KT Corp (KT) 2009 Q3 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 third 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 of the 2009 third quarter preliminary earnings results by KT's CFO Mr. Yeon-Hak Kim.

(Interpreted) Good afternoon, this is Yeon-Hak Kim, CFO of KT. At the start of this year KT made known its commitment to create new value by taking the lead in the area of convergence made possible by the corporate merger. The first outcome of our effort is QOOK & SHOW, the FMC service launched last month. We will continue to establish new trends by thinking out of the box and render greater value to our shareholders and customers alike.

With that I'd like to now announce KT's 2009 Q3 earnings. This conference call by the way is being cast on the web so you can also listen in through our website. For the brief this quarter we've provided two sets of data, one based on accounting and the other on guidance since June 1 was the date of merger. Starting this quarter we're now able to announce our earnings in one set of figures based on KGAAP. Please note however that the earnings data of the previous quarter and previous year provided for comparative purposes are based on guidance.

Now I'd like to give you our Q3 financial highlights. Our revenues inched downward by 1.1% from the previous quarter to record KRW4.8212 trillion due to increases in sales discounts for customers purchasing bundled products and contracts. This figure is 3.9% higher than the revenue of the same period last year thanks to growth in wireless revenues coming from increases in both the number of subscribers and wireless data revenue. The cumulative revenue for Q3 is KRW14.2082 trillion or 75% of this year's guidance, which is KRW19 trillion.

Operating income is KRW413.1 billion dropping by 14.5% Q-o-Q due to the decline in revenue and increase in expenses such as cost of goods sold arising from the growth in wireless subscribers. It fell by 11.7% Y-o-Y due to increase in marketing expense. The cumulative operating income for the third quarter is KRW1.4947 trillion, or 83% of the KRW1.8 trillion guidance set forth early this year.

Net income standing at KRW351.4 billion decreased by 30.3% quarter on quarter attributable to the decline in operating income but increased in Y-o-Y terms by 79.9% thanks to the reduction in foreign currency translation loss. The Q3 cumulative net income is KRW1.0533 trillion. And as long as the foreign exchange rate stabilizes at its current level until the year end we believe that we will have no difficulty in paying out KRW2,000 per share as cash dividend.

Meanwhile CapEx is KRW865.2 billion and the cumulative CapEx for Q3 is KRW1.4871 trillion.

Next we'll move on to individual business areas. First is the wireless business. Voice revenue increased 1.2% from the previous quarter owing to increases in the number of subscribers and roaming service revenue. Despite sales discounts on bundling and mandatory long term contract plans it increased by 1.8% in Y-o-Y terms to reach KRW1.505 trillion, (sic - see Presentation) thanks to the increase in subscribers.

Data revenue increased to KRW302.9 billion, up 5.2% Q-o-Q and up 11.3% Y-o-Y due to growth in subscribers to the monthly flat price plan and increase in data usage.

Believing that wireless data is an area with potential for continuous growth KT is gearing up in many ways to assume leadership in this market. The first step of such efforts is the FMC service launched last month. This is a customer oriented service that takes advantage of KT's wired wireless network, as such, to allow our customer to use voice and data services according to their needs and convenience. By launching such new services KT will persistently endeavor to do its share in promoting wired wireless service integration as well as the wireless data market in Korea.

Next I'd like to move on to the telephony business. Telephony revenue decreased by 4.4% Y-o-Y because of the drop in TSTN subscribers and call traffic. In Q-o-Q terms, however, it fell by a mere 0.5% to record KRW1.2279 trillion thanks to the increase in VoIP subscribers. The VoIP revenue jumped to KRW87.3 billion increasing 71.6% Q-o-Q and 344.6% Y-o-Y due to the growth in service and device revenues generated by the increase in new subscribers.

KT plans to uphold its fixed line subscriber base by strengthening price competitiveness in this area and making strategic use of VoIP. As part of this initiative KT has recently launched new pricing plans such as the nationwide single rate calling plan for home telephone, which is expected to be highly effective in improving the churn rate and maintaining our customer base.

Next is the Internet business. Internet access revenue amounted to KRW513.0 billion falling by 2.1% Q-o-Q and 3.8% Y-o-Y due to a diminished broadband revenue brought on by the increase in discounts offered for bundled service -- bundled products and long term subscribers. Internet application revenue dropped by 19.3% Y-o-Y due to the decrease in one-time sales of bizmeka products such as control and video security solutions. In Q-o-Q terms however it increased by 3%, thanks to growth in IDC and IPTV revenues, to record KRW125.8 billion.

