KT Corp (KT) 2008 Q4 法說會逐字稿

(Interpreted). Good morning and good evening. First of all thank you all for joining this conference call. And now we will begin the conference of the 2008 fourth quarter preliminary earnings results by KT. This conference will start with a presentation followed by a Q&A session. Consecutive interpretation will be provided for your convenience. (Operator Instructions). Now we shall commence the presentation for 2008 fourth quarter preliminary earnings results by KT.

Quickly, a quick correction. The current CFO has now been changed to Mr. Kim Yeon-Hak. Mr. Maeng Soo-Ho was our previous CFO. So this presentation will begin with Mr. Kim Yeon-Hak. Thank you.

(Interpreted). Good afternoon. I am Kim Yeon-Hak, the newly appointed CFO of KT. A tough year of 2008, with global financial crisis, volatile FX rates and oil prices, is now behind us and a new year of 2009 has dawned upon us.

As you know, with the inauguration of the new CEO, Suk-chae Lee, last week, the entire management declared 'all-new KT' in order to remake itself, and three days ago made an announcement on merger which will bring about an important change in the business regime.

I can understand that you would have many questions on guidance of KT post-merger, but today we will only focus on the performances of the fourth quarter. And as the detailed guidances of the merged entity is confirmed, we will come back to you. So I ask for your understanding.

With that, let us now begin the fourth quarter 2008 earnings conference call. At our website you can access the webcasting where you will be able to follow the presentation materials as you listen in on the call.

First is the business performance highlights of the fourth quarter. Due to the fall in the Internet applications and wireless revenue, total revenue fell 1.3% compared to the previous quarter. And with declines in telephony and LM revenue, revenue fell 4% year over year to mark KRW2,875.3b. Cumulative revenue is KRW11,784.9b, which is 1.3% less than the previous year.

Operating income fell 74.6% compared to the previous quarter due to the rise in labor and depreciation cost. And with stagnant sales on a year-on-year basis it fell 54.5% to record KRW83.6b. On a cumulative basis over a year it is KRW1,113.7b, a 22.3% fall year over year.

With the fall in the operating income, EBITDA fell 15.7% QoQ and 7% year on year to KRW750.4b. Annual EBITDA on a cumulative basis is KRW3,316.9b, which is 7% less year over year.

Net income due to FX translation loss fell KRW188b quarter over quarter and KRW134.2b year on year, to mark a negative KRW26.6b. Net income for the whole year on a [cume] basis is KRW449.4b, which is 53% lower year on year.

CapEx spend is KRW627.8b a fall of 27.8% year on year and 22.9% (sic - see presentation) quarter on quarter. Cumulative CapEx spend for the year is KRW2,187.2b, 1.6% fall year on year. For more information please refer to the earnings conference materials.

Next is business highlights. First, Internet access revenue fell quarter on quarter and year on year due to discounts on long-term usage, bundling and decreases in ARPU. In December the Company terminated the contract of delinquent Megapass subscribers. And as a result there was a net reduction of 42,000 subscribers over the previous quarter.

The sales decline from IDC and Bizmeka, which are one-off revenue sources, which includes branded server and video security solutions, brought down Internet application revenue from the previous quarter.

On mobile resale business, with decreases in new subscribers and subscriber retention, revenue fell KRW10.8b compared to the third quarter. As end of April, market share of 3G subscribers for both KT and KTF put together stands at 50.1%.

Once the merger with KTF is complete, we believe we can reduce redundant losses coming from mobile businesses and also provide better value to the customers through service integration.

For telephony business, the impact from on-net discount and VoIP number portability drove down traffic and the subscriber number, resulting in 8.4% fall in the revenue year on year. In December, just like Megapass, Company terminated contracts on delinquent subscribers. So subscriber number decreased 760,000 from the previous quarter.

Next is on MegaTV. With the launch of real-time broadcast services, free trial period was cut to one month. And as customers with no use records over a long period of time was terminated, although there was a net reduction of 35,000 subscribers quarter on quarter, increases in customers converting to paid service platform brought along increases in ARPU, resulting in a 23.4% increase in revenue against the preceding quarter.

Next is on WiBro. After the adoption of locked-in contract plan to acquire prime customers, subscriber net reduction continued on to the third quarter. But in the fourth quarter, with the increase in the prime customer, subscriber net reduction slowed. ARPU and Netbook sales increase brought the revenue higher by KRW4.7b over the previous quarter.

