KT Corp (KT) 2010 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'll begin the conference of the 2010 first 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 on the 2010 first quarter preliminary earnings results by KT's CFO, Mr. Yeon-Hak Kim.

(interpreted) Good afternoon. This is Yeon-Hak Kim, CFO of KT. Time flew by and the first quarter of 2010 is already behind us. KT last year created a new competition paradigm in the telecom market when it introduced the iPhone for the first time in Korea and launched the world's first 3W-based FMC service, creating new sweeping reforms in the wireless sector here in Korea.

As a result, net adds in wireless subscribers reached 350,000 in Q1, owing to the phenomenal success in the sales of iPhones that surpassed 500,000 units as of the end of March, combined with KT's unique 3W network strategy encompassing WCDMA, Wi-Fi, and WiBro on the lines of competitive pricing plans for smartphones.

In particular, subscribers to smartphones, including iPhones, numbered 684,000 as of late March, representing a growth in net adds by 357,000 in the first quarter alone. As of end of April, we have attracted a total of 850,000 subscribers, of which 610,000 are iPhone users.

Furthermore, the synergy generated from the wireless integration and the boost in sales of bundled products drove up net adds in broadband subscribers to 137,000; the greatest quarterly increase since 2005. Now, with this accomplishment, KT reached a new milestone of 70 million broadband subscribers.

And during the first quarter of last year, the total number of service subscribers dropped by a net 100,000 as KT was not able to carry out normal marketing activities with the new CEO taking office, the organizational restructuring, and preparations for the KT/KTF merger.

In Q1 this year, however, we saw an increase in net adds of total subscribers by 500,000, despite the net loss of 440,000 PSTN users, demonstrating much better performance in customer acquisition in YoY terms.

Now, given the size of net adds and total subscribers, we believe that our marketing was conducted very efficiently. Some market-watchers have expressed concerns over increases in marketing expense coming from the growth in smartphone subscribers, including iPhones. But as our earnings results show, the increase in KT's marketing spend, vis a vis increase in subscribers, was much lower than that of the competition.

As we have done last year, we will refrain from wasteful competition for market share, and rather continue to compete with quality by aiming for cost-efficiency and higher ARPU. By doing so, KT will spearhead the change in the competition paradigm in the telecom market.

Now, I would like to announce our 2010 first quarter earnings. This conference call is being cast on the web, so please feel free to listen in through our website. As in the previous quarter, we will, for the sake of easy comparison, provide data based on guidance formulated with the assumption that KT was merged as of January 2009.

Revenue was KRW4.8222 trillion; posting a 6.8% increase YoY thanks to growth in wireless data revenue and despite the ongoing decline in Telephony revenue.

Operating income fell by KRW45.5 billion YoY to KRW552.7 billion as the cost of goods sold increase with the expansion of subscriber base for both wireless and fixed line products.

Net income surged by 88.4% YoY to reach KRW372.5 billion, owing to the decline in foreign currency and translation loss that came with the stabilization of the exchange rate.

Meanwhile, CapEx for the first quarter was KRW480.8 billion.

Now let us move on to the individual business areas. First is the Wireless business. Service revenue increased by 10.1% YoY to post KRW1.6834 trillion thanks to the growth in subscriber base and wireless data revenue offsetting sales discounts. In QoQ terms, it slid by 0.7% due to seasonal factors.

As for wireless data revenue, it jumped by 4% QoQ and 20.6% YoY to amount to KRW332 billion as the number of subscribers to smartphone pricing plans increased.

Meanwhile, handset sales grew 15.7% QoQ and 36.7% YoY to reach KRW894.5 billion thanks to the increase in new subscribers and share of smartphones.

The wireless data ARPU dramatically leaped by 15.1% YoY; a growth that was buttressed by the launch of the FMC service late last year, and greater vitality in the smartphone market, which include iPhones, and increase in subscribers to flat rate data plans. As a result, the average ARPU for Q1, excluding activation and interconnection fees, amounted to KRW31,227, showing a 3.9% increase YoY despite the fall in voice ARPU.