Now we'll take a look at each of the major services. The number of QOOK Internet subscribers continued to show an increase as in the previous quarter. It grew by 80,000 Q-o-Q to reach 6.818 million. However the increase in discounts for bundled products and long-term subscription drove down revenue by 0.7%. Since the Internet is the centerpiece of household-based IT products we will continue to work on lowering churn rates and consolidating the subscriber base by means of bundled products and contract discounts.

As for QOOK TV there was a net addition of subscribers by 183,000 persons or 25.2% to reach a total of 907,000 subscribers. Owing to this increase in subscribers and growth in ARPU, QOOK TV revenue grew by 18.9% Q-o-Q and 75.6% Y-o-Y to amount to KRW25.1 billion.

We are ceaselessly working to differentiate QOOK TV in the pay broadcasting market by securing greater content including channels and VOD, improving user interface, providing hybrid services, incorporating satellite channels and launching diverse pricing plans. We anticipate continued growth in the future benefiting from growth in the number of subscribers and expansion of various additional revenue sources based on a two-way platform.

Due to the reduction in labor related expense, operating expense increased by only 0.4% Q-o-Q despite the fact that cost of goods sold shot up significantly with the growth in new subscribers to wireless and Internet telephone services. KT will continue to make enterprise wide effort to cut costs to improve operating income.

Lastly I'd like to talk about non-operating items. Non-operating income increased by 101.2% quarter on quarter to reach KRW302.1 billion which includes translation gain on foreign currency denominated bonds amounting to KRW154.5 billion (sic - see Presentation) made possible as the foreign exchange rate stabilized.

Non-operating expense increased to KRW259.7 billion due to the increase in valuation loss of derivative products related to foreign currency denominated debt accrued due to the drop in exchange rates. With this the loss and gain figure for non-operating items is KRW42.4 billion.

For further earnings details please refer to the preliminary earnings commentary that we have circulated. This concludes the Q3 earnings announcement. Now we will have a Q&A session to address any questions that you may have.

(Interpreted) Now Q&A session will begin. (Operator Instructions). The first question will be provided by [Chong Ing Yang] from [Han Kook Securities]. Mr. Chong Ing Yang, please go ahead with your question.

(Interpreted) Yes, I have two questions. One pertains to the wireless data segment. We see that you've made a great improvement in the wireless data business. It's probably due to many factors including the increase in the number of subscribers to the flat pricing plan. What are some of the other reasons that you could cite and what are your projections going forward?

And my second question pertains to the income made from sales of handsets. It hasn't been performing all that well in the first half of this year so what are your prospects for the future? Could you give us a little explanation on that?

(Interpreted) Yes, as you've noted our business in the wireless data segment is growing very fast. It owes to many reasons including the flat pricing plan at KRW10,000 and there are many subscribers to this service, about 700,000 subscribers. And there are also additional content for VOD. The sports content for VOD is increasingly popular in usage in this area, so it's also growing. And another contributing factor may be the advent of premium phones not accessible to our customers.

Yes, you also asked about future prospects. We believe that our prospect for the voice services is rather dim comparatively so we have high anticipation for great growth in the wireless data segment with advances in IP phones, the 3W phones, smartphones. And there are lots of additional smartphone models expected to be released this year and next year as well, about 10 are in the product lineup. Combined with this there are lots of high performance, high specification phones that are likely to further expand our prospects for the wireless data sales and revenue figures.

Yes, the second question pertained to the decline in profits coming from handset sales. Well, this is mainly due to the fact that the market overall has cooled down and there has been a reduction in the sales of the number of units of such handsets. And another reason is the sales promotion funds that are given to the manufacturers and we have applied different accounting rules to this. So all in all we share rather dim prospect for increase in handset sales profits in the future too.

(Interpreted) The next question will be presented by Stanley Yang from Nomura Securities. And the following question will be presented [Sean Han Lee] from Citigroup. Mr. Stanley Yang, please go ahead with your question.

(Interpreted) Yes, thank you for this opportunity to ask questions. I have two questions. The first pertains to CapEx. Your Q3 figure for CapEx is KRW1.830 trillion, which is a 35% decline in Y-o-Y terms. For the 2009 CapEx what is your realistic expectations until the year-end? Even if you use the remaining CapEx throughout Q4 it is still smaller than originally anticipated earlier this year. So if the CapEx for 2009 is going to be smaller than original expectations what would your forecast for future trends in 2010 and 2011 be like? Could you give us a rough explanation on the future trends?

