KT Corp (KT) 2011 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 2011 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 2011 first-quarter preliminary earnings results by KT CFO, Mr.Yeon-Hak Kim.

(Interpreted). Good afternoon. I am Yeon-Hak Kim, CFO of KT. Month of May is a month to celebrate our families. I wish all of you and your families health and happiness.

KT has brought about 10m smartphone users with the first ever iPhone introduction in Korea on November of 2009. This year, we intend to introduce more variety in the handset lineup, so as to kick-start mass market adoption of smartphones. We also launched kibot, a robot for children, on April 20, and will soon introduce smartpad as well. Through such new devices and services, we intend to herald in a smart home era.

To this end, KT will expand 52,000 WiFi zones to 100,000 by the end of the year. With our WCDMA network and WiBro coverage in 82 cities nationwide, wireless network will be further broadened, enabling users to access any time, anywhere, via a variety of devices, in a convenient manner. This indeed will be an expansive fixed and wireless network environment.

Also, we intend to make KT's integrated application and content market, the Olleh market, into Korea's biggest and the best open content market, allowing KT users to enjoy any application, music, movies, e-book, etc., via devices such as smartphones, tablet PCs.

KT will also discover new growth opportunities in the era of IT outsourcing, which is moving closer to us, based on the cloud computing infrastructure, well known for its world best quality and reasonable price competitiveness.

With that, let us begin the first-quarter 2011 earnings conference call for KT. You may also participate via the webcast.

KT has applied KIFRS standards from 2011, and so we will be providing consolidated numbers and relevant comparative analysis. In Q1 earnings, 38 companies, including KT, are reflected in the consolidated statement.

Q1 consolidated revenue grew 6.1% year on year to KRW5,303.7b, due to the growth in subscribers and ensuing wireless revenue and merchandise sales growth. On a QoQ basis, despite the seasonal decline in telecom revenue, there was a 3% increase thanks to KT Skylife's revenue and disposition gain on investment stock accounted in the equity method.

Q1 consolidated operating profit posted a growth of 105.4% QoQ and 61.7% year on year to KRW726.3b, on the back of revenue growth. Q1 consolidated net income went up 193.3% quarter on quarter and 84.7% YoY to KRW555.2b, due to the growth in operating profit and improvement in FX related financial profit and loss from the fall in the foreign exchange rate. KT's Q1 standalone CapEx was KRW688.9b.

Let me now walk you through each of our business lines.

First is Wireless business. Wireless revenue increased 1.5% year on year to KRW1,760b, as the share of high ARPU smartphone subscribers increased, enabling data revenue growth. Meanwhile, there was a QoQ decline of 1.4%, due to seasonal factors and per-second billing system. However, data revenue showed growth of 39.5% year on year and 12.9% QoQ, due to increases in smartphone share, and continued on a sustained growth.

As of end of March, KT's smartphone subscribers are at 3.84m, which is a growth of 1.1m compared to the end of last year. The figure is the biggest net addition since the initial mass adoption of smartphones in the Q4 of 2009, and is around 30% of the annual net add target. Such an outcome was possible through a diverse handset lineup comprising of not just the iPhone 4 but Vega X, Galaxy K, Optimus One, Desire HD and others from both home and abroad, as well as customers' confidence on KT's fixed and wireless 3W network.

In order to continue our firm leadership in the wireless data market, we are planning new smartphone lineup with 25 models, which is 50% more than that of last year, of which high end will account for 70% to 80% of the total lineup. During the second quarter, around 10 high- and mid-end handsets will be launched. As of end of April, new handsets such as Galaxy S2, Atrix, Optimus Black, Nexus S are in the market.

To enhance customer satisfaction on wireless data use, we are splitting up cells in areas with high WCDMA traffic load. On top of that, KT's proprietary technologies such as Stealth WiFi, WiFi Eelay, Premium WiFi, CCTV WiFi are being used to increase share of data offloading in hotspots. Especially by the end of the second quarter, once the build out of public WiFi zone using the WiBro Egg in the metropolitan subway is complete, we expect users to fully enjoy KT's mobile WiFi network even inside the metro.

