KT Corp (KT) 2009 Q1 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 2009 First Quarter Preliminary Earnings Results by KT and KTF. 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 on the 2009 first-quarter preliminary earnings release by KT's CFO, Mr. Yeon-Hak Kim, and KTF's CFO, Ms. Wha-Joon Cho.

(Interpreted) Good afternoon. I am Kim Yeon-Hak, CFO of KT. In the previous quarter things went about quite swiftly as we had declared all new KT with a new CEO taking office; merger was resolved at the BoD meeting bringing about a wave of change to the management structure of the Company.

As you know, we have tallied put back option exercise on the 16th and as a result we are able to complete the merger deal at a cost significantly lower than was first expected. And now the consolidation process has begun and is under full swing. So we will be presenting KTF's first quarter results here today as well.

With that let me move on to the first quarter performance results for KT and KTF. You can listen in on the call also through the webcasting at our website.

Let me first start by presenting actual performance against the '09 guidance on a consolidated entity basis. The results as against the annual guidance is not a simple sum of the two companies' results, but is a number that excludes inter-company transactions and is based on the two companies' estimated pro forma consolidated statement.

Revenue is 23.7% against the annual target of KRW19 trillion at KRW4.5 trillion. Operating profit is 33.1% against KRW1.8 trillion at KRW600 billion. EBITDA is 27.5% against KRW5 trillion annual target at KRW1.370 trillion. And finally for CapEx it is 8.4% of KRW3.2 trillion, which is KRW270 billion was expended.

Next is KT's first-quarter business performance highlights. In terms of revenue due to declines in telephony, LM and wireless revenue there was a decline of 3.6% quarter-on-quarter and 6.5% year-on-year so the revenue record is KRW2,773.1 billion.

Operating profit increased 361.6% quarter-over-quarter due to reductions in labor and depreciation cost, and it also increased 15.4% year-over-year due to labor and sales commission reductions. As a result operating profit is KRW384.5 billion.

EBITDA is KRW869.4 billion, which is 15.9% increase quarter-over-quarter and 6.6% increase year-over-year. Our net income is KRW139.6 billion, KRW14.5 billion decrease on a year-over-year basis. For CapEx we revisited each project and adjusted investment schedules to maximize investment synergies from the merger, so KRW120.8 billion was expended which is a 69.5% and 80.8% fall on a year-over-year and quarter-over-quarter basis, respectively. For more details please refer to the earnings document.

Next is on each business line. For QOOK internet revenue we saw increases in bundled subscribers and long term discount subscribers which drove down the ARPU, and so the internet revenue is at KRW485 billion, which is 3.1% decrease quarter-over-quarter. Total number of subscribers increased 2,867 as against the end of last year to 6,714,000.

Mobile on net discounts and VOIP number portability brought declines in telephony subscribers as well as traffic bringing down fixed line revenues 1.6% quarter-over-quarter.

Of the telephony revenue VOIP revenue increased 74.7% quarter-over-quarter to KRW41.5 billion due to the new rise in new subscribers and handset revenue, and also increases in service usage rates from subscriber retention.

Thanks to the second phone strategy with PSTN as the basis, diversified handset product line up and subscriber number increased 54% quarter-over-quarter to more like 505,000. Through full fledged marketing activities we will strategically secure VOIP subscribers in order to focus on retaining our fixed line subscribers.

On QOOK TV after launching real time broadcasting in mid November of last year, real time IPTV subscriber increased to 153,000. However, total number of subscribers fell 10.2% quarter-over-quarter to 694,000 including the VOD services. This is attributable to shorter free trial period and delays in sourcing core channels like the sports channel. Once we complete the major channel line up within the first quarter we expect subscriber acquisition will follow through.

QOOK TV revenue increased to 12.7% quarter-over-quarter to KRW19.9 billion due to higher portion of paying subscribers and increases in ARPU.

For WiBro, subscribers increased 14.71% quarter-over-quarter to 184,000 based on the integration of distribution channels and increases in net book sales. Revenue increased 34.3% quarter-over-quarter to KRW27.5 billion.

Going forward we will continue to launch a variety of devices, expand and maximize the use of KTF distribution in order to continually increase subscriber number.

Lastly on bundling - bundling subscribers continued to increase mostly around variety of DPS products that include fixed line or mobile services. As of end of first quarter total number of bundled subscribers is 2,187,000 which is 18.1% increase against the previous quarter.

Most recently we started providing on net discounts to internet phones bundled with QOOK PSTN. As such we are continuously launching competitive bundled packages. Through expanding product subscriptions we seek to reduce marketing cost and lock in our customer base.

This marks the end of KT's first-quarter earnings highlights. I will now hand over to KTF's CFO, Ms. Cho Wha-Joon to explain KTF's earnings performance.

(Interpreted) Good afternoon. I am Cho Wha-Joon. Let me walk you through KTF's first-quarter results.