And my second question pertains to marketing expense. Could you give us a breakdown? Is this distinguishing the wireless segment and the wired segment? And for the wireless part the subsequent acquisition cost trend, could you give us the overview what the trend looks like given the performance in Q2 and Q3?

(Interpreted) Yes, your first question was about CapEx. It is true that our CapEx execution during the first half of this year was somewhat slow and delayed because of some of the reshuffling that went on earlier this year in terms of KT's management as well as the merger with KTF. But come the second half of this year we expect a CapEx execution to come back to its normal track. So it is likely to increase in the fourth quarter. But even if it does increase it'll be along the lines of the guidance that was announced earlier this year.

And your second question was about projections for the future. Well, we're in the process of forging plans for this so we're not unfortunately able to give you details regarding this. But CapEx may change if our sales or revenue increases but given past trends over the past quarters and years CapEx has remained somewhat flat. So you could predict CapEx to remain at a similar level going forward as well.

And secondly your question was on marketing expense. We asked for your kind understanding during the conference call for Q2 financial results. I have to ask for that understanding once again because we are still not able to consolidate the IT systems for the wireless services of the former KTF and the wireless resale business of KT. We are still operating separate IT systems for both of these segments. So we will work on this IT portion to come up with a more comprehensive and accurate data results for going forward in 2010. So again, apologies for not being able to give you accurate precise data regarding the wireless data business.

But just to give you a glimpse of the internal data analysis I could tell you that marketing expense was greater in the wired service vis-a-vis the wireless service for Q3. And as for the wireless business, marketing expense did edge up slightly overall; this is perhaps due to the set cost, which has hovered around a similar level as in previous periods. But the increase was noticeable in Q3 compared to Q2 because some extraneous factors such as expenditures that went for customer retention and etc. But because of the overall cooled down atmosphere in the market this expenditure increased despite net adds to the subscriber base.

Now as for the fixed line or wired services, the marketing expense shot up in Q3. This is mainly due to the fact that the competitors in the first half this year have competed very intensely with high levels of subsidies for their products and services. That is why we have to suffer in terms of the pie in the market. But going forward and the past quarter we worked as part of our marketing efforts to maintain the previous market share level, to meet the competitors' reaction. So the marketing spend for the wired business overall did increase somewhat because of the subscriber increases to various services including IPTV and VoIP.

But going forward in the fourth quarter we expect the market to cool down in terms of the level of competition for wired services and KT will also reduce the amount of subsidies rendered to the customers. So we will easily be able to meet the target and figures set forth in our initial guidance.

(Interpreted) Yes, thank you for the answer. I do have a follow up question. You mentioned that you will be able to meet your guidance. Does that refer to the operating income guidance of KRW1.8 trillion? Could you clarify that point?

And second with regard to CapEx, you said that you'll maintain it at the comparable level of '08. But I was comparing it with the combined KT/KTF CapEx level. It seems to be smaller than that, so could you please elaborate a bit further?

(Interpreted) Yes, when we say guidance, the guidance figure that we released to the market was four items - revenues, operating income, EBITDA and CapEx. So when I refer to guidance think of it as incorporating all four categories.

As for CapEx, the pro forma CapEx figure we presented for the combined KT Group was KRW3.1 trillion. So for this year it'll be a similar level at KRW3.2 trillion. So it's pretty much comparable.

(Interpreted) The next question will be presented by Sean Han Lee from Citigroup. And the following question will be presented by Jeff Kahng from Credit Suisse. Mr. Sean Han Lee, please go ahead with your question.

(Interpreted) Yes, again thank you for the opportunity to ask questions. I have two of them as a matter of fact. First pertains to dividend. If you are going to return 50% of the net income to shareholders in the form of dividends or stock buyback what would the proportions be? Say the shareholder return on that would be KRW2,500, will you be giving out KRW2,000 of that as dividend payment and the remainder as a stock buyback plan? And in the latter case if you were to buy back the stocks would it also be accompanied by retirement of such stocks as well?

