KT Corp (KT) 2010 Q2 法說會逐字稿

Good morning and good evening. First of all, thank you all for joining this conference call and now begin the conference of the 2010 second quarter preliminary earning 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 second quarter preliminary earnings results by KT's CFO, Mr. Kim Yeon-hak.

(Interpreted) Good afternoon. This is Yeon-hak Kim, CFO of KT.

Our full year already flew by since the successful completion of the KT-KTF merger. Now, over the course of the past year, KT spearheaded the mobile Internet era armed with a differentiated network that enabled the Company to dramatically lower wireless data tariff rates and also launch the Fixed Mobile Convergence, or FMC service.

Moreover, KT offered a variety of smartphones that cater to customer needs and kept abreast of the trend in explosive growth of wireless data usage by expanding the number of Wi-Fi zones from the 13,000 early this year by more than twofold to 30,000 in just seven months. This allowing customers to use wireless Internet more conveniently as well as economically.

As a result, we were able to acquire a total of 1.2m smartphone subscribers, including 840,000 iPhone subscribers as of late July. That performance motivated us to recently make an upward adjustment of our year end target for smartphone subscribers from smartphone subscribers from 2.1m to 2.5m.

The launch of new types of devices such as smartphones and tablet PCs is predicted to drive the increase in the global mobile data traffic by about 39 times by 2014 compared to year 2009. KT, the first among Korean telcos to have already experienced data explosion believes that such explosive growth and data traffic cannot be fully handled with just 3G and LTE networks alone. Therefore, KT plans to further expand the Wi-Fi and WiBro networks and disperse the traffic to create a seamless wired-wireless total network.

As part of this effort, KT, refusing to remain complacent about the existing Wi-Fi zone coverage, plans to continue to increase the number of Wi-Fi zones to about 40,000 by the end of this year and about 100,000 by the end of 2011 so that any KT subscriber will be able to enjoy wireless Internet service anywhere in the nation with speed and stability.

As of late July, KT as a single operator, possesses the greatest number of Wi-Fi zones in the world. We will work to maintain leadership with our world's best network.

With that, I'd like to announce our 2010 second 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 KRW4,986.4b recording a 2.3% growth YoY thanks to the increase in wireless data revenue and despite the ongoing decline in telephony revenue.

Operating income jumped by 24.4% YoY to reach KRW601.4b owing to growth in revenue and a fall in labor cost and marketing expense. In particular, labor cost shrunk by 12% YoY as a result of the special early retirement executed late last year.

Net income declined by 31.8% YoY to amount to KRW343.7b due to reasons such as increase in foreign currency translation loss resulting from the rise in the foreign exchange rate.

Meanwhile, CapEx for Q2 was KRW690.4b, bringing the accumulative CapEx for the first half of this year to KRW1.171.2b.

Next, let us move on to the individual business areas. First is the Wireless business. Service revenue increased by 9.7% YoY and 4.2% QoQ to post KRW1,754b as the smartphone-centered subscriber base expanded and wireless data revenue made a huge leap.

As for wireless data revenue, it climbed up by 23.7% YoY and 7.3% QoQ to reach KRW356.1b as the number of subscribers to smartphone pricing plans increased.

Wireless ARPU, an item of much interest among many, rose by 17.1% YoY and 5.2% QoQ to demonstrate steady growth. That was possible because KT was successful in winning over high ARPU customers to subscribe to KT smartphone services while at the same time, the Company saw its own subscribers continuously switch to smartphones, both driven by KT's competitive advantage in networks.

In particular, the average ARPU for iPhone users in Q2 was about KRW54,000, which is around 70% higher than the average ARPU of the total number of subscribers.

Next, I would like to update you on the Telephony business. Telephony revenue declined by 8.5% YoY due to the fall in the number of PSTN subscribers and call traffic. In QoQ terms however, it inched upwards by 0.7% to amount to KRW1,128.9b owing to seasonal factors and the revenue growth in international long-distance settlements.

Of this, VoIP revenue soared by 80.3% YoY to post KRW91.7b as new subscribers increased. The total number of VoIP subscribers as of the end of June stood at 2.22m with net adds reaching 250,000 in the second quarter.

Next is the Internet business. Internet access revenues slid by 2.6% YoY to record KRW510.2b due to an increase in bundling and long-term contract discounts despite the continuing trend in positive net adds in broadband subscribers.