In the first quarter KTF recorded KRW2,019.9 billion as revenue. Operating profit KRW243.4 billion. Net income KRW127.5 billion.

Considering difficult external environments, i.e., the economic depression, and higher discounts on the voice tariffs with mandatory contract plans and bundled packages, operating profit of KRW243.4 billion is all the more significant as we are reaping the benefits from WCDMA subscriber expansion which entailed robust growth in data revenue. And our cost cutting efforts on all fronts, including marketing, are being paid off.

If you break down the revenue, service revenue rose 2.7% year-over-year to KRW1,471 billion whereas handset revenue fell 15.7% year-over-year to KRW548.9 billion.

Under the service revenue, voice revenue increased 5.0% year-over-year to KRW826.3 billion. Data revenue showed strong growth of 12.6% year-on-year to KRW240.4 billion. However, with the new interconnect rate being applied from this year interconnection revenue only grew 0.5% year-over-year and the resale revenue fell 14.5% year-on-year due to declines in KT's resale subscribers.

In terms of the expenses with our emergency management, which we undertook together with KT, in most of the cost items we were able to achieve cost reduction compared to the previous year. In particular, despite aggressive marketing by the competitors to acquire subscribers by focusing on (inaudible) program, which is the mandatory contract plan, we were able to conduct effective marketing enabling us to control marketing costs at KRW374.7 billion, which is 5.1% and 18.6% lower quarter-over-quarter and year-over-year basis, respectively.

As a result marketing expense accounted for 25.5% of the service revenues which is significantly lower than last year's average of 31.5%. And, moreover, it is 0.3 percentage points lower than 4Q '08 and even 6.7 percentage points lower on a year-on-year basis.

On non-operating expenses in the first quarter of the 12 subsidiaries subject to equity method treatment, including KTFM&S, KTFT and Malaysia's 3G operator, U Mobile, a total KRW30.4 billion of equity method loss was recorded. Also due to the removal of 2G networks exchange and base station equipment approximately KRW12.5 billion of this position loss on tangible assets was booked.

On CapEx KTF expended KRW152.4 billion of CapEx in the first quarter. 92% or KRW139.6 billion was invested on WCDMA network including the network's capacity expansion. For your information, as of March 2009 KTF's WCDMA network capacity is at 12 million people and we plan to expand the capacity to support 15 million by the year's end.

For more details please refer to the earnings document and this marks the end of KTF's highlights and first-quarter results.

(Interpreted) This has been earnings results presentation for the first quarter '09 for KT and KTF. We will now begin the Q&A session. We have the staff from both of the companies so please feel free to ask any questions you may have.

(Interpreted) Now Q&A session will begin. (Operator instructions) The first question will be provided by Mr. Josh Bae from UBS, followed by Mr. John Kim from Merrill Lynch. Mr. Bae, please go ahead, sir.

Yes, hi. Thank you for the call. I have two questions. First is on the profit trends. One of the difficulties in forecasting KT's earnings has been the seasonality. Q1 usually being the strongest, Q4 being the weakest. Should we expect these trends to continue going forward? If not, could you please share with us what efforts are being made to change this trend?

Second question is on market shares. I would say KT and KTF's first quarter operating profits were ahead of expectations, but that came at the expense of market share losses. Could you please share with us if there is a market share or absolute subscriber number target or a threshold you do not want to go below for broadband, wireless and for fixed line telephony please? Thank you.

(Interpreted)

(Interpreted) Yes, with respect to your first question, you are correct in saying that for the past years the trend had been that we had a quite strong seasonality where at the end of the year the cost was mostly concentrated. So the earnings performance for the fourth quarter was not very good. So I take your point.

But the new management, including the CEO and myself, we are determined to exert our utmost efforts to generate even profit every quarter over a period of one year. And so we are at this point trying to identify any certain problems or issues that may exist in our accounting treatment approaches and try to find out and identify what those issues may be with respect to seasonality. So when we -- we are in the process of developing the business plan. We will make sure that we can generate even profits over the first and up to the fourth quarter.

Of course this year we will try to minimize the seasonality factor as much as possible, but one cannot do away with such issues overnight. But by next year we will do our best to make sure that our profit level is normalized just like other companies. So we will try to put in a lot of efforts to reflect that in our business plan and also on our annual budget setting process.

The merged KT entity we will not focus on growing the outer size but we will focus on the fundamentals namely the profitability. And according to such new guidelines with respect to our subscriber target, we will not engage in reckless expansion of the new subscriber acquisition. We are much more focused on retaining the current subscriber base by providing bundled products.

And if we look at each of the services for very highly competitive market areas such as the mobile and broadband market, our target is to maintain the market share at a level that was at the end of year 2008. Meaning as much as the market grows the net addition in the market -- as much as the net addition in the market we will try to enhance our market share.

For QOOK TV we are putting in efforts to retain a mid to long term profit base, and to do that we are increasing the portion of the real time channel subscribers. And by the end of the year our target and goal is to expand the real time subscriber portion to about 70% of the total subscribers.