And my second question pertains to new business areas that KT has shown interest in. In this quarter and the previous quarter Q3 we've seen press reports that KT is interested in businesses of BC Card and Kumho Rent-A-Car. What exactly is the mindset or the areas of interest on the part of the management of KT with regard to these new business areas? Have you given proactive review, meticulous review to this and which business areas have you contemplated in greater detail or have you chosen any? If you choose to go with the credit card business, rent a car business what does KT believe are its strengths to be able to be successful in these respective businesses?

(Interpreted) Yes, your first question pertained to dividends. We announced earlier as part of our pro forma announcement that 50% of the net income will go to the shareholders as the shareholder return portion. And given our progress in terms of net income to date we believe paying out KRW2,000 is a sure thing at the present point in time. For the amount that exceeds KRW2,000, well, we'll have to see our pro formas and how things turn out until the end of this year. And depending on the progress up to that point we will make follow communications to the market.

As for the stock buyback and retirement issue, if we believe that shareholder returns should be in the form of stock buybacks then giving all of that return to the shareholder would necessitate us to retire the stocks that have been bought back.

Your second question was about new business areas and the management's view of the potential new business areas. Well, we have seriously shown interest in the business areas that are related to the convergence, including communications and finance industry for example.

And you cited example of BC Card, well, the review for the acquisition of the credit card company BC Card is currently underway by one of our subsidiaries, KT Capital. I understand nothing definitive has come out of the review process as yet. But if we receive the results we will communicate that to the market.

And Kumho Rent-A-Car, again, likewise, that is under review by the KT Rental Car Company and they are currently evaluating it. And if the results of that review do come out we will be sure to communicate that to the market.

Let me just give you an overview of the broader KT M&A strategy, the overarching strategy regarding M&A. We hope to emerge as the convergence leader in the market and with this vision in mind we are working to look into other business areas that will help us achieve core competency with this particular strategy in mind. So the areas that are explored it'll be conducive to business expansion for the sake of convergence and those areas that are also provide growth momentum for KT as a convergence leader in the market.

So in short we will be only targeting the areas that are closely related to the core competency of KT and those that could create synergy in conjunction with KT's existing business areas and only these fields and areas we will give meticulous review to. Those unrelated to the core competencies of KT, we will not review them.

(Interpreted) The next question will be presented by Jeff Kahng from Credit Suisse. And the following question will be presented by [Sin-Jip Yan] from Daewoo Securities. Mr. Jeff Kahng, please go ahead with your question.

(Interpreted) Yes, thank you for the opportunity. I too have two questions. The first question is about the FMC service. I would expect some level of cannibalization to occur with the existing businesses at KT, so which particular business areas do you expect this to happen? Could you give us a numerical figure as far as estimations are concerned? And what are some of the alternative revenue sources that could potentially offset this cannibalizing effect, again could you give us some figures in this direction?

And second what are your prospects for depreciation and tax rates going forward?

(Interpreted) Yes, thank you for the question. Pertaining to FMC, well let me tell you in advance that KT is exploring diverse business areas for future growth potential. And some of the major leading business areas in this regard will be wireless data market, IPTV market and corporate business market.

If you look at the telecom providers' revenue structure here in Korea, wireless data accounts for only 15% to 20%, but if you look at our neighboring country Japan you may well know that wireless data accounts for 50% of total revenues. So the area for greater growth potential for the telecom sector will be in the wireless data segment.

And you have heard press reports regarding the launch of KT's FMC and the competitors' FMS services. They tend to compare the two different types of services that seem very similar but let me tell you with clarity that these two services are completely different from the very beginning.

Yes, at the very heart of our original plan to launch FMC lies our mind to further add momentum to the wireless data market. When we upgraded the 2G network to 3G networks we enhanced the data capacity with lower rates for our customers yet the data ARPU increased by threefold. Likewise for FMC services, the service will be able to be utilized for free in the designated WiFi zones.

So one may easily think wouldn't that adversely affect profitability, but the reverse is true in this case because if they were to utilize the WiBro network as well as the WiFi network in these WiFi zones that are free of charge that would only add to greater profitability and revenues to KT's book. So in other words we'll be giving our customers greater data capacity in the range of tenfold to twenty fold by increasing our profitability by 10% to 20%.

As a contrast the FMS service launched by the competitors involved the following content. In other words they provide only one, two or three base stations and the customers are required to pay additional fee of KRW2,000 to be able to utilize voice services for free. But that's nothing to do with data services, wireless data services, so FMS will make little contribution if any to promoting the wireless data market.

