan Stanley. Please go ahead Mr. Sam Min.

Sorry about that. Hi. Thank you. Basically I was hoping if you can provide guidance on your annual depreciation for this year. Setting aside your CapEx guidance of KRW2.6 trillion this year, it appears that you are going to cut back on CapEx. Perhaps you can share us a little bit on how we should look at depreciation this year.

Second question is sort of a big picture question. In 2007 you guys went on -- embarked on a growth strategy which lowered your OP to KRW1.4 trillion from a sustainable level of perhaps KRW1.7 trillion, KRW1.8 trillion. Thomas, maybe you can jump in here and comment what do you think it will take for KT and how long will it take KT to realize the fruits of your strategy? And when should we expect that OP ramp up to occur, or should we look at 2009 or perhaps 2010? Thank you.

(Interpreted) On CapEx and depreciation, in order to effectively spend on the budget that we have earmarked, what we do for CapEx is that we make revisions and we manage CapEx on a monthly basis. And going forward, we believe that due to the reduction in the actual unit cost of equipment and also the difference in the bidding price and the actual price that are realized, we believe that the CapEx is going to be lower than our annual guidance.

When it comes to depreciation, no, we're not changing our guidance.

Thanks. Since requested, I will try to address that issue. Yes, we embarked on our plan two years ago stating that in 2007 we'll take a little step back. And our profits did fall to the level that we expected. And this year we are planning to increase that from KRW1.4 trillion to KRW1.5 trillion.

And in the first quarter I can see some frustration. And we -- there was a lot of things that we considered in the last year for this plan. And some of the things -- we didn't anticipate things like what our CFO had mentioned regarding Internet discounts that have brought down some of the MOUs of our fixed line.

But again we're going to continue to try to achieve top line growth in the years to come as we build some subscriber growth, lay out our FTTH and also go into some IPTV. And we hope to see some good take up in IPTV. And we have seen it in the last couple of months.

I think with all this kind of base as well as the technology that we foresee coming for the IPTV, we hope to increase the revenue in the years to come as well as, our CFO mentioned, that we are going to focus a lot on the cost side. So it's a fine balance for us. It's not an easy task but we are well on our way. And hopefully we can show some of the savings.

I hope that answers your question? As our CFO mentioned, we are trying -- we are going to look at the cost issue a lot. And hopefully next year we will have a better business plan. Of course I can't, and we always never give long guidances, but we hope to give what the market expects of the stock as well as some of the other issues that we've all been looking at. And we will continue to tap into our real estate revenues as well. So hopefully we can meet some of those numbers that people are expecting.

Thank you.

(Interpreted) The next question will be provided by Mr. Mitchell Kim from Morgan Stanley. Please go ahead sir.

Yes, hi. I have two questions. CFO, Maeng, Tom I appreciate your sticking to your annual target, but I just want to try to get a little better understanding of how you're going to be able to achieve that now. If I hear you correctly you are going to try to focus on cost control. But with your operating profit in first quarter this year already KRW200b less than first quarter of last year, that means you probably have to achieve KRW300b in cost savings in remaining three quarter relative to three quarters last year, final three quarters last year. So I'm just wondering where do you think you could find such cost savings. Is it more in marketing or is it in other G&A costs? If you could be as specific as possible, I think that would help us to understand your plans better.

Second question is I also want to try to understand your marketing costs better. If I look at your marketing costs, especially on just sales commission, and even if we assume for your cost of acquisition for PCS, it looks like your costs of acquisition, implied costs of acquisition for your broadband subscribers seems very high. The number I'm getting at is a KRW242,000 one per subscriber. Is this an approximately right number or am I really off the wall? So if you could just help me gain a better understanding of what your cost of acquisition per subscriber is for broadband versus PCS resale, it will be very helpful.

(Interpreted) Yes, we have set for ourselves savings target for various different resources from an enterprise-wide perspective. In terms of resource allocation, we will continue on with rationalization and improvement of the processes for resource usages and allocation with a view to improve the cost, the fundamental cost structure.

And also we will very tightly control cost with respect to business areas that is not directly generating or contributing -- generating revenue. And also, going forward, we will focus on subscriber retention and also improving efficiency of the Group's distribution network. So through such efforts we will be able to save costs and expenses. And also we will tightly control cost that's involved with call centers and other outsourcing related -- for the outsourced businesses which are not directly linked to our revenue.