With respect to WiBro we will focus on the net book users, which we are seeing very good results, and we will try to focus on the target that we set for ourselves, so by the end of the year our subscriber target is around 210,000. But we will not set reckless targets -- we will not set reckless targets but we will try to maintain the current level as much as possible.

With respect to the fixed line telephony we will defend the PSTN subscriber base but also strategically make use of the service over IP services, the VOIP services, so that by combining those two we will try to maintain the subscriber level at an adequate level.

(Interpreted) The next question will be presented by Mr. John Kim from Merrill Lynch followed by (inaudible) from NH Investment Securities. Mr. Kim please go ahead Sir.

Yes thank you for the opportunity. I have two questions plus one request to KT's management. First question relates to your FX. If the Korean won were to strengthen to the year end 2008 level by the end of second quarter, and if the interest rate environment stays -- remains the same, can the management discuss your outlook on by year end FX-related translation net loss? And can you also comment on will the FX net loss or gain affect KT's dividend policy this year?

Second question is on your wireless side. Can you comment on your WCDMA migration target for this year, given that 63% of your total subscriber base is already on HSDPA? And along with that I'd appreciate it if you could comment on why KT resale service revenues have fallen so much more than your total subscriber decrease?

And following on, my request to KT's management is, is the management planning to maintain the level of data granularity that KTF currently provides on its earnings release and monthly fact sheet post the merger? And can you make any consideration to provide similar kinds of churn rates or gross ad in the type of data for your voice and broadband subscriber information, given that market share and marketing costs are major focus areas for investors. Thank you.

(Interpreted)

(Interpreted) Well, unfortunately, in the first quarter compared to our operating profit, yes, our net income was quite low and one of the reason is because of the FX rate and as well as the interest rate. There was a loss of about KRW174.3 billion loss was incurred because of those two factors.

With respect to the FX rate, there were additional loss of about KRW64.9 billion because at the end of last year the exchange rate was KRW12.57 against the dollar, whereas the exchange rate of the won against dollar at the end of March was KRW1,377 so there was a KRW120 increase. So there was that additional loss of KRW64.9 billion.

But will this interest rate -- excuse me, will this FX rate at KRW1,377 continue until the year end? We do not think so. We think that this is the worst level of Korean won against the dollar and we, therefore, believe that there will be an FX net gain going forward.

And also with respect to the Korean won interest rate and dollar interest rate, there was the additional loss of about KRW109.4 billion and that's because the Korean won swap rate was significantly low, whereas the dollar swap rate was significantly high. So if you look at the Korean Won swap rate it was minus 0.2% whereas dollar swap interest rate was about 1.5%.

This is quite abnormal. So we believe that this trend will reverse in the near future. And once again the figures at the end of the first quarter we believe was the worst figure and this figure will normalize going forward. So there will not be this addition of KRW109.4 billion loss going forward.

And also, in the second half of the year we believe that the financial crisis will somewhat stabilize. Therefore, by the end of the year the consensus in the market is that the FX rate and interest rate will come into -- come within the normal range. So the figures at the end of the first quarter was definitely the worst figure and a lot of economists are saying that we will see rebounds or recovery going forward.

So with respect to the foreign currency-denominated bonds and the loss that incurred from such bonds, we believe that the loss amount is going to decrease going forward and this will not have a significant impact on the dividend aspect of the Company.

The management at KT, we understand that people have concerns about the aggravating net income level, which might have an impact on the dividend policy. However, we can say with certainty that we will do our best to meet our guidance and also to satisfy the expectations of the shareholders.

(Interpreted) With respect to your second question on migration to WCDMA, unlike the beginning of the WCDMA market, the currently market is quite well stabilized based on the WCDMA platform. So we will not put in any artificial efforts to readjust the market or to make the market migrate to WCDMA. But we will go forward with natural migrations, looking at the natural expansion of the network capacity and also looking at the frequency allocations that will come going forward.

So at this point, we believe that about 100% migration will probably take place around 2011 or 2012. By the year's end, we expect that WCDMA migration would have been complete up to about 80%.

With respect to your question on the reduction of the resale revenue of KTF, the average number of subscribers fell slightly and also that brought about the reduction in the revenue as well. 3G subscribers, however, continued to increase and, with the increase of the 3G subscribers, the network usage rate inevitably has to get adjusted as well.

In the resale rate, such network usage rate is also included, and it is a tiered system where there is a threshold of about 50 million minutes, 100 million minutes and 200 million minutes. If the usage is over 200 million minutes, then a much lower rate system gets applied.

With respect to your question on more disclosure, always we understand your question. We try to provide more as we go. We started providing negative information when the numbers became quite significant. We'll also probably in the near future provide more information on VOIP as well.

There's lot of things going on at the Company. We are reshuffling the Company around to home business unit -- Home unit, Business unit and Personal unit. So with all that in mind, the management and myself, will review what we can disclose and what we cannot due to some of the environmental issues with the competitors. So hopefully we can disclose more, but there's nothing I can commit to at this time, but hopefully we can review it and give you something more in the future.