Internet application revenues shot up by 44.1% YoY to reach KRW175.9b thanks to growth in IPTV, bizmeka, and IDC revenue. In particular, IPTV attracted more than 1.56m in total number of subscribers as of the end of June owing to the growth in subscriber to QOOK TV Sky Life. Accordingly, revenue also dramatically jumped by 119% YoY.

Meanwhile, the number of broadband subscribers has continuously been moving upward with the strength of the brand combined with outstanding service quality and diversity in bundled price plans that surpassed the competitor. Our net adds acquired in Q2 was 100,000, bringing the total number of subscribers to about 7.2m.

In the future, KT will re-double efforts to secure greater competiveness in service quality through ongoing provision of FTTH facilities and to reduce the churn rate and simultaneously expand the subscriber base by means of diverse price plans for bundling.

Next, I'd like to briefly touch upon operating expense. Although the cost of goods sold dramatically shot up in YoY terms due to the growth in demand for high priced handsets such as smartphones, the savings in marketing cost and reduction in labor cost resulting from the large-scale early retirement executed late last year, slightly diminished the operating expense in YoY terms.

KT will continue to funnel in efforts on reducing operating expense by refraining from ill-advised marketing competition centered on subsidies and by officially using marketing budgets with a focus on fundamental quality and competitiveness of services.

For further earnings details, please refer to the preliminary earnings commentary that we have circulated. This concludes the Q2 earnings announcement. Now we are ready for our Q&A session to address any questions.

(Interpreted) Now, the Q&A session will begin (Operator Instructions). The first question will be provided by Mr. Yang Jong-in from Hankuk Investment & Securities, and the next question will be provided by Sean Lee from Citigroup. Mr. Yang Jong-in, please go ahead with your question.

(Interpreted) Yes, thank you for this opportunity for questions. I have two of them in fact, and my first question pertains to the marketing cost.

In Q2, I saw that the numbers fell somewhat in terms of the marketing cost. I think it's important to break this down into the fixed-line and wireless businesses because if you look at the government guidelines, they have two categories. One for the wireless and one for the wired business and they suggest a percentage of the revenue for the marketing expenses. So in the first half of this year, what is your marketing expense as a percentage of revenue, breaking it down into these two business areas, wired and wireless?

The second pertains to the iPad. I understand that the launch has been delayed. What is your reason for this delay and relatedly, what is KT's internal strategy for tablet PCs going forward?

(Interpreted) Yes, thank you for the questions. Pertaining to your first question on marketing expense, you asked for a breakdown into the wired and ireless business so please understand that we have an internal policy not to make an official announcement making this breakdown.

So the combined marketing cost for fixed line and wireless businesses which includes advertisement for Q2 was 17.2% which is a decline compared to the 18.1% of Q1.

In the marketing cost on the fixed line business, we saw a small fall compared to last year and for the Wireless business, SKT announced its numbers yesterdays and I would like to let you know that our numbers are not very different from SKT's. But please understand once again that it is our internal policy not to make an official announcement on this breakdown.

However, we did supply these numbers to the authority, KCC, so perhaps at a later time, when KCC makes the announcement, it could include these numbers in that announcement.

You also asked about the reason for delay in the launch of the iPad. Please understand once again that I'm not in the position to make a formal announcement on that matter. I was asked to refrain from that from KT's Marketing Department so please understand.

And on the strategy for tablets, so including iPad, we have planned to launch four to five tablet PCs in the latter half of this year.

Again, we have planned to launch about four to five tablet PCs in the latter half of this year. This would include the lower priced low-end tablet PCs ranging from KRW200,000 to KRW300,000 to the higher end models that may amount to about KRW1m. So we will launch these products in accordance with the customer target strategy.

And as for the overall tablet PC strategy of KT, I believe that we have an occasion some time in the future to drill into the details on that matter. One point I would like to add at this point is that if you look at the situation in the US, perhaps that the data traffic generated or required by iPad is 10 times higher than that of iPhone.

So even if it is not just iPad alone, the other tablets, they require much higher data traffic and volume compared to the average smartphone. So with this in mind, KT feels that 3G and LTE network alone will not suffice in handling this kind of data traffic. So we need to combine with these two networks Wi-Fi and WiBro networks as well.

So we were mindful of this need and we are taking every measure to put the preparations in the right path to handle the traffic for the smartphones as well as the future launches of tablet PCs.

(Interpreted) The next question will be presented by Sean Lee from Citigroup. And the following question will be presented by Jay Park from Samsung Securities. Mr. Sean Lee, please go ahead with your questions.