From this year the incentive paid out to manufacturers were grossed up and added up as marketing expense. That's why the marketing spend looks much bigger compared to the previous and other years. In the first quarter that incentive amount was KRW50b for your reference.

I'm sorry, is that from vendors or is that paid to vendors?

That's -- it's basically a wash. It makes it look much bigger because we actually receive it from manufacturers and then we pay it to the dealers. So it comes in and out. But on the outside, as you see on the cost line, it shows up. So overall yes, our marketing did go up, but there are figures of KRW50b that does not really reflect any of our marketing cost.

(Interpreted) Because of competitive reasons, we will not be able to disclose the exact acquisition cost. But compared to the same period of last year the acquisition cost did go up.

(Interpreted) Currently there are no participants with questions. (OPERATOR INSTRUCTIONS). The next question will be provided by Mitchell Kim from Morgan Stanley. Please go ahead sir.

Yes thank you. Since no one else has a question, I have one additional question. One the non-operating lines, I was just wondering why interest income fell more significantly in first quarter?

And secondly why you're incurring pretty significant translation loss? And then when I look at other companies, I'm seeing actually gains from foreign currency translation. So I was just wondering why you're incurring such large loss. Thank you.

Okay, first the fall in the interest income is attributable to the decline in the cash assets. Cash and cash equivalent related interest income fell.

And on the translation loss, we hold about KRW1.7 trillion of foreign exchange. And due to the increase in the FX rate by KRW53 compared to the previous year, this brought about the increase in the translation, ForEx translation loss.

The total amount of translation loss actually is KRW98b. However we have hedged. And through the translation of the gains that we gained from the derivatives, through the hedging mechanism, the net translation loss stands at KRW46.8b. Just for your reference, on our foreign currency denominated debt, about 65% of that is hedged.

(Interpreted) The following question will be presented by Chung Yun Bae from UBS. And the next question will be provided by John Kim from Merrill Lynch. Please go ahead Mr. Bae.

Yes, thank you. Since you mentioned the real estate revenues, could you please share with us what you expect for real estate revenue this year and also potentially in the coming years?

Secondly, could you please share with us your thoughts about a potential merger with KTF which has been widely reported by the press?

Regarding your question on real estate, just to give some background, we had a real estate revenue of about KRW150b in 2006, about KRW200b in 2007. And this year we have communicated to the level of about KRW240b to KRW250b this year. And I think we are on track.

There's a lot more real estate that people expect, but I just want to clarify to the market that we will continue to capitalize on our real estate value. However the market also has to understand that these are all the telecommunications zoning and it does take time to change things. So we don't have a guidance for next year, but we will give some thing of a figure towards the end of this year. But one thing for sure, we'll do about KRW250b this year.

(Interpreted) On your second question about potential merger with KTF, at KT and the management team at KT, we really feel that in order to enhance customer value, reorganization or the change of the management structure to rightly deal with the conversions of communications of broadcasting and to deal with the trend of mobile and fixed services is one of the must. It's a very -- it's a necessary factor that we must think about.

We are open to mergers, or we are even open to holding company structure. So we are open to various options. But there are many stakeholders that are involved, so we need to undertake more discussions. So it's a bit too early for us to reveal any details.

(Interpreted) The next question will be presented by Mr. John Kim from Merrill Lynch. Please go ahead sir.

I just have a follow up question with respect to your plans to make your marketing distribution more efficient. Is this primarily referring to KT's -- if you have any plans to also invest into KTF M&S? If so, what kind of equity stake are you planning to make? And are there any other plans that you have in working with KTF to make your marketing more effective?

(Interpreted) Yes, we are working to share the distribution network together with KTF and one of that is to utilize KTF's M&S. However there are many factors to consider before we could finalize these plans. And we believe that it will be finally determined by -- in the second half of 2008.

And with respect to the size of the investment, it is, at this point, not determined.

With respect to what we can do together with KTF, as I mentioned before, we will integrate the sales and CS side with KTF. And also we will move fast for timely launch of bundled products and also improve efficiency of the network.

(Interpreted) Currently there are no participants with questions. (OPERATOR INSTRUCTIONS).

(Interpreted) I would like to thank our dear investors for the questions. Once again I would like to emphasize that we will do our utmost to maintain and retain our customer base and also to enhance the customer value. We will be very active in improving our cost structures and do our best to attain the annual targets that we have set for ourselves.

I would like to once again thank you for participating despite your busy schedule. This will mark the end of the earnings conference call for the first quarter of 2008. Thank you very much.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.