(Interpreted) The next question will be presented by Mr. Hongseek Kim from NH Investment Securities, followed by Mr. Mitchell Kim from Morgan Stanley. Mr. Kim, please go ahead, sir.

(Interpreted) Yes, I have two questions. After merger, even post-merged entity, you will still own certain treasury shares. So what is your plan of making use of those treasury shares, because one of the weaknesses that was pointed out about KT was its growth potential going forward? So would you be then using such shares to acquire certain equity holdings on other types of subsidiaries or do you have any plans to allocate those shares to other related entities?

Second question is that price competitiveness is strengthening and with KT's introduction and growth of the bundled services and as VOIP takes root this will have a negative impact on the ARPU level of broadband and local telephony. Do you think -- and we originally, the analysts, have thought that the -- this could be compensated through IPTV and also other wireless Internet products. Would that happen?

(Interpreted) First, with respect to how we're going to -- how we plan to use our treasury shares, but -- after this merger is complete, the level -- the amount of treasury shares will drop quite significantly. But as you say, we can make use of the treasury shares to maximize synergies by entering into certain strategic alliances. That is one option.

So currently, it is under review and we are looking at various different options. And so -- however, there will not be a case where we will dump our treasury shares into the market, just as we've done in the past. We -- so we will stick to our past policy on that as well. So once we have more detailed plans on how to use our treasury shares we will communicate that to you.

With regards to your second question, as you have correctly pointed out, yes, we are seeing more heightened competition on a product by product basis. So for each of the single products, the ARPU level is decreasing. However, we are also at the same time increasing our bundled subscribers. Of course, when you introduce and launch a bundled product, you give a discount, so there is an initial impact on the revenue decline.

However, as you retain more of a bundled service subscriber, this has a significant impact on customer retention, as well as lock-in of the customers. So it can more than compensate by significantly reducing the cost -- it can more than compensate that fall in the revenue by significantly reducing the cost. So -- and this is one of the very reasons why KTF -- KT and KTF have decided to merge the two entities.

And also, our strategy going forward is to expand our bundled product line up so that at the end of the day we can enhance the so-called ARPC, which is ARPU per customer. And also, we will include new services, like IPTV, into the newly introduced bundled products so that, once again, we can attain that strategy of increasing ARPC.

(Interpreted) The next question will be presented by Mr. Mitchell Kim from Morgan Stanley, followed by Mr. (inaudible) from Nomura Securities. Mr. Kim, please go ahead, sir.

Yes, thank you for this opportunity. First of all, I'd like to acknowledge that this effort on reducing cost and (technical difficulty). But related to that, I was just wondering how much of this cost saving is temporary versus more a sustainable ongoing cost reduction?

The reason why I ask that is, if you look at your net cost savings for this first quarter, you saw the operating costs (technical difficulty) 51% -- that is like KRW51 billion. And if you extrapolate that for four quarters, we're looking at around KRW200 billion for the whole year. Is that the right way of -- to look at this?

If it is, (technical difficulty) in cost savings, and given that last year's operating profit was KRW1.1 trillion, should we be looking at operating profit improvement, or (technical difficulty) more deterioration of your cost base in subsequent quarters? So if you could add some color on the sustainability of this cost saving, the net cost savings that you were able to achieve in first quarter for 2009, that would be very much appreciated.

My second question is on your marketing spending and is going to require some input from CFO Cho as well. You just said that you want to maintain wireless market share at December 2008 level. Currently, at March end, you're about 31.46%, which is about 4 bps lower than your December level.

What are you going to do to maintain your level or bring your market share back up to year end '08 level? And does that mean we should expect marketing costs to increase in subsequent quarters for wireless portion? I would appreciate it if you could give us some color on that. Thank you.

Mitchell, I hope you can hear me, because we could not hear your question due to some serious static. If you could call back and ask that same question, we would be glad to attend to it. But for now I think we have to take the next caller unless Mitchell can get back on the phone and call us again. So, operator?

Yes, this is operator. We will move on to the next question then.

Okay. Please have somebody call Mitchell back and tell him to call back.

Yes, we will make sure.

Thank you.

Thank you.

(Interpreted) The next question will be presented by Mr. [Yeong] from Nomura Securities, followed by Mr. Sean Lee from Citigroup. Mr. Yeong, please go ahead, sir.

(Interpreted) Yes, I have two questions. My question relates to your brand strategy on QOOK and on SHOW. I understand that QOOK brand is focusing on TPS, whereas SHOW is for wireless. So as you launch the QOOK brand, is your intention -- is it your intention to focus on TPS or are you also, going forward, trying to bring the QOOK brand and SHOW brand together and come up with a fixed and wireless bundled product? So what is your evolution path for such brand?