The average Q1 ARPU for smartphone subscribers is KRW49,611, or 59% higher than the overall average ARPU. In particular, the net ARPU for iPhone users that has price discounts factored in is KRW52,244, or 67% higher than the overall average.

As the share of smartphone subscribers expands in the future, we expect the overall ARPU to persistently increase, despite the varied discount plans recently introduced, as the growth in wireless data ARPU will further accelerate.

Meanwhile, the spread of smartphones is expected to lead to explosive growth in wireless data traffic. Now, to prepare for this, KT plans to enhance network coverage by securing greater capacity in the WCDMA network, expanding WiBro coverage to 84 cities nationwide, and more than doubling the number of nationwide Wi-Fi zones, known as QOOK & SHOW zones, to 27,000, and APs to 78,000, whereby it will work to further sharpen its network competitiveness that differentiates it with the competition.

Next, I'd like to update you on the Telephony business. Telephony revenue diminished by 2.6% QoQ and 9.6% YoY because of the decline in PSTN subscribers and call traffic. It recorded KRW1.1206 trillion. Of this, VoIP revenue is KRW87 billion; a jump by 6.8% QoQ and 109.8% YoY achieved by the growth in new subscribers. The total number of VoIP subscribers as of the end of March stood at 1.972 million after a net increase by over 270,000 in Q1.

On the 16th of this month, KT launched the conceptually new integrated pricing plan for household units, known as [QOOK set two]. Now, this plan allows subscribers to use the Internet, fixed line telephone, and IPTV all at the price of KRW42,000. It is an excellent deal that provides maximum speed for the Internet at 100 mega BPS; unlimited fixed line calls; and a hybrid set-top box that enables the viewing of Sky live HD channels; plus about 90,000 VOD titles.

In the future, KT will capitalize on its second-to-none fixed line subscriber base and bundling of competitive services as part of its ongoing pursuit toward greater customer value and unwavering fixed line subscriber base.

Next is the Internet business. Internet access revenue grew by about KRW6.5 billion in QoQ terms owing to positive net adds in broadband subscribers, but shrunk slightly in YoY terms due to bundling and long-term contract discounts to post KRW511.5 billion.

Internet application revenue climbed up by 7.5% QoQ and 25.8% YoY to reach KRW154.1 billion thanks to the growth in IPTV and IDC revenue.

Now we'll take a look at each of the major services. QOOK Internet revenue slipped by 3.9% YoY due to an increase in bundling and long-term user discounts, but inched upwards by 0.4% in QoQ terms as the number of subscribers increased.

Meanwhile, the total number of subscribers has continuously been moving upwards with the success of the QOOK brand, combined with the high quality and variety in pricing plans for bundling. It reached 7.09 million, which is an increase by 137,000 QoQ.

The Internet is the centerpiece of household-based ICT products, and thus we will make extra effort to further expand our subscriber base by boosting quality competitiveness through continuous supply of STTH infrastructure and leveraging the high brand awareness of QOOK.

At the same time, we will ceaselessly work to reduce the churn rates by means of bundling with the IT-based services, such as IPTV and VoIP.

For QOOK TV, the number of subscribers grew by 140,000 QoQ to reach 1.312 million, supported by the popularity of QOOK TV SkyLife, a combination of VOD and HD satellite channels of SkyLife, a subsidiary. With respect to revenue, the increase in subscribers pushed revenue up by 3.6% QoQ and 73.8% YoY to record KRW34.5 billion.

In 2010, KT will focus on attracting subscribers through active promotions to secure over 2 million cumulative subscribers and lay the foundation for future revenue growth.

Next let's move on to operating expense. Although labor expense shrunk as a result of the special ERP carried out late last year, growth in new subscribers and brisk sales of smartphones drove up costs of goods sold. Hence, our operating expense increased by 9% YoY to amount to KRW4.2696 trillion.

For further earnings details, please refer to the preliminary earnings commentary that we have circulated.

This concludes the Q1 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 [Yan Chon Yin] from [Hong Kong Investment Securities], and the next question will be provided by Shawn Kim from Morgan Stanley. Mr. Yan Chon Yin, please go ahead with your question.