And secondly, if you subscribe to KT's FMC service without the basic rate for voice services all users will be able to use free VoIP services within the WiFi zone. But the FMS service provided by the competition requires an additional fee of KRW2,000 and the users would have to be using this in a specified designated cell only in which free voice services would be possible. And even with that you have to use a minimum of 15 minutes of airtime in order to qualify for this plan.

But KT's FMC services have very extensive coverage compared to FMS, within the homes with APs available or the homes with MegaPath services available as well as the public sites with over 35,000 NESPOT zones, this service will be under the service coverage area. So, in other words, as long as you're within this range the customers were able to utilize voice services at the rate of VoIP and use data services for free. And if greater momentum is added to the wireless data market and many people use greater data services in the WiFi zone, we would anticipate greater revenues in this sector.

And if FMC Services further expand we could anticipate some amount of cannibalization to occur with KT's wireless phones and the voice services across the PSTN. But, with portable data services usage fees and other benefits that this new plan can offer to the customer we believe that it will have no adverse effect at all to the revenue line. It will be very constructive to further growing our revenues in this sector.

And another point I would like to mention is the app stores with enhanced content and KT's app stores, we believe that there's a lot of value that can be created for our customers as well as some profitability on the part of the developers as well.

At the Group level, by [pouring] greater amount of volume content we could introduce some three screen or four screen models for our data models for further contribute to the top line of the sector.

So, if KT's FMC Services are to further grow and expand we will also have the added advantage of preventing churn in customers for broadband services and the fixed line PSP end customers. Another part is that we have done various simulation scenarios with regard to FMC, even before the merger, and this is actually the very rationale behind the broader master plan to go ahead with the M&A with KTF. So, we have the results of the scenario simulation, we have the numbers, and I can tell you that they are all positive. But, again, I have to apologize that we are not able to release to you the specific numbers of the simulation results at this point.

And the depreciation for this year is KRW3.2 trillion and our projections for the tax rate is 16% to 18%.

(Interpreted) The next question will be presented by Sin-Jip Yan from Daewoo Securities and the following question will be presented by Han Joon Kim from Goldman Sachs. Mr. Sin-Jip Yan, please go ahead with your question.

(Interpreted) Yes, thank you for this opportunity. It seems that you have high hopes in anticipation for your FMC business, although you are not able to release exact figures with regard to the FMC. In terms of the subscribers could you give us your estimations for net additions to the subscriber base going forward in 2010? And was this in any way likely to cause a reduction in revenue?

And I also have a question concerning the churn rate. Depending on how the churn rate looks, you would have a plus or a positive or a negative effect on your operating income and as I'm sure that you have given thought to this internally, so, could you share your insight, first of all?

And in order to expand the services I would naturally assume that this would entail much capital investment for the wireless network with the iPhones and the smartphones underway. If you were to expand the services in this area you would have to further expand the WiFi network and infrastructure. So, that is why I'm asking you this question concerning whether you feel some sort of burden going forward from 2010 for the additional needed investment for CapEx or facilities investment in the wireless sector.

And recently, the broadcasting communications committee has announced a public -- made an announcement that it would like to see further WiBro expansion and it's encouraging the industry to further promote the WiBro business in the market.

And my second question pertains to the fact that you have other types of bundling opportunities that you will have to take full advantage of, including WiBro and iPlug based on HSDPA technology. So, what are your sales plans for this particular segment and what are your targets?

And I also have a question concerning CapEx. Of the KRW800 billion, what would be the portion responsible for the depreciation of this KRW800 billion? How much would depreciation be and it wasn't very big towards third quarter? What are your extended execution levels for CapEx going forward in the fourth quarter?

(Interpreted) Yes, you initially said that you'll ask only two questions, but it turns out there are about seven or eight questions altogether. And having said that, I have to let you know that most of your inquiries and questions would have to be incorporated in our business plan for 2010. And they are still in the process of being formulated and they have to seek final approval from the Board of Directors. So, it's the corporate center and the finance management office that are currently reviewing five to six scenarios at present, that much I can tell you right now. But, I'm afraid again, I'm not able to give you precise numbers regarding this.

And as for your question concerning the targets for subscribers to the KT's FMC Service, again I'm not able to share with you details on that because that's part of next year's business plan, and it isn't adequate to compare with the ARPU of the mobile phone services. But, with added momentum to the wireless data segment we'd anticipate this to increase going forward.