And in the first quarter, I understand that your bundled subscriber number was slightly higher than 2 million. So what is your number of bundled subscribers for the people who take out both the wireless and fixed line products, bundled packages that have both the wireless and the fixed line products? And what is your forecast for such subscribers going forward?

Second question is, with regards to your labor cost, on a year-over-year basis, you were able to reduce it by 12.5%, and that was a quite large sum compared to our expectation. So on a year '09 basis, as a full year basis, is that about the level of labor cost reduction that we can see as compared to year 2008?

(Interpreted). On that question with regards to QOOK and SHOW, I hope that you don't put too much of a weight on QOOK as a means to strengthen TPS. I hope you don't think too -- interpret it too deeply or too seriously. I'm not a brand expert. However, one would naturally think that one brand would be better over a multiple number of brands. But when it comes to SHOW, it was a big hit in the market, and people know it as a mobile brand, wireless brand.

So it would have been nice if we had one single brand that could encompass both of the aspects. So we really haggled over it and, because SHOW had a very strong wireless image, we decided to introduce a fixed line or wire-line brand of QOOK. But QOOK and SHOW, it's all one-syllable word, it's very simple to call and it's quite impactful, so I guess one could combine it and call it a QOOK and SHOW to communicate fixed and wireless brand. So I hope you don't interpret it or -- too seriously.

In terms of your question on the number of subscribers for bundled products, both for SHOW and broadband, for SHOW we have about 1.33m. And for broadband, we have 910,000. So respectively, once again, it's 910,000 and 1.33m. Regarding the bundled subscriber target, because of the competitive landscape, I hope you understand that I won't be able to disclose a definitive number. But what I can say for certain is that our churn rate has significantly declined.

The third question, on labor cost reduction, yes, compared to year 2008, the first quarter number shows a significant fall. In 2008, of course, we had some early retirees and also we had cut certain labor in order to make our business more efficient. As our CEO mentioned during the shareholder value enhancement presentation, over the period of five years, we are seeking to reduce labor cost at about KRW100b -- in the amount of about KRW100b. That includes both the direct cost as well as the outsourcing labor and the commission. On a per-year basis, that is, for a period of five years. So we will keep to that promise, so in year -- so compared to year 2008, the '09 labor numbers will be about KRW100b less compared to '08.

Let me clarify one word. It's not just labor costs. It's labor and labor-related costs.

(Interpreted). The next question will be presented by Mr. Mitchell Kim from Morgan Stanley, followed by Mr. Sean Lee from Citigroup. Please go ahead, sir.

-- before. First question is on your cost savings. I think you did a good job of realizing cost savings in first quarter, but I was just wondering if you could add -- give us some color as to how sustainable this is. This is the type of ongoing program you have or just that this is something that we may only see in first quarter and remaining quarters we should expect to go back to lower cost saving quarters?

And if we do see more sustainable cost savings, like about KRW50b that -- what we did see on a net basis in first quarter, does that mean you expect to improve your operating profit from last year's level? So that would be my first question.

My second question is on your comment about maintaining your wireless market share at the December 2008 level. As of March, your wireless market share level has declined by about 4 bps and I was just wondering what you're going to do to increase that market share back to December level. And if that's the case, should we be expecting marketing expenses to rise in subsequent quarters? Those are the two questions. Thank you.

(Interpreted). Yes, that was a very important question. Thank you for that. With respect to cost reduction, if a cost reduction takes place without any sustainability, then I believe that that is meaningless, so we are putting in efforts to sustain that level of cost reduction going forward. Once again, as I said previously, for -- over a period of five years, we will be saving labor and labor-related costs in the amount of about KRW100b on an annual basis and we will deliver on this goal.

And you also asked whether then we will have plan to increase our OP guidance. We will, for the time being, stick to the initial guidance that we have communicated. Later on, if the timing is right and if certain factors are right, we may revise it. However, at this point, because there are so many variables out there in the market, we think that it will best to just stick to our original guidance.

On your second question, if you look at the KT Group as a whole, yes, it is true that a couple of basis points of market share have been falling, a few basis points. That is true. However, if you look at it in a high-level basis, we are maintaining our market share at the level of 31.5%, which was the figure at the end of last year, and we will continue to do so.

And also -- so -- and if you look at the number itself, it is not all that significantly different. The current level is not all that significantly different from the figure at the end of last year. And so, yes, although there was a slight difference, what we will focus on is focus on retaining the customer, enhancing the value that we provide to our subscribers, thereby increasing ARPU per customer.

Can I just ask a follow-up question on the first question? And that is, if you're saying -- if you don't see operating profit improvement, then -- from last year, basically what you're saying is that we're going to see -- we should expect to see operating profit much lower than last year's level for subsequent quarters. Is that the message that you want to share with us today?

(Interpreted). Well, if you look at our current environment, our PSTN revenue has fallen and also there are signs of overheating competition in the broadband market as well. So we would have to defend our market share. That's quite important. We will not initiate attritious competition. However, if the late entrants do start competition, there could be certain costs that we would need to incur in order to defend the market share that we already have.