(interpreted) Thank you for this opportunity. I have two questions for KT. First of all, I'd like to ask about the reductions in prices. There's been a lot of talk these days, renewed discussions, on lowering our tariff rates for the users, and there have been renewed discussions and talk about the per-second billing and demands on that front as well. So, does KT have any new pricing plans in the pipeline to release to the customers? That's my first question.

And second, the question pertains to the smartphone handset lineup. And there are high expectations in the market for the 4G technology and handsets, so aside from iPhone, does KT have any plans for handset lineups in the second quarter and third quarter?

(interpreted) As for your first question on pricing, we have no additional comments to make with regard to that at this point in time.

And as you well know, KT has the ultimate goal of dramatically enhancing revenue on the wireless data business by further promoting this particular business of KT. So, whatever can promote the usage of wireless data, we will take active positions to review such pricing plans.

For example, another plan that is under discussion at this point is a plan that would enable users to bank unused data for usage the following month. So, such types of plans are under review at this point. Other than this, there is nothing new that we can comment on at this time.

(interpreted) I'd like to ask you a second question on the smartphone lineups. Recently, the competition has released numerous new handsets as part of their smartphone lineup, and there has been concerns among market-watchers out there that the lineup that KT has may not be sufficient.

(interpreted) I believe, when it comes to smartphone lineups, it is quality not quantity that is of the essence. Rather than competing with numerous types of different models in terms of quantity, we believe that a few select [excellent] models that is very strong and can differentiate with the competition would be helpful for KT end-users.

And as you well know, the smartphone handsets are high-end expensive products. They range anywhere from KRW500,000 to even KRW1 million, so they're much more expensive than the average feature phone. So, if you just focus on expanding the quantity of smartphones in the lineup, at the point of sales it could incur on KT excessive marketing costs when the sales do not happen as expected. Or there could be additional burden when it comes to inventory management that could consequently have KT in a predicament to suffer more losses and damages from that.

And as was announced earlier this year, our plan to release 10 different smartphone lineups is remaining unchanged, and we are on track as to the performance implementation of that plan. We're not able to disclose any details on that at this point.

But what we can tell you is that within the first half this year, in other words until end of June, we plan to launch four new models. And of them, some may be very similar or same as those released by the competition, but some will be very different and differentiated from the competition.

And within the latter half of this year, we plan to release seven to eight new models at appropriate times in the market. So, if that happens, our total number of smartphones released in the market this year will amount to 15, which is outperforming the initially-announced 10 that was informed to the market earlier this year.

As regards the 4G iPhone, apologies, we're not able to make any detailed comments on that topic.

So, the existing iPhones sell very well in the market. And if we were to release additional handsets with very similar specs as to the existing iPhones it could cause a friction in the market, so we will target the niche market that could cater to the true needs of the customer at a time deemed appropriate by our Company. So, when it comes to KT smartphone lineup, rest assured that you will need not to address any concerns on that.

(interpreted) The next question will be presented by Shawn Kim from Morgan Stanley, and the following question will be presented by Jay Park from Samsung Securities. Mr. Shawn Kim, please go ahead with your question.

Yes, thank you for the opportunity. Before I ask my questions, I just wanted to comment that I thought your wireless service revenue growth quality was quite impressive.

I have two questions. First, regarding your LM interconnection cost, can you explain why there is such a disconnect on changes in your LM revenue, which fell 18% year-on-year versus your LM cost, which fell only 3.7% year-on-year? I'm asking this because if you actually look at your full-year LM results for '09, your 2009 land-to-mobile revenue fell 18% again compared to just 3.7% decline for your LM costs, which are identical with your quarterly figures. So, if you can help reconcile that, I'd appreciate it.

Second is your merger synergies. If I remember correctly, I think the management indicated to the market something like KRW120 billion in operating cost saving synergies during your first year post merger. Three quarters now have passed, and from your OpEx, if you actually deduct your cost of goods sold and labor cost, we actually see that your operating expense increased by KRW13 billion. So, I don't think the evidence of operating cost saving synergies is evident on your P&L, so could you please explain? Thanks a lot.