We will continue to introduce Netbook bundled products and efficiently expand WiBro coverage, provide WiBro voice services and further utilize KTF distribution network which will all make up part of our active marketing.

Next is Internet phone. By providing video-based SoIP services, which clearly stand out from other's low-cost VoIPs, both the subscriber and revenue continued to increase in the fourth quarter. In 2009, in order to ensure leadership in the Internet telephony market, we will fully focus our marketing capabilities.

Next is on bundled products. There was a continuous increase of subscribers for bundled products, particularly around various DPS products. So as of the fourth quarter there are 1.852m bundling subscribers.

In particular Megapass plus Phone product, which was launched in July, saw a steep increase of subscribers to 557,000. As of fourth quarter 61% of the total bundled subscribers have taken out Megapass plus Mobile and Megapass plus Phone products.

Increase in bundled subscribers can bring drop in revenue due to declines in ARPU over the short run. But in the long haul we expect it to have significant impact on improvement of churn rates and incentives for new subscribers.

This has been the fourth quarter performance highlights of year 2008.

And now let me briefly touch upon 2009 guidances. 2009 will be a year for us to prepare for a leap forward as a global leader in the age of convergence through cost saving, business innovation and merger with KTF.

We are planning to attain revenue of above KRW19 trillion, operating profit of KRW1.8 trillion and EBITDA of KRW5 trillion and are planning KRW3.2 trillion for CapEx spending.

As I mentioned at the very beginning, as soon as the detailed guidance is set and confirmed, we will come back to you.

This marks the end of the earnings presentation for fourth quarter of 2008. Fourth quarter has been quite troubling and difficult, both inside and out. KT will do its utmost to successfully close the merger, achieve the guidance and meet market expectations and efficiently use internal business resources and improve business process to remake its fundamentals.

With that, we will now take questions.

(Interpreted). (Operator Instructions). The first question will be provided by Mr. Chung-Ang Yang from Han Kook Investment Securities followed by Mr. Sang Hyun Park from SK Securities. Mr. Yang, please go ahead.

(Interpreted). Thank you for the opportunity. I have two questions. The first is with respect to the increase in labor cost. If you look at your presentation materials, it says that the number of early retirees have increased. I would like to ask how many people have taken that early retirement. And, as a result, how many of the total employees exist at KT at this point?

The second question is with respect to your international telephony services on page five. It seems like in terms of the revenue there seems to be a big difference compared to the previous quarter. And if you look at other companies' data, they also show a certain increase in revenue due to the impact from the FX rate.

And especially for other company it seems like the international call termination, or inbound portion, had increased. And it seems that KT's line item for that number stays the same. So could you explain what the difference is or how the accounting treatment is?

(Interpreted). With respect to your first question, there has been an increase in the labor costs because of the increases in retirement benefit, as well as other types of benefits given to the employees. Compared to the last quarter, there has not been an increase in the wage itself. It's for the overtime allowance and the various different vacation allowances and holiday allowances.

With respect to the number of early retirees, with downsizing of the Plaza, the number of early retirees in the fourth quarter increased. And as a result the retirement -- early retirement allowance also increased.

From the Plaza we have -- there has been 507 early retirees. And the total of early retirees add up to 650.

As of end of last year the total number of employees stand at 35,423. In previous years the number was 37,250. So in the year of -- in last year there has been a reduction of 2,000 employees.

Second question, the reason why the international telephony revenue fell compared to the previous quarter or the previous year, of course is due to the decline of the traffic.

(Interpreted). The next question will be presented by Mr. Sang Hyun Park from SK Securities followed by Mr. John Kim from Merrill Lynch. Mr. Park, please go ahead sir.

(Interpreted). Yes, I will ask two short questions. The first is if you look at your IDC revenue for the fourth quarter compared to the third quarter, it fell. But in the case of your competitors, they have recorded an increase in IDC revenue. So could you elaborate on the reason behind this trend at KT?

And the second question is, during the CEO day two days ago, the new CEO has mentioned the 3G plus WiBro as the next growth engine for KT. So when will be able to expect this type of service out in the market?

(Interpreted). Last quarter compared to the previous quarter, the reason why the IDC revenue fell is because number of certain projects had been completed, for instance the on-demand project that had been undertaken had been complete. And also branded server, there has been less of a sales on branded server.