(Interpreted) Thank you. I do have two questions. The first pertains to Wi-Fi. KT has so far maintained leadership when it comes to Wi-Fi networks and I take that it is continuing to make efforts to maintain that leadership. But the competitor is also making similar investments to further revamp and build upon its Wi-Fi network. And also given that the CapEx required to build more Wi-Fi zones and networks is rather low, what is KT's plan in holding on to its leadership in the Wi-Fi network area?

What do you believe are essential vital points to expand and maintain a Wi-Fi network and what to do you believe is your competitive edge over the competitor in this regard?

My second question pertains to the products that were recently released by the competitor. What is your reaction or response in the market to these competitor's products? The products would include the pricing plans that offer unlimited data usage services and also a family all-in-one pricing plan.

Given that these are being favorably received in the market and that they are helpful in attracting more subscribers, would KT in the future, consider launching similar types of products?

(Interpreted) Yes. Thank you for the questions. To first address your question on Wi-Fi, as you recall, the main incentive behind the merger between KT and KTF was the competitive edge that we could acquire with the integrated network of the fixed-line and wireless and we were able to pioneer the Wi-Fi market since we launched that service back in 2002. So we know precisely where the customer needs are, where the high-need areas or frequencies are and the traffic patterns.

We have accumulated a tremendous amount of know-how over the years in managing this network compared to the competition since we have about almost 10 years' experience under our belt.

Furthermore, we already have acquired as a pioneer in important sites, we are in a favored position in negotiating with the merchants to cover these sites that warrant lack of interference or non-interference in terms of radio waves that provides services to the Wi-Fi zone. So in these regards, we feel that we have an edge over the competition.

Yes, secondly, I would like to add that in trying to build up a Wi-Fi zone, building access points alone would not suffice. You would need a competitive back-up network which will be the fixed-line backbone. And as you know, KT has undisputed leadership and competitive edge when it comes to the fixed-line network.

And for the households as well as corporate, we are at an advantage in supplying over the years, the various types of network services including ADSL, VDSL, wide-area line, KFTTH and core networks. So we have competitive advantage when it comes to internal fixed-line strategies as well as hardware and know-how.

And we also have an advantage in the strategic cooperative relationships that we have enjoyed with the merchants of the buildings in which these zones are installed. Not to mention the maintenance and repair businesses and this kind of business relationship that has committed over the years and this is definitely an advantage we have over the competition that it cannot even attempt to emulate.

And we also took into special account of security measures with the premium secured Wi-Fi zones and networks. According to a recent survey by KCC, many smartphone users, actually 42% of smartphone users, complained that their major concern is security issues. But at KT, we took every measure to secure the wireless networks through various codes and passwords, and also an authentication key. This maybe some technical detail, but it's EAP-AKA or SIM. So there are a lot of technological measures that we have in place to protect the security of these users.

And even for QOOK AP, we have established a special networking scheme that requires a password to access this particular service and network. So users need not be overly concerned about the leakage of customer information. And in this sense, we have airtight security and took measures to that end and this is another competitive advantage that we have against the competition.

Now, when it comes to the Wi-Fi zones and networks, so we have an edge over the competition in terms of quantity, quality, as well as security. We plan to continue to maintain this edge and leadership. And recently, we have upgraded the KPIs for Wi-Fi network maintenance to the level of 3G so that we could be steadfast in folding on to our leadership in this area.

Now let us address the topic of the competition with the pricing plan. KT regrets that the telcos are engaged in overheated competition on the platform of price. So KT will continue to refrain from indiscriminate competition with pricing. We would rather, as we have done in the past, continue to focus on getting what we deserve in terms of price and to win the customers back with greater value. So we will continue on this platform and maintain leadership in this regard.

One other competitor, LG U+ has released a highly cheaper price plan, perhaps merely intended to acquire a subscriber base. But if you look at the past experiences in our domestic market, providing such cheap pricing plans does little in acquiring a lot of subscribers in the end at the end of the day.

And the pricing plan recently announced by SKT is yet to be approved by KCC. So we personally have doubts as to whether SKT could really pursue this pricing plan.

SKT has announced two different types of pricing plans, one of which is the so called unlimited data usage plan. But if you look at the details of this plan, in case of a network overload, the company limits usage of the data. And so in this sense, we are skeptical as to whether this plan allows for indeed unlimited data usage.

KT has no intention to release such types of unlimited flat rate data usage plans. Rather, given the same price, we are actually effectively providing unlimited data usage opportunities to our users.

