KT Corp (KT) 2010 Q4 法說會逐字稿

(Interpreted). Good morning and good evening. First of all, thank you all for joining this conference call. And now we'll begin the conference of the 2010 fourth quarter preliminary earnings results by KT.

This conference will start with a presentation followed by a Q&A session. Consecutive interpretation will be provided for your convenience. (Operator Instructions).

Now we shall commence the presentation on the 2010 fourth quarter preliminary results by KT's CFO, Mr. Yeon-Hak Kim.

(Interpreted). Good afternoon. I am Yeon-Hak Kim. I'm the CFO of KT. I wish all of you a very fruitful year 2011, which is the Year of the Rabbit.

With the iPhone introduction at the end of 2009, Korea's telecom market underwent a very rapid change from the smartphone frenzy over the period of last year. In just one year smartphone subscriber number hit the 7m mark. And we expect subscriber expansion to further accelerate this year.

Also at the end of last November, iPad, which stirred up the global market, was introduced, opening up a chapter on tablet PC era, which will bring innovative transformation to our digital life.

The spread of the emerging devices, i.e., smartphones and tablet PCs, is facilitating the migration into FMC, Fixed-Mobile Convergence, faster than expected, rendering the distinction between fixed and mobile service irrelevant.

As a way to respond to such change in a nimble manner and to lead the market, as of January 1 this year KT has integrated QOOK and SHOW brand, which were respectively brands for fixed and mobile services, into the Olleh brand. Going forward we will provide new experiences to customers through a variety of convergence services.

With that, allow me to begin the 2010 fourth quarter earnings presentation. You can also take part in the conference call via webcasting on our website.

For the convenience of investors and analysts in comparing and analyzing the figures, 2009 annual numbers are based on the guidance that assumes merger as of January 2009.

Fourth quarter revenue grew 9.3% year on year, driven by Wireless revenue growth underpinned by the smartphone. However, with decline in Telephony and Real Estate revenue, it fell 0.8% quarter over quarter to KRW5,191.4b.

Annual revenue is KRW20,233.5b, overachieving 2010 guidance of KRW19.5 trillion. Compared to KRW18.9 trillion of 2009, there was 6.7% growth.

With falling revenue and increases in depreciation and commissions expense during the quarter and net-loss impact from the adjustment of interconnection rate, operating profit declined 48.7% against the previous quarter to KRW304.7b.

On a per-annum cumulative basis, operating profit is KRW2,053.3b, a 117.2% increase from 2009. Even after taking out early-retirement expense, the growth is 13%.

Net income fell 70% against the previous quarter to KRW105.1b, due to decreases in operating profit and relative increase in FX-related loss coming from FX fluctuations.

2010 annual net-income increase is 93.7% year-on-year to KRW1,171.9b.

Dividend has been decided at KRW2,410 per share. And it will be paid out within a month from the general shareholders' meeting.

CapEx in the fourth quarter was KRW1,238.8b and KRW3,057.2b on an annual basis, which is similar to the previous year.

Let me now move on to each of the business areas. First is the Wireless business. Wireless service revenue fell 2.1% quarter on quarter due to the adjustments in the interconnection rate at the year end, which drove down the interconnection revenue, as well as the adoption of per-second billing in December that lowered the voice revenue.

However, on a per-annum, cumulative basis, due to increases in smartphone subscribers, as they generate higher ARPU, there was a growth of 7.3%.

Especially revenue from wireless data grew 11.6% QOQ to an annual figure of KRW1, 474.3b thanks to increased smartphone penetration. On a YOY basis the growth is 24.4%.

As of the end of December KT's smartphone subscribers are 2.737m, over-achieving our yearly target of 2.5m. And smartphone subscribers are now 17% of the mobile subscriber base.

Following the iPhone 4 introduction last September in the fourth quarter, other competitive smartphones from both home and abroad such as LG Optimus One, Samsung Galaxy K, KT [Text Tick], HTC's Desire HD and Dell's Streak were also launched.