Next is our Telephony business. Telephony revenue declined 5.6% QoQ and 11.6% YoY to KRW986.1b, due to a continuous decline in PSTN call traffic volume. In terms of decline in PSTN subscribers, in the first quarter, there was monthly average of 60,000 net reductions, which is 50% less compared to previous year's net reduction of 120,000. We believe this is attributable to the lock-in effect, with increased share of bundled subscribers, lessened competition in the fixed telephony market and gradual reduction in price sensitive customer churns.

VoIP revenue increased 23.6% year on year to KRW78.4b, on the back of subscriber growth. KT was industry's number one at end of January, in terms of total VoIP subscribers, and has gained 60% market share in quarter one net addition market.

Combining both the PSTN and VoIP, as of March end, KT has 19.39m subscribers. Through fixed and mobile bundled product strategies like the Olleh product and continuous and active VoIP conversion strategies against price sensitive customers, we will further solidify our existing subscriber base.

Next is Internet business. Internet revenue increased 5.4% year on year to KRW640.8b, due to the growth in broadband and IPTV subscribers. On a QoQ basis it declined 1.5%, due to fall in game business related revenue of KTH, which is one of the subsidiaries for the consolidated statement.

KT's broadband subscribers increased by 130,000 in Q1 to a total of 7.55m subscribers. Also, thanks to variety of bundled products and customer care program, churn rate was at a record low at 1.08%. Together with IPTV and VoIP, since broadband comprises the main pillar in building a smart home through connecting WiFi based smart devices to the network, we will continue to expand our broadband subscriber base.

For IPTV, on the back of popularity of Olleh TV Skylife, which is a hybrid product with KT Skylife, at end of March total subscribers stood at 2.39m, with a revenue growth of 83% year on year, marking a revenue of KRW63.1b.

Next is revenue for Other Services. Other Service revenue increased 7.6% QoQ to KRW304.6b, as KT Skylife's revenue is now reflected in Q1 numbers. But with IFRS, KRW193.6b of real estate development revenue was all reflected in Q1 2010. As a result, there was a 24.8% year-on-year decline.

It wasn't SKT Skylife; it was KT Skylife.

(Interpreted). Next is revenue from sales of merchandise. Merchandise revenue increased 45.8% year on year to KRW1,072b.

Next is other operating revenue. As disposition gains of KT Skylife stock accounted in equity method of KRW187.4b was reflected this quarter, other operating revenue increased 250% QoQ and 205% year on year to KRW232.5b.

I will now briefly touch upon operating expense items. Q1 consolidated labor cost increased 4.5% year on year and 4.6% QoQ to KRW687b, with a rise in number of early retirements. With the change to IFRS, Q1 2010 number for depreciation for the wireless business went up by KRW264.5b, and due to such one-off impacts this depreciation fell 31.9% year on year to KRW726.1b. Sales expense increased 9.1% year on year and 17.4% QoQ to KRW507.9b, due to growth in new subscribers for both fixed and wireless services and increase in sales expense for consolidated subsidiaries.

For more details, please refer to the materials circulated. This will conclude consolidated earnings presentation for Q1 2011 based on KIFRS standards. We will now begin the Q&A session.

(Interpreted). Now Q&A session will begin. (Operator Instructions). The first questions will be provided by Mr. Sam Min from Morgan Stanley. And the next question will be provided by Mr. Yang Jong In from Korea Investment & Securities. Mr. Sam Min, please go ahead with your question.

Yes. Hi. Thank you. I have two questions. My first question is on ARPU. It seems as though your ARPU fell again about 3%. And my question is, I think in the past conference call you mentioned that perhaps the ARPU might rebound, starting in the second quarter. I wanted to check if that statement still stands true.

And then my second question is on marketing. And I notice on your IFRS marketing it has increased, year on year. We've seen both LGU and SKT see marketing expenses fall. It seems that if you hadn't done the IFRS that your marketing would have fallen by about 8.5%. I just want to understand the rationale for you for taking the marketing expenses out of the calculation on your IFRS. That's it. Thank you.

(Interpreted). With regard to your question about the ARPU rebound, yes, I do admit and I'm also a little bit frustrated at the fact that ARPU is not going up as I had hoped or expected.