(interpreted) Yes, those are very poignant questions, thank you. With regard to the first question on the interconnection fees, let me remind you that there is a two month gap so there can be a mismatch between the revenue numbers and the cost numbers. And again, there is a forecast margin of error with regard to this.

To answer your second question on merger synergy, well, the predictions were made with the assumption that we will be competing under similar conditions in the market. And the major effect coming from the synergy would pertain to marketing expense.

As for the synergy impact on OpEx, it is quite difficult to make the tally in calculations internally on that. But what I can tell you is that in the aftermath of the M&A until late last year, there was an effective savings on the investment side. And new cost savings amounted to about KRW80 billion.

And the estimations that we relayed to the market at the point of the merger incorporates both the OpEx and CapEx numbers. And in certain situations, this may not be adequately or correctly incorporated or reflected in the financial statements because of technical difficulties.

I, as CFO of KT, am personally in charge of management innovation and cost reduction at the Company. But compared to the earlier announcement made at the time of the merger, we are now focusing on different sets of criteria and categories when it comes to enforcing the merger synergy. So, with a new set of standards and criteria, we are pursuing synergy from the merger, and we're constantly and very keenly following up and evaluating that performance.

So, if you look at the detailed items item-by-item, it may not necessarily be exactly consistent with what was announced to you at an earlier point in time. But, overall, we had a savings effect to the tune of KRW80 billion. And if you annualize the saving effect, we anticipate that the volume of savings will be much higher by the end of this year.

And on the network side, we are in the process of working on the IT integration, as well as the IMS integration. But this part of our effort is part of our mid to long-term plans so the effects of this effort is likely to manifest itself post 2011.

I'm sorry for asking a follow-up question. So, I understand that some of the categories may have changed, but you're indicating that the total amount of savings that you've achieved so far is on track, so does that actually mean that the achieved savings are going to add to your operating profit?

(interpreted) Yes, compared to the announcement with regard to the effects of synergy that we made back in '09, the basic factors or elements that were released back then are factored in, in this year's business plan. So unless these are [effective], we would not be able to meet our profit targets.

And in addition to these mentioned items, we are making continued efforts with regard to other areas and categories of management innovation and cost reduction. We are grappling with that; putting much energy and effort into this particular area, too.

Thank you.

(interpreted) The next question will be presented by Jay Park from Samsung Securities, and the following question will be presented by [Yi Dung Sup] from SK Securities. Mr. Jay Park, please go ahead with your questions.

(interpreted) Yes, thank you for this opportunity. I'd like to pose two questions. First of all, I'd like to applaud your wonderful performance in enhancing data ARPU. With regard to data ARPU, I'd like to ask what your target or forecast is for the end of this year, the end of 2010?

And my second question may be a bit sensitive one; it pertains to the regulations presented by KCC. KCC's regulations govern not only smartphones, and smartphone handsets themselves, but to encompass the larger fixed line and wireless businesses as well. So, with regard to the regulators' new rules and regulations, what is KT's current stance and position?

(interpreted) Yes, our data ARPU increased by 20% YoY. And internally, we do not have a specific target pertaining to data ARPU per se. But given that the current number of subscribers to smartphones at KT is 850,000, we anticipate this number to increase to 2 million by the year's end. Now, given this trend, we believe that the growth in data ARPU by the year-end will far exceed 20%.

Please allow me to correct myself. The 20% increase pertains to total revenue; data ARPU growth is 15%. So, again, we don't have specific targets for data ARPU per se. But given the current trends, we anticipate a growth by 20% until the year's end.

I'd like to answer your other question pertaining to the cap on marketing expense imposed by KCC. We believe that the telecom operators in Korea are in a broad consensus when it comes to reducing marketing costs, and enhancing profitability, and using that excess capital to invest in other areas.

And if we may add, KT's position is that with regard to this cap all of the operators in this market should be governed by this rule under equal conditions and equal rules and standards. So, no benefits or disadvantages should go to any particular operator.

So, KT is continuing to convey its position and opinions to the authorities at KCC. I'm not privy to the details of the consultations with KCC, so I'm not in a position to give you any further updates on that. And I believe that it is not a matter to be discussed in detail during this conference call. Anyhow, I hope that the negotiations are successfully concluded so that the overall marketing costs in the entire sector could be reduced.