In order to continue our strong market leadership in the wireless data market we plan to launch 25 to 30 new smartphones, which means more than 70% of the new handset line-up will consist of smartphones. We will actively source high-, mid-, low-end handsets that meet customer needs from various domestic, foreign makers with different operating systems base.

Through such plans we expect to reach 6.5m smartphone subscribers by the end of the year. We will also introduce around seven to eight tablet PC models within the year to reach more than 1m cumulative subscribers by the years' end.

In the meantime, we will focus all of our network capability to differentiate service quality so that our customers can easily use a variety of smart devices anytime, anywhere.

To achieve this we are in the process of converting into CCC, Cloud Communications Center, which enables us to secure more than 50% in wireless network capability and competencies compared to the existing system. We also plan to apply this technology to LTE, which is planned to be built in the second half of the year.

For an efficient dispersion of data traffic we will complete WiBro coverage build-out to 82 cities by end of February and expand current 42,000 Olleh Wi-Fi zones to 100,000 sites nationwide by end of the year.

Recently KCC came up with a guideline to minimize signal interruptions in highly-dense Wi-Fi sites, to which three mobile carriers agreed to keep. And so we can expect improved Wi-Fi network quality in the future.

Next is our Telephony business. Telephony revenue in the fourth quarter is KRW4,388.6b on a cumulative basis. Although revenue decline in fixed line continued with a KRW464.2b decrease on a year-on-year basis due to declines in PSTN subscribers and traffic, net reduction of subscribers slowed from monthly average of 150,000 in 2009 to 118,000 in 2010.

Out of this, VoIP revenue was KRW380.2b on a cumulative basis which is an increase of 45.7%, thanks to the rise in number of subscribers. In 2010 KT took more than 40% of the net addition market share. So as of December end we now have 2.724m subscribers.

Next is Internet business. Increase in Internet subscribers drove up growth band revenue and WiBro revenue, bringing Internet-access revenue 4.9% higher compared to the previous year.

There was 110,000 net additions in the fourth quarter for broadband subscribers, bringing the total number to 7.42m. Through a variety of bundled products and customer-care programs, churn rate fell from 1.9% at the end -- at year end of 2009 to current 1.2% at the end of 2010, sustaining a very stable trend.

Broadband service is core to the -- to building a smart home together with IPTV and VoIP, where various Wi-Fi-based smart devices are connected to the network. Therefore we plan to continuously expand our subscriber base.

Internet application revenue increased 24% year-on-year thanks to IPTV and Bizmeka revenue growth. For IPTV, Olleh TV Skylife which is a hybrid product with Skylife, was quite popular, helping in bringing the total subscriber number to 2.90m as of end of December, higher than the annual target of 2m subscribers.

Accordingly, annual cumulative revenue is KRW192.9b, a two-fold growth from last year.

Olleh TV will continue to provide differentiated contents based on OTS, which bundles with Skylife's product and open platform. In 2011 with the implementation of in-home mobile Olleh TV, which enables IPTV viewing while on the move inside one's home, we will expand our N-Screen services.

Briefly on the operating expense side, labor cost increased 5.3% this quarter as the one-off factor from adjustment in calculation method of retirement benefit went away.

However, on an annual cumulative basis due to the large-scale early retirement end of last year, there was a reduction of KRW300b when compared to 2009 labor cost after excluding the early-retirement expenses.

Marketing expense decreased 7.6% QOQ with the relative softening of the market competition. However, with increased demand for high-end handsets like smartphones, COGS, depreciation, commissions, repairs and maintenance expense increased. So operating expense in the 4Q inched up 5.3% QOQ.

That was the fourth Q 2010 performance numbers. Let me now move on to 2011 guidance.

Guidance for revenue in 2011 is KRW20.5 trillion. Please understand that in consideration of competitive environment, just as we did last year, we will not be announcing our operating profit target.

We are expecting KRW3.2 trillion of CapEx. And investment into Wireless network will be increased in order to efficiently handle data traffic, which is exploding with higher usage of smartphones and emerging devices. But we will reduce the investment into the existing legacy-business areas.

For more details, please refer to the materials we circulated. This is the end of the presentation for 4Q, 2010. We will now start the Q&A session.