Now another package, a pricing plan package that SKT released is one that allows free usage of the fixed-line services once a subscribers subscribes to a certain type of wireless package. Now, we have strong concerns on this front because if this is approved by the authorities in the end, this would take away the incentives to invest in fixed-line networks such as those for IPTV or FTTH. We have relayed this concern to the authorities. We understand that the authorities currently are reviewing this matter in detail.

Now, in KT, when its decides to release its pricing plan, we will have on our mind as a top priority, enhancing value on the part of the customer and also enhancing retention of our existing subscribers. And we will make full utilization of our competitive edge in networks to pursue greater benefits that are generated for the customers.

A recent example is the Tune, the talk Tune pricing plan that was released in the market. Now, this is in line with our philosophy on pricing plan. So we will continue to refrain from indiscriminate competition on the pricing platform and work to enhance the benefits returned to our customers. And for the Company, we will work to enhance the ARPU and retention of our subscribers.

(Interpreted) The next question will be presented by Jay Park from Samsung Securities and the following question will be presented by Neale Anderson from HSBC.

Mr. Jay Park, please go ahead with your questions.

(Interpreted) Yes. Thank you. I do have two questions. My first question pertains to the marketing expense regulations and guidelines of KCC. Because these guidelines are in place, I think that the telcos have recently increased discounts on pricing plans and tariff offered to subscribers.

Now, for KT's Smart Sponsor, what is the percentage of this Smart Sponsor pricing plan? What was it at the beginning when you first released it and how has it changed over the course of the months?

And a related question, the second quarter, how much were you able to save in terms of marketing expenditure? And the total ARPU trend, we take that it is somewhat falling. I'm interested to know what KT's idea is, or view is on the trend of total ARPU?

A second question pertains to the LTE network. It seems that at the competition is taking bolder steps in building and expanding their LTE network. What is the plan on KT's side? When do you expect to commercialize your LTE network and what are your predictions for CapEx for LTE going forward?

Yes, I would like to answer your first question on the Smart Sponsor. We actually released this pricing plan earlier than the competition last year, but this doesn't comprise a significant portion. But I'm not in a position to disclose any exact numbers at this point. But yesterday, we heard from the competition that its share is about 20% to 30%. But KT's share is lower than this.

And KT's Smart Sponsor plan, it may reduce the overall revenue but it actually enhances profits so in the end, it is not all bad.

As you know, the ARPU for an average iPhone user is KRW54,000. Compared to this, the Smart Sponsor pricing plan, or other discount pricing plans, they have an effect of slightly diminishing revenue volume of about KRW8,000 to KRW9,000 per month. But if you look at the flipside of it, we do not offer any subsidies on these subscribers to such a pricing plan, so at the end of the day, it has a cost savings effect on marketing expense.

And as for the share of Smart Sponsor, again, we will allocate an appropriate mix so that we will be able to maintain a positive trend in the ARPU so that this won't have a big affect on the top line and as I mentioned earlier, it's not going to affect the bottom line. The profit stays the same. Plus the feature phone, the ARPU is about KRW31,000. So this will now bring down the iPhone ARPU average to KRW54,000. But if we are able to acquire a greater number of subscribers and maintain the increasing trend on this ARPU as well, plus refrain from increasing the share of such discounts to our pricing plans, we believe that we can achieve an adequate mix so that it does not negatively affect in any way, the -- either the top line or the bottom line.

I'd like to address your question on the plans for LT. Well the equipment for LTE will be released in the market in 2011, so next year. But the greatest issue is the handsets, or devices, that will be utilizing the LTE network. The dominant market consensus is that it will take another two/three years for relevant handsets for LTEs to be released in the market.

And as you know, KT recently acquired the 900MHz frequency range. So we will shortly begin using the frequency range for the LTE business. And for the time of commercialization, we are initially targeting the first year of 2012, which seems to be a point time in which the data traffic capacity with our WCDMA network will become somewhat saturated.

And as for the coverage, will not begin immediately with our nationwide coverage from the outset. We will begin with the high traffic generating areas such as the Seoul metropolitan area and other large cities in the country.

Even if we do commercialize the network by year 2012, this will be targeting the handset type LTEs not the volume-types. And so if you consider the handset sector to apply in this scenario, it will be late 2012 or early '13 in which that is likely to happen. So we plan to make full utilization of our advantages in Wi-Fi and WiBro networks compared to the competition so that we will be able to efficiently handle our data network capacity.