Yes, you asked about the potential burden for facilities investment or CapEx with regard to the wireless network. Well, let me tell you that we already made investments in the 35,000 some WiFi zones. There are some that have already been deactivated but we will deactivate that and make additional investments in this direction. But, the WiFi network, unlike your typical telecom network, does not require very granular infrastructures so it won't be that expensive as anticipated by some of you.

And as for the AP the charge is KRW28,000 and the cost of a smartphone, for example, is nearly KRW1 million, so it's a very small fee that a customer would have to pay and as long as you have subscribed to this service you could have access to WiFi or the internet services free of charge as long as you have this installed into homes. And given the 20 million some broadcast subscribers that we have under our belt this affordable AP will further contribute to the expansion of our broadband and VoIP services and phones that are likely to gain momentum in the market. So, my concluding remark is that, no, it will not pose as a big burden for facilities investment to carry out our FMC business.

And then you also asked about the depreciation trends. I'm not able to give you the exact figures with a detailed breakdown. Please contact one of our working level staff for the exact numbers. But, I am able to tell you that it's KRW3.2 trillion for '09, which means that we are well under the CapEx guidance that was initially set forth.

And with regard to the WiBro statement coming from KCC. Yes, we have received comments for corrective action from KCC and, in accordance with their corrective action statements, we will carry out a future investment. Again, for CapEx, as mentioned earlier, that it was KRW3 trillion, so additional requirements will be easily managed with the KRW3 trillion as set forth in our earlier guidance. So, no additional burden that way.

And you also mentioned that some of our wireless data products overlap with one another. But, we are basically pursuing a 3W strategy in terms of the products. The 3W meaning WiFi, WiBro, and W-CDMA, and we'll go in that order in terms of priority access. WiFi has an advantage of high speed and low rate but, there is on the other hand, a disadvantage of coverage area. So, we'll begin with WiFi initially with the wireless frequencies and then if WiFi isn't easily available we'll then go down the priority list to WiBro and W-CDMA in that order. So, we have this mechanism system in place to separate the traffic when necessary.

(Interpreted) The next question will be presented by Han Joon Kim from Goldman Sachs and the following question will be presented by [Jesup Park] from Samsung Securities. Mr. Han Joon Kim, please go ahead with your question.

Great. Thank you very much. Two questions from my end. The first one, can you just remind us why your depreciation is so seasonal, because obviously over the past several years you've been consistently spending KRW3 trillion on a pro forma basis. So, given the longer lifespan of your equipment depreciation, which is in a straight line depreciation to my understanding, yes, I recognize you didn't spend a lot in the first three quarters. You typically don't, but just why it tends to be so backend loaded? And why it's so backend loaded in this quarter as well. And just a reminder for us on that.

Second is on SKT and they've commented that they are not inclined to merge with SK Broadband in the near term. From KT's perspective do you see that as a strategic mistake; if so, how do you plan to monopolize that over the next several months, relative to your competitor? Thank you.

The first question regarding depreciation, the two companies run on a different depreciation schedule. KTF, a straight line and KT is accelerated, so that may have something to do in the past, as for now we're still on an accelerated depreciation rate. So, assuming that we have a much backended usage then obviously we'll have some more depreciation, which our first year in accelerated is roughly 40%, the first year and thenaccelerates therefore, so, that should answer your question.

(Interpreted) Pertaining to your second question you noted that SKT will not merge with SK Broadband in the near term. But, this is actually a decision left up to the SK Group, so it is at SK's discretion. We're not in a position, as a matter of fact, to make any comments on another company's decisions.

But, I'd like to mention that the governance structure of KT is different from that of SK. So, given these differences the rationale for the M&A was a lot greater for KT.

As you well know, KT was a state owned, or state invested, company in the past. Now, it is a fully privatized institution. But, KT and KTF have had different business areas that it has engaged in to date. It has different BoDs and different shareholder structures and organizations as well. So, there were some problems in trying to coordinate and harmonize the strategies between the two companies and there was more to lose than gain from this corporate division. So, we at KT we had greater needs, or a more compelling rationale, for this merger with KTF. And again, as to the SKT issue, it is something left up to that company and we're not in a position to make any comments.

(Interpreted) The next question will be presented by Jesup Park from Samsung Securities and the following question will be presented by [Dong-Jung Kim] from [Eugene Securities]. Mr. Jesup Park, please go ahead with your question.