(Interpreted). Now our Q&A session will begin. (Operator Instructions). In order to allow as many Q&A chances as possible within the restricted time, you will appreciate only two questions for each participant.

The first question will be provided by Yang Jong-in from Heungkuk Investment Securities. And the next question will be provided by John Kim from Deutsche Securities, Korea. Mr. Yang, please go ahead with your question.

(Interpreted). I would like to ask the questions.

The first question is that if you look at the fourth quarter the ARPU number actually declined compared to the third quarter except for the access revenue.

This is quite surprising, because I see that the smartphone subscribers have increased quite rapidly but the ARPU level fell. So what is the reason behind that? And what is your projection for ARPU in year 2011?

Starting this year you're going to be adopting IFRS. And what are some of the high-level changes that we could expect, for instance, in terms of the revenue, profit or depreciation line items? You do not have to provide us with the specific numbers, but if you could just paint the big picture that would be helpful.

(Interpreted). The reason for reduction in ARPU is that, yes, you're correct, that in the fourth quarter there was about KRW271 of ARPU decline. Partially the impact came from per-second billing systems.

But we believe that mostly the reason is because from the month of July to September there was about a three-month delay in iPhone introduction. We believe that is the main reason.

And, as you can recall, the iPhone 4 introduction was delayed for about three months. And unfortunately during that period of time KT did not have any high-end smartphones that it could provide to the market. So it had to provide the low-end and the feature handsets in order to respond to that situation at that point in time.

And according to the analysis, the impact from the high-end handsets on the ARPU line item begins to emerge after three months. So we believe that because of the delay in the iPhone 4 introduction, we see the temporary impact of ARPU reduction in the fourth quarter.

And we believe that starting this year the ARPU is going to record a turnaround. After the September of last year the supply of iPhone went about in a smooth manner and we sold about 250,000 units on a monthly basis. And last year, if you look at the second half of the year, we sold in total 1m units. So starting the first quarter of this year we believe that there will be a positive impact on ARPU number.

Especially for this year we see that people taking out the higher-rate plan, their percentage is increasing. And also we have a high-end smartphone line-up which is much more expanded. So we believe that since we have competitiveness in the smartphone space we expect the ARPU to improve going forward.

Just for your reference, in the third quarter of last -- in the third quarter there was 33% of the subscribers took out a rate plan above KRW55,000. In the fourth quarter that number increased to 48%. And in January of this year that percentage increased to 61%. So we see a continuous growth.

And on top of that, other than the iPhone -- even other than the iPhone users there are people who use high-end smartphones. And because of that we expect the ARPU to show a further trending-up trend, going forward.

As you know, KT usually or in the past two-thirds of KT's smartphones were accounted for by the iPhone. And at that time other smartphones did not generate as high an ARPU as iPhone did. However, as we have sourced the new models now those new smartphone models are generating high level of ARPU.

Just for your reference, if you look at the high ARPU subscribers who take out above KRW55,000 pricing plan, currently the percentage of those types of subscribers for iPhone is 70%. Whereas for Vega X 75%, for Desire HD 74% and Galaxy K 66%.

So even other users of smartphones are now showing quite high level of ARPU. And that's one of the reasons why we expect the ARPU to show an upward trend.

On IFRS currently we are running the simulation to see what type of adjustment and change it's going to bring about in the revenues and various different expense line items. But at this point the simulation is undergoing. And we do not have any [consensus] outcome that we can share with you at this point on a detailed level.

We will make sure that before we present the 2011 first quarter performance that we will have a separate explanatory session where will explain to you what the impacts are. And we will make sure that you can make apples to apple comparison by providing you with the previous performance based on IFRS criteria.

(Interpreted). The next question will be presented by John Kim from Deutsche Securities, Korea. And the following question will be provided by Sam Min from Morgan Stanley. Mr. Kim, please go ahead with your question.

Yes, thank you for the opportunity. I have two questions.