The investment that is required for LTE is somewhat different in nature compared to the investment required for 3G. 3G, it may allow for nationwide investment in coverage from the very outset. But LTE is different because it could take advantage of the backward compatibility that LTE has with it. So we will start solely focusing on the regions that generate high traffic and flexibly react to different regions as the traffic patterns become more visible to us and adjust the capacity requirement as needed.

And three days ago, our CEO, Mr. Pyo has announced that the annual CapEx range will be kept in mind in making this future investment.

(Interpreted) The next question will be presented by Neale Anderson from HSBC and the following question will be presented by Sean Wu from Merrill Lynch.

Mr. Neale Anderson, please go ahead with your question.

Thank you. Two questions for me please. Firstly, on the Wi-Fi network. I understand that Shinseki has asked KT to open its in-store Wi-Fi hotspots to all users from other operators too. Is there likely to be pressure from other Wi-Fi partners to do the same thing?

And secondly, could I ask for a bit more color on WiBro and IPTV trends in the quarter?

And WiBro revenues were down 16% QoQ after rising 14% in the first quarter. Why was this please?

And also, do you expect the strong growth in IPTV to continue; very strong growth relative to the first quarter? I believe the Sky Life product wasn't launched until May. Thank you very much.

(Interpreted) Yes, I'd like to address your first question on the opening of Wi-Fi hotspots. I guess it is a false report that has been released to the market that Shinseki has requested for an opening of the Wi-Fi hotspot, so that is not true. Let me correct you on that.

KT is actually already opening its Wi-Fi network. So it is just that we are adequately being compensated for that service provided. If the Wi-Fi zones and networks are offered for free, what investor out there would put money into this network?

And also, there is the security issue. We consider this to be very important. That is why we are being adequately compensated in providing the premium secured Wi-Fi network.

Yes, I would like to address your question on WiBro. We have seen an increase in the subscribers to the WiBro service that has led to an increase in the service revenue. But on the device side, the sales, or revenues on the devices, have fallen. That is why you are seeing a slight decline in the WiBro numbers.

On IPTV, yes, it is strongly growing owing to the fast increase in the number of subscribers. It has increased by about 400,000 to date and we expect the total number of subscribers to IPTV to reach about 2m by year end. And accordingly, we expect sales or revenue on the IPTV business to also steadily grow.

Thank you.

(Interpreted) The next question will be provided by Sean Wu from Merrill Lynch and the next question will be provided by Stanley Yang from Nomura Securities.

Mr. Sean Wu, please go ahead with your question.

Hi, thank you for the opportunity. I have three questions. Does your 54,000 ARPU include sign-up and interconnection fees?

And will iPhone 4G continue to do well and if so, what is your rationale as to why it's going to do well given that a lot of the potential iPhone 4G subscribers have gotten into Galaxy S phones?

And number two, what is your take on the interconnection in terms of timing?

And number three, what is your take on the potential MVNO entrant?

Thank you.

(Interpreted) Yes, in the ARPU of KRW54,000, that does not include activation fees and interconnection fees.

Yes, it is unfortunate that the launch of the iPhone 4 is being delayed, but it is common as a telco operator competing in this market to encounter such unpredictable or unexpected developments. And it is regretful that some high ARPU generating customers have already subscribed to the Galaxy S service.

But we still do believe that there are a lot of potential customers out there that are earnestly waiting for the release of the iPhone 4. And when it is released in the market, I believe that they will be rushing to purchase them.

As for the negotiations on the interconnection fee, the negotiation is currently underway. It is being delayed somewhat by about two to three months compared to the original schedule. Other than that, we are not able to disclose any details on this matter.

Yes, as for the MVNO business, the designated operator that is required to carry out this business is SKT. KT is not required to do so. We could implement this business on a voluntary basis if we feel that this is needed there.

For the voice service market in Korea, it is already pretty much saturated and the competition is rather cut-throat. So carrying out an MVNO business in the voice sector, we believe that is not very meaningful.

But the data explosion era in the market in which KT is spearheading, we believe that here, the data MVNOs are meaningful so in this sense, will accommodate this need and work together with the relevant entities to further build upon this particular market segment.

We plan to take a proactive stance and take more aggressive measures in pursuing the MVNO data business with regard to the opening of the network. We believe that this is also conducive to the convergence of projects between heterogeneous businesses and would also have a positive impact on increasing the subscriber base to our network. So regards the data MVNO, we are very positive and plan to take an aggressive attitude towards this area.