(Interpreted) Yes, thank you. I have two questions. The release of the iPhone in the market, there has been word that it'll be in the market in October/November timeframe. But, it seems to be delayed and there are many speculations as to the cause of this delay. But, I'm curious as to what is exactly the reason for the iPhone not appearing in the market right now as anticipated? When do you expect the iPhone to come out? And, if the iPhone is launched, what potential related business effects it will have with the FMC business of KT?

And second, the lease line income has diminished, if you look at KT's books, while the competitor's figure has increased. How would you attribute that?

(Interpreted) Yes, as for the delay in the launch of the iPhone, well, I'd like to ask you to please refer to the press reports for the number of reasons behind that. Of course, there are some mistaken reports out there but they are able to paint a broad picture as to why. But, we at KT believe that one of the reasons is the delayed processes regard to licensing for LBS which Apple has applied -- requested to KCC. KT had initially offered to do that on their behalf but Apple seems to be doing that directly with KCC and that process is rather progressing in a slow manner. But, we expect some progress to be made, and as to the timing of the launch, well, I expect that it will be out sometime soon.

Again, KT has high hopes and anticipations for greater momentum in the wireless data market and we believe that iPhone will play a significant role in this sense to spark off that momentum and, of course, we plan to apply FMC technology to the iPhone handsets as well. But, it is not iPhones alone, we will do that with the other 3Ws, in other words WiFi, WiBro, and W-CDMA. And in the pipeline at present there are one or two models that will be released by the end of this year and there are 10 additional ones that are in the product lineup for next year 2010.

And you also mentioned that there is a decrease in the revenue for the lease lines. Well, this is attributable to two main reasons. Recently, there has been a reduction in the rate offered to the government agencies and institutions, which account for 24% of our lease line business, and on top of that there are some contracts that have expired. But, we expect this business to stabilize going down the road. So, no further reductions in the lease line business revenue is expected.

(Interpreted) The next question will be presented by Dong-Jung Kim from Eugene Securities and the last question will be presented by Suran Seong from HSBC. Dong-Jung Kim, please go ahead with your question.

(Interpreted) Yes, thank you for the opportunity. There has been much talk about the wireless data market and iPhones and to secure a differentiated competitiveness there's talk about KT having -- providing WiFi access exclusively for KT customers. So, even if SK, for example, adopts the Apple iPhone there's also could be the possibility of opening the WiFi network to other customers outside of KT. So, there are customers out there that are arguing against exclusive use of the WiFi network by KT alone. So, what are your mid to long term plans as to this? Do you plan to provide it to only KT customers, or open it up to all of the other telco customers as well?

And my second question pertains to the IP strategy and there's been announcements made by the competition like SK recently saying that the market size in the next few years will be as large as KRW10 trillion and KT has also initiated some mode of action to promote this part as well. So, what's KT's internal assessment as to the potential market size and marketability of this? Can you give us some sort of broad guidance in this regard?

(Interpreted) Yes, as for iPhones, KT's customers will be able to use the iPhones in the future using the 35,000 some NESPOT zones and also this will be opened to the private networks as well. So, for the open part of the other private networks that's okay but we have no intention at present to provide the NESPOT zones to our competition.

And one important issue that is often left out in the discussion concerning WiFi is the aspect of security. If one were to access the AP without any official certification authentication procedures then the customer is likely to face the risk of information leakage, tapping, or invasion of privacy issues, not to mention the reduction in service quality.

And as for the service providers, if an external company, a third company, was able to access KT's WiFi network without any constraints that would definitely have an adverse effect on KT's wireless data revenue figures. And, on top of that, it would also cause some network problems, such as network overload. And that is why our basic position at this point is to have established an authentification or certification process for AP and only enable those certified APs to be used by the customers. If the other companies were also to utilize KT's WiFi network, well, that would happen only upon consultation among the players involved and we'd have to levy a certain usage fee for that.

Yes, you also asked a question concerning the overseas market and corporate market of the competition and what's KT's stance with regard to this. Well, KT's fundamental belief is that the overseas market is indeed a big one. But, that also entails a high level of risk. So, we do not set forth specific targets as to when and how much. We only go as far as designating these overseas markets as one of the many potential new business areas. We will try to keep that in mind with our internal hurdle rates but we don't have any detailed target established for this.

The corporate customers are also a very important business area for KT and so earlier this year when we are reshuffling or reorganizing the organization we created a CIC, a separate team, for these corporate customers and the head of the CIT is a president level head.