So what we're saying is that we're not yet ready to revise our guidance at this very point. However, in the second half of the year, once we become more confident, then we will be -- we might be able to revise the guidance targets. And so, revising the operating profit target upwards just based on one or two signals, I believe, is just too premature.

(Interpreted). The next question will be presented by Mr. Sean Lee from Citigroup, followed by Mr. Sam Min from BNP Paribas. Mr. Lee, please go ahead, sir.

(Interpreted). I have two questions. With respect to the wireless market, in the month of February, competition has strengthened and it's got more fierce. What do you think is the reason behind that? And I would like to hear your views on the second quarter development that will take place this year compared to the '08 third and fourth quarter with respect to competition.

And you mentioned that you will maintain the market share level. SK Telecom has set for itself 50.5% as its internal discipline in terms of market share and they control their market share around that level. So when you say you will maintain your market share at 31.5%, does that mean that you will not go over that threshold? That's the first question.

Second is with respect to the M&A progress. We hear a lot about the positive merger related synergies, but what are some of the difficulties that you would experience during this process? What does the management identify as certain issues and difficulties in the integration process and what may be some negative news flows that we at the market may see going forward?

(Interpreted). If you look at the data as of end of March, the new MMP cases have increased and this may be attributable in part because of the new school year has started. And if you look at the MMP number of April, it is slightly higher than that of March. However, the overheating of competition in the market is not as high as what we had experienced in the past and this can be evidenced by our acquisition cost per subscriber, which is not significantly different from that of the previous month. And compared to the fourth quarter of 2008, the acquisition cost for the subscriber is quite low.

And I believe that there has been some aggressive movement by the competitors, before the M&A process is complete between KT and KTF, for them to acquire more aggressively subscribers. So we had to, to some extent, respond to that. A minimal response was implemented for that. So I think that, after the merger, we will see a much more stabilized market condition in the wireless market in terms of competition.

With regard to your question on market share strategies on our wireless business, as CFO Kim has mentioned, our core strategy is to enhance our customer value based on our current subscriber base. And that is one of the purposes on why we are conducting the M&A between the two entities.

And in order to live up to the spirit of the merger we are going to focus on enhancing profitability rather than on growth. And we will try our best to lay the foundation and environment where there is less of a competition based on cost platform with cost without any generation of productivity.

But we would focus more on enhancing the fundamental and core competitiveness of the services that we provide and also all of our efforts would be geared towards enhancing revenue per subscriber. And I think that all of these efforts are well evidenced by our first quarter results. So we welcome increases in market share that arise from enhancement of the customer value. We will not engage in subsidy based competition and launch and initiate a competition merely based on the subsidy platform.

With regard to M&A related negative, potentially negative, aspects, so far M&A process, it's so far so good. Many related costs, we were able to minimize them as much as possible. And we have been actually preparing for the M&A between the two entities for many years and we have a very stringent plan in place, which we are following at this point.

And regarding the synergies that will be generated from this M&A we have from very early on prepared for IT systems, the billing system and also the procurement aspect was also integrated. So through such preparedness and we will continue to enhance and set our operation direction. And all of these preparations will be complete within the month -- before the month of May.

However there could be some organizational differences in terms of organizational culture between the two Groups, of two Companies. If you look at KTF they're relatively smaller in terms of the organization's size and also the relative wage and welfare benefits that they receive is relatively higher. So the employees at KTF may feel a little anxious about post merger that they may be disadvantaged to some extent.

But management at KT and KTF, we are doing all we can to alleviate those types of anxieties by providing certain cultural programs to the employees and we guarantee the level of wages that KTF employees were receiving. And as KTF becomes part of the personnel business unit it is more of a horizontal movement of the organization or the employees.

For example each business unit under KTF is going to be absorbed into the personnel units under the merger entity and other support or staff functions, which overlap between KT and KTF, the overlapping staff will still be absorbed within KT. For instance the IR team members that are participating today from KTF. They will become members of the IR team under KT.

So we are doing our best to alleviate even the smallest anxiety the employees may feel and also to maximize synergy we are putting all our efforts. And good example that CEO Lee Suk Chae of KT, he actually goes to KYF twice every week and he actually meets with the KTF employees and the management. So we do not foresee any significant problem or issue going forward.

(Interpreted) The next question will be presented by Mr. Sam Min from BNP Paribas, followed by Mr. [Jae Jong Song] from KTB Asset Management. Mr. Min, please go ahead sir.

Yes, hi. Thank you for this opportunity. My first question of voice erosion. It appears in the first quarter KTs are roughly 400,000 households, KTN users leave. And can we expect that kind of number to be sustainable going forward or do you think that number will be lower or accelerate? Can you give us some comment to that?

My second question is this big competition picture. There's a lot of -- the market is concerned that, maybe not this year but perhaps next year, the combined KT and KTF could fuel more -- heavier competitions in the overall telecom market. And aside from what you said in regard to this year in terms of focusing on profitability what is your take on the following years and is KT and KTF will continue to focus on profitability and cost cutting even beyond this year. Thank you.