(interpreted) The next question will be presented by Yi Dung Sup from SK Securities, and the following question will be presented by Sam Min from BNP Paribas. Mr. Yi Dung Sup, please go ahead with your questions.

(interpreted) Yes, thank you for the opportunity. I too would like to ask two questions. My first question pertains to the number on depreciation and amortization.

If you look at the Q1 figure, it is less by KRW80 billion in YoY terms; it is a significant drop. I'd like to ask if there are any specific or particular reasons for this dramatic fall. And this appears to be too big to bring seasonal factors into the scene too, so I'm wondering are there any reasons behind this; if this trend is likely to continue throughout the year; or will the numbers return now to previous years' figures by the year's end?

And second, I have a question on the Telephony business. The subscribers to PSTN services diminished by 400,000 and the market share is continuing to shrink, so given your mid to long-term view and plan, what is your anticipated market share? And do you have any tolerance level when it comes to market share for PSTN?

(interpreted) Yes, as for your first question on depreciation and amortization, it is true, as you pointed out, that we saw significant drop in the first quarter. Because this is, basically, due to the reduction in the types of tangible assets that were subject to depreciation and amortization in QoQ terms, so the investment on these particular types of assets diminished to account for this drop. And this also is accounted by the construction in progress, and that is also on the books.

And this trend we expect is likely to continue. Last year's number was KRW3.1 trillion. So, this year we expect the number to be a bit less than this, but the broad trend is likely to persist.

Now, to answer your other question on the reduction in PSTN subscribers, well, I have to admit that the market share has already exceeded our tolerance level for the PSTN market.

And as you well know, in the past, KT heavily concentrated on working not to further diminish the market share in the PSTN business. But with the new CEO, and his new governance of KT, the broad understanding within our Company is that reduction in PSTN market share is something that is inevitable. So, in order to make up for this loss, it is imperative that KT uncovers new growth engines.

Yet, as you well know, the fixed line business reduction, we're trying to further minimize that by conducting aggressive marketing policies for VoIP services. So, our target subscriber base for VoIP plus PSTN subscribers is 20 million. But, again, this is easier said than done.

So, a reduction in revenue coming from this business area, it is something that is inevitable again. So, we are hoping to make up for this loss, or counterbalance that, with growth in other areas.

And if you look at the performance and earnings results of the first quarter alone, you'll notice that the performance of the Wireless business far exceeded the diminished results in the fixed line Telephony business. So, overall, we hope to minimize the shrinkage in the PSTN business and make up for that loss with other stronger business areas and offset the loss, or even outperform that loss.

(interpreted) Thank you.

(interpreted) The next question will be presented by Sam Min from BNP Paribas, and the following question will be presented by Sean Lee from Citigroup. Mr. Sam Min, please go ahead with your questions.

Sure, hi. Thank you. I wanted to ask you about your smart projects. I know that you guys don't really like to disclose these projects but, first, if you can tell us how much revenue from these projects you booked during the quarter I would appreciate it. Also, any new exciting mobile office projects; if you can disclose any, I would appreciate that as well.

Secondly, Apple obviously has launched iPad quite successfully, and for the first time AT&T broke out a connected device category, from which they did roughly 1.1 million net adds. How is your discussion to procure iPad going?

Also, are you discussing with local manufacturers for 3G connected tablet devices as well? What do you think will be the opportunity here in Korea? Thank you.

(interpreted) I'd like to answer your first question on the smart projects. I'd like to advise you that our corporate customer business grew by 3.6%. And in the first quarter, our figure is KRW900 billion, which accounts for a quarter of the initial target number that we disclosed to the market.

Now, smart focuses on six areas, namely, enterprise; SMB/SOHO; government; zone; building; and green. I'm not able at this point to give you a detailed breakdown on each of these areas, but let me tell you that we are on track of our plans announced earlier since our achievement is about KRW903 billion.

And for mobile office projects, we have pretty much confirmed agreements with the following business entities; POSCO E&C, Shinhan Bank, and [Hanhua Group]. There are other project discussions underway with other companies, but please understand that we're not able to disclose information on that for confidentiality issues.