The corporate customer market, since their heavy focus is on cutting costs and accessing total solutions, the traditional communications needs of these corporate clients may decline, but their needs for IT outsourcing services are likely to further grow in the future.

As IKT has shown strong interest in IMO and AMO, which are infrastructure management outsourcing and application management outsourcing, that we are pioneering and working to further expand upon these business market areas, because they could significantly add to our growth in revenue.

So, in the near term we will focus on the in-house networking needs of our corporate clients but from a mid to long term perspective we will focus on other related business areas such as digital service solutions for security, management solutions for the computer room, management services for the building, and electric supply systems.

(Interpreted) The last question will be presented by Suran Seong from HSBC. Suran Seong, please go ahead with your question.

(Interpreted) Thank you for the opportunity. I do have two questions. My first question pertains to competition in the telephone market, or the wired services market, in 2010. SK Broadband, for example, is pursuing very aggressive growth strategies to enhance its market share by up to 30% in the near to midterm. When do you feel the competition in this sector is likely to stabilize?

My second question pertains to the FMC business. If you look at overseas cases there has been some restrictions as to the number of handsets available, which has in turn adversely affected the growth in the number of subscribers. Now, this was an example of BT per se, but how would KT differentiate itself from the previous experience that BT has undergone?

(Interpreted) Yes, to address your first question concerning competition in the wired services market. In the first half of this year KT's subsidy plan was much smaller compared to the competition. The competitors spent much to subsidize this service, which in turn caused the market to become overheated. And, as you noted recently, this level of competition is somewhat cooling down but the company that you mentioned, company S, is still maintaining a policy of high subsidies. So, if you want to know exactly when the market is likely to cool down in respect of competition I think you'll get a better answer from company S.

KT again will not compete with high subsidies like the competition. We will instead focus on bundled products and FMC Services to reduce and minimize churn rates.

Yes, your second question concerning FMC, you cited examples of BT and FT, but to let you know KT has in the past a phone called iPhone, unfortunately -- OnePhone excuse me, but it wasn't very successful.

To elaborate on BT's experience, well, there was intense competition in terms of the pricing plan so the customers for the FMC Services were not able to feel at the skin the effects of cutting costs to their communications bill. And another reason for their failure is that they had a very small insufficient number of handset lineups. They only tried to compete with two or three in the market which was far lacking.

And BT, for example, sold off the O2 company, for example. They had to focus on this business in the position of an MVNO and there were some restrictions and limitations to the wireless network and the WiFi zones as well. And a similar story is true for FT, there was far -- few number of handsets to make FMC service successful. So, because of a variety of reasons cited above, these two companies were not able to successfully implement their business.

Well, unlike these two companies, KT does have the required infrastructure in place for a successful implementation of the MFC service. Unlike BT and FT we have the requirements in place, for example, the tariff rate or the pricing plan, the handsets or other devices required and the network.

As for the rates, as long as you use the service within the WiFi zone, you can have unlimited access free of charge of that too. So, from the standpoint of the customer there is a cost cutting effect by 88% on their wireless data bills.

We also have the preparations under our belt on the network side as well. W-CDMA by maintaining the cell division strategy we are currently preparing to expand capacity of this network and the same goes for the WiBro and WiFi network. We're working to further expand and build upon the existing network structures. So, unlike the other companies that have failed in this business previously we have the 3W in place already, the networks in place, to further promote wireless data utilization for our customers.

And one of the major reasons for the previous failures was the lack of handset models, but we have that all set up as well. In November, the globally popular iPhone is likely to be introduced into the market together with Samsung's 3W phone. So, until the end of this year three or four new models are likely to come out into the market and also more are anticipated to be released in the market next year, about 10 smartphones and additional 10 regular phones for a total of 20 altogether next year. So, with all of these infrastructures in place we believe that the FMC business will further expand in the future.

While I was making that answer my staff asked me to make a correction with regard to the potential release of these phones in November. I mentioned that I anticipate release of these phones in November but again these are just anticipations. I believe it's not in November, I anticipate the releases to become a reality within the end of this year.

Yes, thank you for the many questions and your interest and support. KT will continue to commit itself to creating customer value and enhancing shareholder value through the synergy coming from the merger, combined with a variety of convergent services.

I'd like to thank you all once again for joining us despite your busy schedules today. This concludes the conference call for 2009 Q3 earnings announcement for Olleh KT. 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.