Thank you. Just one follow up question. Your competitor has increased projections for its smartphone subscribers to 3m. Are you guys planning to announce something similar in the near future or -- if you can comment on it please?

(Interpreted) Yes. If you recall, in the opening comments that I made earlier in this conference call, KT has already made an upward adjustment to its annual target for smartphone subscribers from the previous 2.1m to 2.5m.

Okay. Thank you.

(Interpreted) The next question will be presented by Stanley Yang from Nomura Securities and the following question will be presented by Mr. Josh Bae from UBS.

Mr. Stanley Yang, please go ahead with your questions.

(Interpreted) Yes, I have two questions. My first question pertains to the 22% marketing cost cap guidelines that were presented by the regulators. It seems that this item isn't exactly making headlines obviously. There is more talk about a subsidy cap in the latter half of this year.

But regard to the 22% guidelines, how strong do you believe is the government's commitment, willingness to enforce this guideline and how committed is KT in complying with the government guidelines?

Looking at the second half of this year alone, how feasible do you believe it is -- how feasible do you think it is for KT to comply with the 22% marketing cost cap?

My second question pertains to the ARPU. The smartphone ARPU is quite positive, very promising, essentially given that the subscribers to iPhone has exceeded 800,000 and the average ARPU has been maintained at about KRW54,000. And the ARPU overall has been steadily growing since '09 and with the further penetration of smartphones that is anticipated going forward, how far -- how much do you think the total ARPU is likely to grow in the future? This will be a mid- to long-term so about 2011 to 2012. I'd like to know your mid- to long-term forecast on the total ARPU and if there is any upside potential on that?

(Interpreted) Yes, to answer your first question on the guidelines concerning marketing costs, KT is in full agreement with the intent of the KCC in that the telcos should refrain from wasteful competition on the marketing side. But given that, KT voluntarily has and will continue to make every effort to reduce our marketing costs even without such regulatory guidelines.

And since the new CEO has assumed office, you probably know that it is currently manifest in our earnings that we are continuing to refrain from such wasteful marketing competition and rather focus on enhancing benefits and value for the customers and generating greater ARPU for the company.

But as you know, the details on the marketing cost cap has not been finalized and officially approved. But once it is approved, and as long as it is not detrimental to fair competition in the market, there is no reason for KT to object to such guidelines.

And one more point to add, if such a guideline or regulatory -- regulator's intention is to prove more effective, we believe that some preventions and regulations that place a cap on subsidies per handset would be more effective in achieving the intended goal. And so we anticipate this regulation to be put in place as soon as possible. And as long as the conditions that are placed on all three telcos are fair, then we will make every effort -- dedicated effort to comply with this regulation.

Yes, the average ARPU for an iPhone user increased from KRW52,000 to KRW54,000. Of course, there are some seasonality in that increase but overall, we believe that it is very encouraging and promising. And we also believe that the overall trend in the increase of such ARPU is likely to persist well on into the future.

Another promising sign comes from the fact that we did not implement any aggressive push marketing to attract smartphone subscribers. It was the potential customers that truly wanted to use our smartphones, they came to us in a voluntary basis. That is why their average data usage is quite high. So if the iPhone 4 handset is released later this year, we believe that together with a total of 12 new smartphone line-up in the second half of this year, we will be seeing very promising ARPU trends, which is likely to continue on an upward hike into the future.

(Interpreted) The next question will be presented by Josh Bae from UBS, and the following question will be presented by [Chan Sung Min] from JP Morgan.

Mr. Josh Bae, please go ahead with your question.

Yes, thank you. I have two questions. First is on your dividend policy. I understand that you have a 50% payout ratio guidance but we are seeing fluctuations in the bottom line due to the FX moves. Do you have any plans to adjust your policy so that the dividends don't fluctuate due to the FX moves?

The second question is on one of your cost items; the cost of service provided which increased quite a bit this quarter. You mentioned in your material that the systems integration revenue increase was one of the reasons. Could you please help elaborate and share with us if there are any other reasons for the increase?

I ask because the cost of service provided as a percentage of this service revenue has increased about 1 percentage point versus previous quarters, which looks to be a big jump. Thank you.

(Interpreted) I'd like to answer first your question on the dividend policy. As you well know, KT maintains a dividend policy that is minimal 50% of net income. We usually do not tend to normalize this portion but if the fluctuations in the foreign exchange rate or other circumstances are highly volatile, then we do consider normalizing this particular item.