(Interpreted) As you have pointed out into mobile telephony and with Internet phones becoming more prevalent we are seeing reduction in PST and subscribers and revenue number as well. However, the figures that we see for the first quarter is within the expected range.

And that's why at the beginning of the year when we communicated the guidance we came up with a conservative number because we were projecting and expecting certain situation in PST and reduction in PST.

So PST and subscriber number is declining, and yes, it is quite painful for us, but it is a trend that we cannot revert. We will try to defend our PST and subscriber base but make full use of our service over IP so that on a total, in the total aggregate basis we can retain and maintain the subscriber number.

With regard to your question on competitive environment after next year, our strategic direction will not change. Our strategic direction is sustainable profitability. And we will not engage in increases in handset subsidies by giving out free phones in the market just to increase our mobile market share. We will not engage in these types of competition.

Even after next year KT will continue to focus on its bundled strategies and FMT strategies. And by providing bundled products and packages our key aim is to reduce costs and ensure profitability.

And as I've mentioned at the very beginning even after next year we will continue. We will, even after next year, we will continue to put in efforts so that we can even out our profit over different quarters. We will do our best to minimize the seasonality and to provide a condition where we can predict the performances going forward much easier. So it will not be a roller coaster performance results number quarter over quarter. And we will not engage in excessive spending of marketing budget. Our competition will be based on quality platform.

(Interpreted) The next question will be presented by Mr. [Jae Jong Song] from KTB Asset Management, followed by Mr. [Jay Park] from Samsung Securities. Mr. Song, please go ahead sir.

(Interpreted) (technical difficulty) type of scheme to others existing Internet phone users.

Second question has to do with the annual labor cost. Now the labor cost has declined and can you break that down between the natural reduction from retirement, meaning the reduction in headcount, and with your cost reduction efforts. So what would be the breakdown between the two types of factors that impacted the reduction in labor cost?

And I understand that labor cost related expenses also include some maintenance, repair cost as well. And I understand from year 2008 the '09 number is about KRW100b less. So when I interpret that number do I also consider that repair cost as part of the labor cost related items?

And with regards to CapEx post merger are you planning to maintain the CapEx level at around KRW3.2 trillion?

(Interpreted) In KTs Internet subscriber target by the end of the year is about 2m subscribers. But we will not fix this target at this level, we will respond flexibly depending on how the market moves.

With regard to the on net discounts, or on net discounts that we provide on Internet phones. It is to respond to the developments of our competitors and also to enable soft landing from PSTN to Internet phone migration.

And this is a very -- one of the very important factors that customers consider when they select an operator is this very factor. And the fact that we provide on net discounts to 070 Internet phone users who also use PSTN is a very positive aspect. Meaning only on the second phone on we are providing this benefit and only -- this benefit is only provided for voice communication or voice traffic between KT numbers. And we do not have any additional plan to expand such on net discounts.

And on the second question the labor and related expense, this is an important term to note, it's a related expense. It includes the commissions as well as installation related expenses but it does not include repairs cost.

And with regards to the breakdown between cost saving from natural retirement and reduction in head cost and our cost saving efforts, at this point it's very difficult to provide you with the specifics. What I can say is that we seek to save about KRW100b on an annual basis at overall level with respect to labor and labor related cost items. At this point many plans are being devised, and as you understand this is a quite sensitive and difficult area to tackle. So I hope you understand that we will not be able to disclose any specifics.

And as we have communicated at the beginning of the year, our CapEx guidance is KRW3.2 trillion on a combined entity basis. And this figure will not increase.

(Interpreted) The next question will be presented by Mr. Jay Park from Samsung Securities, followed by Mr. Yang Chong Il from Han Kook Investment Securities. Mr. Park, please go ahead sir.

(Interpreted) Yes, the first question is on in the first quarter you've expended very small amount of CapEx budget, it's only about 50% of that of last year. And KCC has made know that it will conduct monthly monitoring of the level by different operators. KTF has expended a little more than KT but still the small portion. So based on your explanation about the annual guidance of KRW3.2 trillion you have only spend about 7% to 8%. Is it because of the delays in certain projects or are you going to concentrate on spending most of the CapEx in the second half of the year?

And if you consider the seasonality related aspect which you've explained previously it seems to be in conflict with our efforts to try to even out the seasonality factor. So can you give some more color to that?

(Interpreted) Yes, the CapEx expenditure for the first quarter, yes it's quite low, and there is a reason behind that. At the end of last year there was a vacuum in the top management for a certain period. Usually what happens is that our business plan gets finalized at the end of the year and the plan gets executed from the beginning of the year. But there has been about two months delay whereas the business plan was finalized at the end of February and execution on that business plan started thereafter.