On your second question, WiBro service has been provided by KT, whereas 3G service was provided by KTF. So there was a certain lack of alignment between these two. However once we are merged, meaning post-merger, we are currently preparing to realign those 3G and WiBro services and maximize the synergy that may arise from providing the two types of services. 3G will be voice-focused, whereas WiBro will be data-centric. And by employing these two services we will try to complement and supplement any lacking areas.

And also with WiBro, with Internet focus and voice based on the HSDPA, we will be able to expand on the current limited WiBro coverage. And also we will expand the portable devices which could help in creating new market and the new demand.

(Interpreted). The next question will be presented by Mr. John Kim from Merrill Lynch followed by Mr. Jae Kyoung Song from Eugene Investment & Securities. Mr. Kim, please go ahead, sir.

Yes. Thank you for the opportunity. I have three questions. First I understand that KT went through a lot of tumultuous times in its management situation second half of last year. Having said that, the old management placed a lot of emphasis on cost control but the results came up short. Can the management -- can you provide some more color in terms of the efforts you made and what went against your expectations as far as cost control efforts are concerned?

Second, if the new management has had some time to think about what KT's shareholders and the market wants to see from the Company, could you share what you think they are? I'm not talking about the events like merger that you announced. But what quality change are you trying to change and what kind of timeline do you expect for the market to feel these changes?

And third and lastly, I'm sorry if you discussed this at the beginning, but I would like to understand how the macro conditions are affecting your real estate business. Thanks a lot.

(Interpreted). In the fourth quarter of last year there has been certain increases in the cost with respect to the -- after the labor negotiations there was a one-time spending of KRW35b of labor cost. And with additional people applying for early retirement at KT Plaza there was an additional labor cost of KRW20b.

And also there has been certain increases of acquisition of certain network lines and machines with lower -- with shorter useful life where early depreciation is needed. So there has been an increase of KRW70b in terms of depreciation. So despite the controlled efforts at KT there has been certain increases in the cost.

Of course the former KT management have put in a lot of efforts to control the cost. However, with the newly appointed CEO Suk-chae Lee and under his helm we will put in more heightened efforts towards cost innovation. KT will not be bogged down by revenue focus. We will place more focus and concentration on cost reduction and enhancing the profit rate -- operating profit rate. We will have done away -- we will do away with the KPIs which focus on revenue and introduce KPIs based on profit. And we will put in our utmost effort.

The second point I would like to make is that we will make our head office more slim. And we will also strengthen the field offices. It was also featured in the press that if you look at our business units at head office, it used to be 45 members of the management, where that number had decreased to 31. And out in the field office the number of management directors have increased from 11 to 22. But still the total number of management and directors have fallen.

The adjustment of the number of the management means the adjustment of the organization itself. At the head office, the staff divisions, you will see that the number of personnel would go down by 30% and those very personnel will be located at the front line. And after the merger with KTF, you will still see the number of managers and -- management, as in directors at KT head office, decline.

Turning to KT head office, we have established a task force team for business innovation or business improvement. And they are currently in the process of defining projects and tasks that will contribute to cost reduction.

And once we draw up this plan it will be reflected to our business plan. And once that takes place we will be able to confirm the guidances for the coming year. And we will communicate this to the market once they are ready. Once again I would like to emphasize that there will be heightened efforts on making our organization more slim and enhancing the operational profit rate.

At this point in time it will be difficult for me to share with you the details because it is too early with respect to what this plan is going to embody with regards to cost reduction. But we are really going at it with full determination.

At KT we believe that the ultimate expectation and hope of the investor is that they want the fundamentals to improve and for KT to have a very competitive platform and also for structural improvement if needed.

The new CEO and the top management will exert its utmost effort to maximize corporate value as well as shareholder value through such cost cutting and cost saving efforts that we are at this point envisioning.

To answer your question regarding the real estate, the actual for this year came out to roughly KRW245b, right on track with what we expected at the end of the year. We will continue to roll out our FTTH and unlock some of this real estate for this year as well. We don't have the exact guidance but I believe it will be a little bit higher than last year's performance.

Again, ultimately we're going to use our real estate value and try to make some synergies with our existing IT business. So I think we'll continue to move ahead with our real estate unlocking.

Thank you.

(Interpreted). The next question will be presented by Mr. Jae Kyoung Song from Eugene Investment and Securities, followed by Mr. Jeff Kahng from Credit Suisse Securities. Mr. Song, please go ahead sir.