First on your operating profit for 2010 versus 2009. You commented your operating profit of KRW2.05 trillion improved over 2009. Now, if we make rough adjustment to your 2009 operating profit by adding about KRW200b to your 2010 marketing cost, which is my rough guess for your handset subsidy cost, that would have been included in your operating expense if the sales discount subsidy approach was not used.

And then if we add back roughly KRW900b in labor restructuring charges to your 2009 operating profit, it seems that there wasn't much operating profit improvement in 2010 at all. So can you provide some color on this? And, as you alluded to before during your commentary, what are some key risks to improving your profitability in 2011?

Second question is on your spectrum resources. Given you've had a chance to observe impact of smartphone introduction for a full year and considering we are at the early stage of tablet introduction, do you have currently enough spectrum resources to support your planned 3G and LTE services for next two to three years?

If not, how much more spectrum do you think you'll need? And what do you think will be the impact of KCC's introduction of auction-based spectrum sales, going forward? Thank you.

(Interpreted). Let me answer the second question first. As you know with the expansion of penetration of smartphones there was explosion of data traffic, and also the introduction of unlimited fixed rate plan has also triggered additional data traffic.

And also with the introduction of tablet PC there would be a further increase of data traffic. However, as you know, and KT has communicated this a number of times to the market that KT is actually well prepared to respond to such data explosion.

KT, unlike other competitors, employ a 3W plus LTE strategy, which that we not only make use of the 3G network but we also will utilize WiBro and Wi-Fi network and by doing so we can disperse the data traffic that comes onto the network. And on top of that, on the 3G network we have applied the concept of CCC which will enhance the data capacity by amount of 50%.

However, having said that we feel that, despite those types of preparations, if need be we will need to secure additional spectrum in order to more efficiently respond to the data explosion.

So the additional spectrum could be in the form of getting 2.1 gigahertz spectrum or that we could think of acquiring other empty slots. And also we understand that there was auction system that was introduced by the authorities but that could incur quite a high level of cost.

So we do have many different contingency plans that we have envisioned. But because it has to do with our strategy we will not be able to share with you the specific details. But let me say that we are very clearly aware of the necessity and we do have many different options.

Let me now tackle the first question which is a bit of a difficult question. Well, I think your question is that despite many different factors you're saying that the actual profit actually did not increase. I guess this is the gist of your question. But in operating in business you have to take into consideration various different aspects, like even the restructuring and marketing expense and investment.

So in 2008 we have achieve OP of KRW1.8 trillion. However, that was at the expense of very restricted marketing activity. So as you know the percentage of the Wireless subscribers actually decreased from 2008 to 2009 for 31.5% to 31.3%.

In 2010, despite the reduction in labor cost in the amount of KRW300b, there was improvement in the profit and there was increase in the usage of the marketing expense due to the overheated competition in the Wireless space. And also from a long term perspective, in order to further strengthen our customer service capabilities and also to really secure long term -- to secure high quality content we have put in important investments. And therefore the Wireless subscribers' market share has been improved by 0.3%. And in terms of the revenue market share, it improved by more than 1%.

And also this year with the further penetration of the smart devices we expect a much bigger profit contribution from the Wireless services business. And we believe that the productivity of our employees is also going to further enhance and also we can attain better cost efficiency.

So with the expansion of the smartphone segment in 2011, we expect that the profit coming from the Wireless and mobile space will more than offset the reduction we're going to experience in the fixed line space. And also with various different smart devices and VoIP services we expect that to also further drive up the profit level.

But once again, with regards to the specific internal target number, please understand that we will not be able to explicitly share with you what those numbers are.

And you also asked about possible risk factors and I think what we see as risk factor is quite similar as what market thinks. One of them is the continuous decline in the revenue coming from the fixed line services. So KT has to think as to how it can actually compensate for that decline in the PSTN space.

Second has to do with the data traffic in the Wireless space. There is a significant explosion of data traffic which may entail additional investment and also need for additional spectrum. And also there is a talk of the fourth mobile carrier coming into the market. Many different other players or even the MVNO players as more players enter into the market there will be a fiercer competition in terms of pricing and product. So that could be a risk factor, but, of course, we are fully prepared to respond to that situation.