As for the foreign exchange rate fluctuations, we are waiting to see how the future fluctuations transpire. And if it has a dramatic upward or downward effect on our net income, then we would submit the relevant bill to the Board of Directors and pursue normalization of our dividend.

But these are usually limited to a dramatic one-off item. So for instance, the massive restructuring undertaken late last year that had a dramatic impact on our bottom line, so we have to normalize it in this case and we are able to provide 2001 as part of our dividend payments to our shareholders.

But this is in case only if the one-off item has a strong impact on the net income. And if that is deemed to be true, then we submit the relevant item to the Board of Directors and they make the final decision as to whether or not to normalize this. But at present, we do not consider the foreign exchange rate fluctuations to be so dramatic that it requires normalization.

You asked about the reasons behind the increase in the cost of services provided. As you have pointed out, the revenue coming from SI increased which has also led to an increase in costs on the SI side.

In addition to this, we saw an increase in number of subscribers to QOOK TV and that entailed us to pay more for purchasing a bigger amount of content and also pay per view, in which demand is also increasing.

(Interpreted) The next question will be presented by Chang Sung Min from JP Morgan and the following question will be presented by Ms Kwon Chongu from Hyundai Securities.

Mr. Chang Sung Min, please go ahead with your question.

(Interpreted) Thank you. I have a few questions. First pertains to the seasonality factor in your business cycle. Traditionally, we saw the cost to be spent more in the fourth quarter of each year, although last year seemed to be an exception. Do you expect this kind of seasonality to also show up for this year as well?

And second, you mentioned that you are planning to release 12 different types of smartphones in the latter half of this year. Of the 12, how many types are being imported? If you can comment on that I'd appreciate it.

And third, your revenues generated from real estate assets seem also very favorable. I saw somewhere that your target for this year end is about KRW200b. Will these numbers in certain places increase more, according to your expectations?

And fourth, it may be a more technical question. I may be the only one not presently understanding this. But if you look at the combined revenue on the fixed-line business and the wireless business, it amounts to about KRW4.787 trillion. Where exactly is the reconciliation problem?

(Interpreted) Could you clarify your fourth question? What are you saying? There's not exactly a match in terms of the math?

(Interpreted) Well, to clarify on the fourth question, if you look at your preliminary earnings commentary on the service revenue side, including voice telephony, Internet, data, real estate and others, and you also have below that the wireless service revenue, if you add all those up it amounts to about KRW4.787 trillion. But in your statement you said it's a little -- it's just shy of KRW4 trillion. So I'm wondering where the discrepancy is coming from.

(Interpreted) Let me answer your first question on the seasonality impact. You very well know that KT's operating income dramatically falls in the latter half of each year. But in the course of past years, if you look at the fixed-line business, for reasons of increases and depreciation, amortization and increases in commissions paid out, you'll see this trend on the fixed-line side.

But the trend is completely opposite on the wireless business. Because of the increase in new subscribers to wireless services at the beginning of the year, they contribute to steady increases in revenues throughout the year, so the trend may be different between wireless and wired businesses.

And with the merger with KTF, the seasonality impact has been somewhat dampened. Although it was there to some extent in '09, it was considerably less compared to previous years in the aftermath of the merger. And since the wireless revenue is far surpassing that of the fixed-line revenue we expect a seasonality impact to further diminish in the future. Although it will still be there for this year, we expect a downward trend going forward. And as CFO in charge of financial matters at KT, I'll see to it that we will be able to smooth out the seasonality impact on our business.

Now on the smartphone line up question, yes, we plan to release 12 different types of smartphones in the latter half of this year. Of the 12, four will be imported and this includes iPhone 4 and eight will be Korean brand smartphones. The four that are imported will be exclusive KT phones and of the eight local phones, three will be exclusive KT phones. Three will be shared with SKT and two will be shared with LG.

Concerning your question of real estate, let me refresh your minds regarding our KT's projects on an all-IP scheme. Currently, there are about 450 KT branches nationwide. Given the current market situation and demand, we believe that about 50 is enough and if we reduce the 450 to 50, that will leave us with a lot of idle assets. So utilizing these idle assets and further development upon the real estate business, we believe that we will be able to further maximize our revenue and income.

In order for KT to further strengthen its real estate business, as you all know we have already established a dedicated subsidiary focusing on real estate development. And this subsidiary will focus on the development and planning of KT's real estate assets. We have earlier this year communicated to the market that our expected revenue currently generated from the real estate asset is about KRW203b. But we anticipate leases and sales of real estate assets to become more, to have more vitality in the coming months, so that this initial forecast is likely to be greater. And you can anticipate that throughout this year.