(Interpreted). The first question is on your bundled subscribers. You've mentioned that it's increasing quite steeply. For Megapass subscribers I understand that the bundled subscribers account for about 28%. For next year can you tell us the percentage that you are expecting for Megapass services in terms of bundled subscribers?

And you will probably give discounts to the bundled subscribers and I'm just wondering how you treat this in your accounts. The reason is because you've mentioned that you have terminated the contract of certain subscribers. But even after that we are seeing certain -- some decreases in ARPU. So that's the reason why I ask the question.

And also you mentioned that you are at this point not able to share with us the details of the business plan for this year. However can you just give us a direction as to the PSTN subscribers, including the Internet VoIP telephony, and also the IPTV subscribers? Can you just give us a rough feeling as to how many of those such subscribers that you expect next year?

(Interpreted). Regarding your first question as to the percentage of bundled subscribers for the Megapass in the future, it's very difficult for me to specify a certain percentage or number at this point because we are in the process of devising the business plan. But it will no doubt be much higher than 2008's number.

And with regards to how we account for the discounts --- how the accounting treatment takes place, on product A and on product B, if we give 5% discounts each, the discount is treated in the accounts as per the product.

However, as we have mentioned during the CEO Day and through the IR meetings we believe that the inevitable trend is with all IP. Therefore we will be aggressive in investing and marketing and sales under this trend. What that means is that we will be more aggressive and active in VoIP sales and marketing.

However in terms of the subscriber target we will not set to stretch a target. Once again we will not be bogged down by the sales numbers or the subscriber numbers. Our plan will be based on cost reduction and enhancing the profit rate of the Company.

With the introduction of the real-time broadcasting for IPTV from the end of year 2008, we now have a competitive landscape where this service can compete on an equal footing with other paid broadcasting.

And also for this year we will be quite active in acquisition of IPTV subscribers and also put in efforts to enhance the profitability and also lay down a stable source of revenue and profit. I would once again like to ask for your understanding that we will not be able to talk about and disclose specific numbers.

But one thing I would like to say is that once again we would put in a lot of efforts to enhance the profitability of IPTV. IPTV really was not very profitable up to last year. Whether we can turn black in IPTV this year it has to be wait --- one needs to wait and see. However we will work hard at it so that we can attain that. And our mind towards IPTV is that we will be quite active in doing this business.

(Interpreted). Another follow-up question. It would be nice to know when then you will be ready to communicate those -- such detailed numbers?

(Interpreted). It's hard to say at this point but it will be as soon as possible. Once our business plan is finalized we will come back to you.

(Interpreted). The next question will be presented by Mr. Jeff Kahng from Credit Suisse Securities. Mr. Kahng, please go ahead sir.

(Interpreted). Yes, I have two questions. If you look at the year 2008 numbers it seems like there are a number of one-off expenditures, for instance your Company's termination of the delinquent subscribers. I would like to know the percentage or the -- even an absolute amount of those one-off items. The reason I ask is that I would like to understand the impact of these one-off items on the year 2008 number.

The second question I might have missed --- this might have been raised previously. But post merger, will there be any changes to your shareholder payout policy? Or is 50% payout ratio going to persist?

(Interpreted). If you look at KT's past trend, the fourth quarter always showed not good profitability and that is because of the seasonality factor.

The second question, a couple of days ago during the CEO Day we also mentioned that, at this point, the priority task at our hand is making this merger a success. So once the merger is successfully completed and once we stabilize the merged organization, we will come back to you with that information ASAP.

(Interpreted). Currently there are no participants with questions. (Operator Instructions).

(Interpreted). Thank you very much for your questions and your interest. But before I wrap up I would just like to say and emphasize one thing. Currently, as you know, KT and KTF are undergoing certain preparations to merge the two entities. And in that process certain competitors and even analysts show concern that once the two entities get merged that KT will become very aggressive in its Mobile business.

As the KT CFO, I can clearly say that we will not trigger and we will not engage in aggressive marketing or aggressive approach. Once again our focus is on cost reduction and enhancing the profit margin and really making the fundamentals of KT strong and sound. That is a firm determination of the new CEO and the top management.

So in the Wireless or Mobile area we will not in any way trigger excessive competition in order to attain larger market share. We will be focusing on increasing the ARPU and enhancing our services, thereby contributing to the overall profits.

Once again I would like to thank you for joining us at today's conference call for the fourth quarter of 2008 at KT, and taking time out of your busy schedules to be part of the conference call. Thank you.

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.