(Interpreted). The next question will be presented by Sam Min from Morgan Stanley, and the following question will be presented by Stanley Yang from Nomura Securities. Mr. Min, please go ahead with your question.

Yes, hi, thank you.

My first question is on marketing expenses, particularly in the fourth quarter. It appears that from my calculation that marketing expense really didn't fall as much as it should have given that you were offering significant deferred subsidies during the quarter which sort of led to a decline in your ARPU. If you could explain that I would appreciate it.

My second question is on your comment on smartphone and maybe smartphone users have been signing up for KRW55,000 plans. If you look at 2011 it seems that smartphone migration will happen for the mainstream and I think you discussed that you'll be offering a variety of low to mid end smartphones. So do you think that kind of high 70% smartphone users signing up for KRW55,000 plan will continue to sustain itself. Thank you.

(Interpreted). It is true that the marketing expense actually declined because compared to the previous quarter the market became more stabilized. So marketing costs and expense for new subscribers and handset replacement, as well as marketing expense per person, also declined. And the decline took place both in the fixed and the mobile area. So if you look at the total number it fell from 241,000 to 215,000 and if you look at the acquisition cost per subscriber it fell from KRW180,000 to KRW165,000.

And so the marketing cost, I guess your question is that the marketing expense should have declined much more than what you see. But it is true that we were able to reduce the acquisition cost for the subscribers. But, as you know, starting the second half of last year Company-wide we are focusing very strongly on customer care. So there is a very strong focus on strengthening customer care, so even if the acquisition cost fell there were more activities in terms of providing care to the customers, like the membership and some of other indirect bonuses to the customer. So that is one of the reasons.

And secondly, you mentioned whether we can really increase the overall ARPU if [people] get on low to mid-end smart phone handsets. The thing is we have different strategies for different target market and different product portfolio. For iPhone and high end smartphones which generate high ARPU of course we will focus there as well. But at the same time we still have many customers who are subscribers who are using feature phones and their ARPU level is quite low. So if we could migrate them to low to mid-end smartphone that will have an impact of further driving up the ARPU.

So once again let me emphasize that we have a very differentiated strategy that we employ. That is why we say we will also go after the high ARPU customers and at the same time provide the adequate product to the mid to low-end segment. But overall, our marketing strategy is to further increase ARPU.

(Interpreted). The next question will be presented by Stanley Yang from Nomura Securities and the following question will be presented by Chang Sung Min from JP Morgan. Mr. Yang, please go ahead with your question.

(Interpreted). I would like to ask a question about the impact of iPhone introduction in your bottom line. For your -- if we look at your competitor companies we have a clear understanding of the Wireless revenue and the marketing expense so we can clearly plot out the trends going forward. However, for KT, because you do not break down or break out the marketing expense for fixed and wireless, it is quite difficult for us to paint a picture for the profitability going forward.

In the 4Q the iPhone sales were very good, however the profitability was quite lagging. So we would like to understand whether the iPhone introduction actually had a positive impact on your profit numbers or just as there's the one month delay in ARPU is there also a one month delay in profitability.

And also you mentioned that smartphone subscribers are taking bigger portion of your entire subscriber base. So we would think that that would immediately show actually in the profit line item. Or maybe because there are still feature phone subscribers does that offset the impact of iPhone. So we would like to further understand what the situation is with regards to the iPhone and its impact on profitability.

And since you did not provide us with the earnings guidance for 2011, the investors could be rather concerned that despite the successful iPhone introduction it may not have a positive impact and further increasing the profit. So if you could paint a clearer picture that would be helpful.

(Interpreted). Our understanding is that even the competitors don't provide profit numbers by different products or different handsets. For KT, as you know, we are a converged entity between fixed and mobile. So our market expenses are based on consolidated basis and we do not provide a breakdown by services.

What I can say about iPhone is that all marketing expenses, all included together, per one unit of iPhone we spent KRW130,000. However, as the income we receive KRW50,000 of the usage fee we receive from the subscriber. So if you do a simple math you could see that it's quite possible.