And concerning your question on some discrepancy in the numbers, I believe that you only take a look at the numbers for PSTN on the fixed-line business. But it actually includes the handset or devices, not just for PSTN but VoIP and On handsets as well. But if you have further enquiries, perhaps you could have a talk with one of our team members and they could allay some of your concerns regarding this number discrepancy.

(Interpreted) Can you call me after this conference call?

(Interpreted) Yes, we will do that. Thank you.

(Interpreted) The next question will be presented by Ms Kwon Chongu from Hyundai Securities. Please go ahead with your question.

(Interpreted) Thank you. I have three questions. This question may have already been asked because I joined this conference later on, but it pertains to your forecast on the number of subscribers for year 2011. Yesterday the competitor SKT said that it expects an increase from 8m to 10m. What are KT's anticipations?

And two, if the iPhone 4 is released, whether it's in August or in September, we could potentially anticipate some cannibalization effect with the iPhone 3GS. How serious do you believe that that potential cannibalization will be once the iPhone 4 is launched in the market?

And third, with the smartphones, many of the telcos and SMEs are rushing to introduce the mVoIP service and this will inevitably lead to an acceleration in the decline in wireless voice revenue. So have you done any analysis or assessment with regard to the impact of this?

(Interpreted) You asked about smartphone subscribers for your first question, right?

(Interpreted) Yes.

(Interpreted) As far as the target smartphone subscribers, actually I mentioned in my opening comments that we've made an upward adjustment from the previous 2.1m to 2.5m and this will accordingly be reflected in our annual business plan. And earlier in a press interview, our CEO Mr. Cho has mentioned that the target for all smartphone subscribers will be 6b. So you could for now consider this as a tentative guidance since it hasn't been officially approved or formalized. And going forward, this will have to be listed in the business plan with this number. Once the business plan is formally finalized, it's not likely to fall, but it could go up. But for now consider this as your guidance.

And you also asked about a potential cannibalization effect with the launch of iPhone 4. You are perhaps aware of our program that allows the customers to replace the existing iPhone 3GS phones with the new iPhone 4 and you're asking whether this has a cannibalization effect. But I think otherwise. It rather has a positive impact on expanding our overall subscriber base with this iPhone for takeover program.

For example, if I were to buy a new iPhone 4 to replace my iPhone 3GS my daughter, for instance, would nag me to give her my iPhone 3GS phone. So in the end, it will not be cannibalization but rather have an opposite effect of further expanding the subscriber base.

I'd like to comment on KT's position regarding mobile VoIP. Given the current state of technology, the QOS with mVoIP is not guaranteed. So the call quality so to speak, is sub-par at this point and users would have to pay a special charge for Skype-to-Skype. That has a negative impact on the traffic. So the traffic at this point isn't all that substantial and regretfully, it is not generating all that great amount of value to our customers either.

We will keep abreast of the technology trends involving mVoIP as well as the actions and responses taken by the competition. And we will do our utmost to eliminate most of the negative perceptions associated with mVoIP service, so that it will further help us to generate more revenue. And we are reviewing to that end and we are working to create a concrete policy on our VoIP services.

Recently, SKT, the competitor, released a new pricing plan (technical fault). But it is a KRW55,000 pricing plan and if a subscriber purchases, this he or she is given a free MVoIP. I think it's a very clever scheme. It doesn't do any damage to the ARPU and it generates benefits for the customer. So we will take into every situation and factor into account and KT will thoroughly and meticulously review this option. And in the end we may opt for a similar scheme, but at this present time, we have no definitive policy in place.

Are there any further questions?

Thank you for the questions and interest. In the second half of this year, we plan to further solidify our leadership in the wireless data market by augmenting our competitive smartphone line up, including iPhone 4 and by launching a wide variety of tablet PCs.

Going forward we will see to it that our customers are not in any way being inconvenienced and are freely using data through our diverse services. This will be done by dispersing the explosively growing data traffic throughout our differentiated 3W network.

We will continue to expand our WiFi zone, supported by our excellent Fixed-line infrastructure and allow our customers to experience real unlimited usage so that we may continue the growth in wireless data revenue. And meanwhile, we will also be unrelenting in our efforts to cut costs and improve profitability.

I'd like to thank you all once again for joining us despite your busy schedules today. This concludes the conference call for 2010 Q2 earnings announcement for Olleh KT. Thank you.

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