With regard to the introduction of Apple iPad, we are internally reviewing that. Everyone else is [speak], but nothing has been definitively concluded at this point.

So, in addition to smartphones, we are funneling in lots of energy and interest into the sector of mobile broadband devices. So, we are looking into alternative emerging devices. We have recently launched in the market our e-book, and also we are proactively considering the tablet PCs as part of our mobile broadband device strategy. So, whatever's conducive to our mobile broadband, we will actively review devices available to pursue that goal.

(interpreted) Your next question will be presented by Sean Lee from Citigroup, and the following question will be presented by Neale Anderson from HSBC. Mr. Sean Lee, please go ahead with your question.

(interpreted) Yes, thank you for the opportunity. My first question pertains to the Wi-Fi network. In the conference call with SK Telecom yesterday, the company announced that it has plans to install additional 10,000 Wi-Fi zones. Now, KT, I understand, has plans to establish 27,000 Wi-Fi zones nationwide. Now, this is -- how competitive do you believe your Wi-Fi network is to maintain this Wi-Fi gap with the competition?

And additionally, given the broad outlook with regard to the smartphone market, how important do you think it is to maintain competitiveness or the quality of the Wi-Fi network? How integral is the Wi-Fi network to maintain your competitiveness in the smartphone market?

(interpreted) Yes, I have no intention to degrade the competition. But I must say that in the mobile Internet area, when it comes to the network capacity, KT is a distant first and second-to-none in the market out there.

And KT currently has 16,500 Wi-Fi zones, we call them QOOK & SHOW zones, and our plans to expand this by the year's end is 27,000. But we do not believe that expansion in terms of quantity is of the essence here because it does not cost very much to make this additional investment.

KT, in the course of offering Netspot services and business over the past decade, we have accumulated substantial know-how when it comes to operating the Wi-Fi network. So, we have better knowledge and know-how in terms of where heavy traffic is, so how the users use the wireless Internet services, so when and where. So, compared to the competition, we're much better off in terms of the know-how and knowledge acquired over the years.

So, if a company were to, say, install the Wi-Fi AP in an area where there is little or no traffic, then even if you have a lot of access points, it would do very little benefit for the business. And these access points, the distance apart from one to another is about 20 meters. So, if you're not careful as to the precise location of the access points, these devices will be rendered inutile.

And within KT, we have a separate business division dedicated to the wireless network operations. And as part of this business's KPI, there is an indicator that encourages them to upgrade the quality of the Wi-Fi networks to that of a 3G network. So, in other words, customers will be able to utilize services in the Wi-Fi areas at the quality level of a 3G area.

Plus, we have a nationwide organizational arm at KT. So when it comes to establishing Wi-Fi networks in buildings, or, say, public institutions or agencies, we have built very good relationships with these entities so we could build Wi-Fi networks or devices in these buildings at a much more effective and quick manner.

Now, to meet the demands of wireless data explosion, I believe that we have to deploy as many networks to cater to that need as much as possible. So, we need much higher capacity than the current level, and KT's plan, starting from early last year to the end of 2012, is to increase data network capacity by 50-fold.

Now, we are going to mobilize our network resources available, namely, Wi-Fi, plus WiBro, plus WCDMA, and take advantage of these three networks in a very integrated manner. So, until the end of 2010, we will pursue a 3W strategy, incorporating Wi-Fi, WiBro, and WCDMA, in the ratio of 60-to-20-to-20 when it comes to data traffic. Yes, this is our target, or plan, for 2012.

And in addition, we will utilize all devices available. One example would be the Egg. We can convert WiBro services to Wi-Fi services where necessary in terms of network needs, and there are also tethering technology that we could offer our customers. So, we are always on the look for new devices to invent to enable this utilization to enhance our network capacity and to offer a diverse range of pricing plans to further facilitate this trend.

So, conclusively, I'd like to tell you that when it comes to the capacity for a wireless data network, I think the competition cannot even nearly approach us.

(interpreted) The next question will be provided by Neale Anderson from HSBC. Please go ahead, sir.