However, having said that, as you know, KT does not just sell iPhones. We have other feature phones where we provide high level of subsidies and there are also other smartphones with low level of ARPU. So it is true that these other types of products are offsetting the profit from iPhone.

But at the end of last year on top of iPhone 4 we have introduced other profitable high end smartphones. So we expect that there will be improvements going forward. And even by introducing mid to low-end smartphones we can attract current feature phone users, which is going to have an impact on improving and increasing the ARPU level. So we expect this will have an improvement effect on our profitability.

A couple of days ago our competitors had an earnings conference call and they also said that they expect the market competition to soften this year. We also think the same. KT is committed to not increasing the marketing expense expenditure but efficiently acquiring as well as retaining our customer base.

As different players compete based on reasonable competition I believe that the KT's, as well as other telecom telcos' ARPU will improve as well as their profitability. We expect that will happen and we will devote our efforts to that end.

(Interpreted). The next question will be presented by Chang Sung Min from JP Morgan Securities. Mr. Chang, please go ahead with your question.

(Interpreted). You mentioned your revenue target is KRW20.5 trillion. What about the target for your service revenue?

And also with regard to your Real Estate revenue, during the conference call in the third quarter I remember that the CFO spoke about this item in a very positive tone and said that there may be another separate IR session on it as well. But on a QOQ basis in the 4Q the number actually declined. So for year 2011 and 2012 what should we expect with regard to the Real Estate revenue.

And also you have mentioned that marketing expense for the fixed line area has declined. But can you share with us what the number is on a QOQ basis because just before KT's conference there was a conference call by SK Broadband and they have mentioned that their marketing expenses has increased and their subscribers numbers seemed quite good. So that made me think that maybe in the market the competition was a little more fierce or further deepened. Can you provide more color on this?

(Interpreted). Our revenue guidance is KRW20.5 trillion but our internal policy is that we do not provide the breakdown of this number. But roughly speaking the Wireless revenue is going to increase and service revenue will also increase. The fixed line revenue will decline because there is a decline in the PSTN revenue. But we expect that VoIP and IPTV services will be able to compensate and make up for that decrease. And, of course, the increase in the revenue in the Wireless is going to be in much deeper amount than the decrease in the fixed line revenue. But please understand that we will not be able to share with you specific numbers.

On the Real Estate, as we told you before, all the KT offices they are all going to convert to all-IT basis. That's why KT branches are going to lower in its number. And we can reap further development as well as real estate sales revenue from these types of activities. And so in a period of one year our revenue had moved from KRW290b to KRW390b, so that was about KRW100b increase.

The rent revenue is quite steady over a period of time. However, development related revenue as well as real estate sales related revenue is actually contingent on whether there is big project or not. So it's different case by case. That is why it does not show a steady trend over quarter over quarter. However, on an annual basis you will be able to see that there is a steady increase in Real Estate revenue.

We were originally planning to have session where we explained to you the Real Estate master plan. But if we were to openly announce certain things that that's going to have a quite a bit of an impact in the real estate market. So having a large scale setting will not be easy, but I believe that we can have one on one sessions and meetings where we can explain to you what our real estate plan is.

On the marketing expense on the fixed line business, once again we do not provide you with the breakdown of the fixed and wireless market. In the fourth quarter compared to the third quarter there was actually a decline of 3% in marketing expense. You mentioned that you felt that maybe the market was actually more fierce in terms of competition, but if you look at KT over the past one year our performance and actual numbers from this fixed line space was quite good for us.

And I understand that for the competitors they might have placed a lot of marketing spending at the end of -- during the fourth quarter to better their year-end performance, but in the case of KT we have maintained our pace. So if you look at the net gain in terms of market share the number is actually lower in 4Q for KT.

I would like to thank you for your interest and many questions. 2011 will be a year for KT to leap forward as a global ICT leader, breaking away from the bias that telco industry can no longer grow or that it is a mere domestic industry. With further strengthening of sophisticated core platforms and its openness we will transform into an IT service company based on cloud computing. Through such efforts we plan to materialize on revenue opportunities in the cloud computing market within the year.

Thank you for joining us today. This marks the end of 4Q 2009 earning conference call of 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.