And the second reason is because, even if the investment budget was previously set, we actually initiated a process whereby we revisited those investment related items and we review that in spirit of cost reduction. So we eliminated any unnecessary investment items and that was also one of the reasons why the CapEx expenditure was decelerated.

However, from the second quarter, all the investment budgets that we have finalized and set. We will, based on those budgets, evenly expend the budget over the period of the year in order to try to minimize the seasonality as much as possible. But as I said at the very beginning, fully eliminating seasonality factor for this year would be difficult because of the past practices that does ensue, that does follow. However, starting next year we can be certain that we will minimize seasonality.

(Interpreted) The next question will be presented by Mr. Yang Chong Il from Han Kook Investment Securities. Please go ahead sir.

(Interpreted) I have three questions to KTF and one question to KT.

You mentioned that your acquisition costs per subscriber has declined but also your retention cost has declined as well. Can you provide us with a subscriber trend for the handset replacement subscribers for the first and the second quarter?

And also with regard to subsidiary in Malaysia, we heard that you recently sold the equity stake that you have. What is the reason behind that and what is that impact on your profit or on your profit and loss?

And with respect to mandatory subscriptions and with regards to Smart Phone, what are some of the Smart Phone related changes that we may see going forward?

And on IPTV, regarding content sourcing with respect to sports and news channels, can you provide us with some explanation on how this is going?

The third question for KTF was with respect to whippy. What are some of the plans regarding providing Smart Phones going forward with respect to whippy?

(Interpreted) The retention cost did decline and that's because certain fees and commissions had declined. And with regards to trend for replacement subscribers, the trend is on an upward trend. When we first launched 3G services the initial handsets that were launched have now elapsed and now we are seeing increases in replacement demand and need. So at this point we are focusing on acquiring and retaining those types of replacement subscribers.

Your second question on new mobile, because we are bound by investor contract we cannot disclose any additional information other than what was disclosed. I hope you could understand that. But to clarify one point, it's not that we sold our equity stakes, it's just for risk management purposes we have exercised our put option right. So there are still aspects of negotiation that need to take place so more details cannot be divulged, so I ask for your understanding.

But one think I would like to note is that this does not mean that we are giving up our global business.

With regards to the whippy question that you -- or the abolishment of the whippy requirement on the general handset the removal -- on general handset there is a general handset that is non whippy phone and Smart Phone. And Smart Phones would open OS and various types of applications will be provided based on that open OS.

In terms of the service for non-whippy handsets, yes, there will be certain constraints when it comes to providing whippy content use. However when it comes to very popular contents like decorating one's cell phones and will respect to major service areas as have fully prepared to provide the services without any inconveniences created to the customers.

And when it comes to certain handsets, including Nokia and certain handsets that KTF are planning to adopt, it will have the browser on top of the handset that will enable the browsing of the fixed line sites. So compared to the previous whippy environment more contents and services can be enjoyed and therefore we expect much higher level of use.

So when it comes to the general handset based on whippy we will try to provide -- we will provide whippy based services and for those non whippy handsets, where whippy is impossible, where whippy cannot be provided we are in the process of developing the service plan for that.

And also in the Smart Phones for the Smart Phones we are planning to provide various different types of content and also by entering into strategic alliances with other portal providers we will be able to provide more diverse and higher quality content.

Regarding IPTV, currently we are transmitting 53 channels. On VoD we have clear competitive edge however when it comes to content, because we do not have at this point sport and news channels, we are quite weak in terms of competitiveness in that front. That is why we decided we need the sports and news channel and that we are undertaking negotiations at this point.

We believe that negotiation will come to an end by the first half of this year and so by the first half we will be able to secure sports and news channel and will be able to provide about 60 channels. And after the second half of the year we will be equipped with competitive content and I think that we can at that point safely complete with other cable TV operators.

Come September we will probably be able to provide 70 different channels and by the end of the year our competitiveness will be at a level where we can clearly compete with other cable TV operators. And afterwards we belive that subscriber growth rate will also become more significant.

Hello operator.

Yes, this is operator.

How many people are waiting.

Sir, we have no participants questions.

It's been about two hours so we'll conclude with final comments.

Okay sure.

(Interpreted) I'm the KTF CFO, Cho Wha-Joon. Today was actually the last earning conference call under KTF's name. I would therefore like to take this opportunity to thank the investors and analysts for your interest and affection that you've shown to KTF. We will strive towards better results under the new and combined KT.

For the previous quarter KT and KTF have exerted Company- wide efforts in the merger deal. Both the management and employees have endeavored day and night under one goal. And thanks to your encouragement and support the deal process went along smoothly. Now KTF together with KT will remake itself into all new KT and we will strive to satisfy the initial guidance that we've communicated to you at the beginning of the year.

There was a point made by an analyst saying that should we not adjust our OP guidance. For the time being we will maintain the OP guidance as was communicated previously. And from next quarter on we will meet you with one performance result of combined KT.

Lastly, I would like to thank all of you for joining us and this marks the end of 2009 first quarter earnings conference for KT and KTF. 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.