Thank you. I think my question has largely been answered by the very full reply previously, but just one follow-up, if I may, on the wireless data network. I wanted to ask if the growth in data traffic that you've seen since launching the iPhone, whether that has been greater than your expectations or as predicted.

And then, secondly, can you give any indication of where most of the data traffic on your network is originated? Is it in your subscribers' households, or public areas, or is it more broadly spread than that? Thank you very much.

(interpreted) Yes, so as for your first question in terms of the growth in the data traffic, it is slightly higher than originally anticipated, or it is pretty much in line with our optimistic prediction in the growth of the data traffic. And so to meet the demands or the targets for subscriber increase over the next three years, again, as I mentioned, we will work to enhance our network capacity by 50-fold.

With regard to your second question on the locations where most data traffic occurs, well, it depends on the situation and I need some detailed back-up data to give you a more precise answer. But roughly, 70% of the data traffic occurs inside buildings and the remaining 30% outdoors.

Now, as for iPhone, it's 50/50 data traffic in 3G and [Wi-Fi] happens in 50/50; half-and-half ratio.

Thank you very much.

(interpreted) Your next question will be provided by James Kwon from Mirae Asset Securities. Please go ahead, sir.

Hi. Thank you for the opportunity, and congratulations on a solid set of earnings. I have two questions on your guidance; first is sales. Given your target for revenue this year was KRW19.5 trillion, first quarter run rate is not yet at 25% of guidance, and it's kind of concerning because revenue has a chance of slowing with the lower handset sales plus marketing, going forward. Are you still confident you can reach the total sales target? That's the first question.

And secondly, can you speak briefly on CapEx? Given lower marketing costs, and possibly better earnings, and the commitment from the operators regarding more investment in R&D, can management briefly speak about how they feel about investments, going forward?

(interpreted) Yes, with regard to your first question, I'd like to mention that the marketing costs cap proposed to be enforced by KCC has not yet been conclusively finalized. And KT's revenue is likely to attract further momentum down the road. So, given that, we believe that we could easily beat our KRW19.5 trillion; our target for the overall revenue.

But when the regulation is actually in force, like you pointed out, we may end up needing making modifications to our earlier guidance on profits, or revenues, etc. But at this point, the government regulations have not been officially released and are not yet finalized so we have no plans at this point to make any modifications on our existing guidelines.

Now, as you pointed out, if the marketing costs are reduced, that extra capital could be funneled into the R&D sector. But again, that hinges on what assumptions that you have based on.

And I had a chance to look at greater depth into the marketing costs, and I notice that of the three telco operators here in Korea, KT spends the greatest amount for investment vis a vis marketing expense. So, given that, our general overarching plan when it comes to investment is to make investment within the scope of our CapEx guidelines.

And when the government regulations are released and in force, there may come a need for KT to make adjustments in the revenue and CapEx guidance. Now, if that need arises, we'll make it a point to make the necessary communication with the market.

(interpreted) Currently, there are no participants who have questions. (Operator Instructions).

Okay, we will continue with the last final comments by the CFO.

(spoken in Korean).

Operator, we'll take one last phone call.

(interpreted) Your next question will be presented by [Kwon Chongu] from Hyundai Securities. Please go ahead, sir.

(interpreted) Yes, thank you for this opportunity. Again, I congratulate you on your phenomenal performance in the wireless data business.

My question is quite simple. If the KCC guidelines or regulations are in force, and hence contributing to the enhancement of profitability at KT, how would you foresee any change in the dividend policy?

(interpreted) There are no changes to our dividend policy, it remains the same; 50% of net income. So, if income grows, the dividends will also grow in line with that.

Thank you for the questions and interest. This year, KT plans to consolidate its leadership in the domestic wireless data market by implementing KT's unique and differentiated network strategy and releasing competitive smartphone pricing plans.

We will widen the range of choices for subscribers by substantially expanding the smartphone lineup, with a view to growing revenue, upon enlarging the smartphone subscriber base. At the same time, we will relentlessly pursue cost reduction and improve profitability.

I'd like to thank you all, once again, for joining us despite your busy schedules. This concludes the conference call for 2010 Q1 earnings announcement for Olleh KT. Thank you.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.