Now, with regard to the reasons, in the first quarter there were some seasonal factors. There were a smaller number of business operation days. There was also a holiday season, so for one week there was no business operation. And also, because of the impact of the per-second billing, as we are seeing more increases in the subscribers that are taking out Smart Sponsor pricing plan, there was certain declining impact on the ARPU side. That is why ARPU was not able to inch up, but rather it declined.

However, in the second quarter we expect ARPU to increase compared to the first quarter. Once again, however, there are certain factors, like the price discount pressure, which is out of our control. But considering that there are no additional factors, we are expecting about -- ARPU increase of about 2% to 3% on a whole-year basis. But once again, there are certain factors with regard to the regulations, so there are regulatory related factors. So at this point it would be very difficult for us to provide you with an exact number that we expect.

And also, you have to consider the fact that the 3G Pad related numbers are reflected in that ARPU number. So those 3G Pad numbers have an impact of reducing the overall ARPU level. But -- so we do not expect that the ARPU will increase significantly going forward, but you have to approach this issue from a different light, in that now we are seeing one user using multiple devices. They are carrying multiple handsets and multiple devices. And we also see more usage of M2N as well. So we need to look at it from a different perspective, in that rather than average revenue per -- we are looking at average revenue per customer, so we call that ARC. And we need to approach it in that regard, as well.

And so, since the data revenue is increasing, the overall total revenue number for the services will increase, but at this point we will not be able to project a bold increase or a significant increase in the level of ARPU.

With regard to your second question, KT is committed to fully complying with the IFRS related standards. That is why the subsidies on the handsets are deducted from the total handset related sales. In the past, the subsidies have been accounted for under operating expense line item. So -- but we believe that since we are also a listed company in New York Stock Exchange, and also we have also treated our accounts based on US GAAP as well, we believe that it is most feasible and reasonable to deduct that subsidy number from the overall -- the revenue number.

But if we were to base it off of KGAAP standards, meaning if the subsidy number was included in the marketing expense or the overall revenue number, then, as you have correctly mentioned, the overall marketing expense number will decline by 8.5%. Then why does our marketing expense look inflated or why is it higher? The reason is because of -- even though the subsidy number fell significantly, the reason is because we are also focusing on customer care for our subscribers. There are certain efforts going into retention and customer service arena. So, once again, if the past subsidy number was inclusive in the marketing expense number, then you are correct there will be a 8.5% decline in that line item.

(Interpreted). The next questions will be presented by Mr. Yang Jong In from Korea Investment & Securities. And the following questions will be presented by Mr. Stanley Yang from Nomura Securities. Mr. Yang Jong In, please go ahead with your questions.

(Interpreted). I would like to ask two questions. We heard this morning that KT has decided to sell off its share in the company NTC. I would like to understand your rationale behind your decision to sell your stake. It seems to be that this company was operating quite well. And also, can you explain as to what your overseas investment strategy is?

Second is with regard to the news that the government is trying to bring about a rate reduction -- tariff reduction in this industry, and they are thinking about allowing the users to directly purchase the handsets from the manufacturers; they are considering the blacklisting. What will be the impact on KT if that goes through, as well as the impact to the overall industry?

(Interpreted). With regard to your first question, it is true that NTC was a very well operated and managed company, but there were certain limitations that was inherent with NTC because it was a local operator. Of course, in Vladivostok -- city of Vladivostok, they had market share of 40% and they were doing quite well. However, they were not a nationwide operator. Currently, in Russia, if you look at this industry, there is reshuffling going around, around three to four major nationwide players. So we felt that if we waited longer, the corporate value of this company could decline going forward.

And also, another limitation is that this company was doing business based off of 2G. It did not have a 3G license. So, considering that, and from a long-term perspective, we felt that this was a very opportune timing for us to exit from this investment.

With regard to our overseas investment, when it comes to overseas investment, a lot of resources are required. We consider this NTC case to be a very successful case where we have exited from the investment, and with this proceed we will also actively look at another opportunities to create another success story like the NTC story. So we will look for investments. But I think there will another opportunity for us in the future to explain to you our strategies in more detail.

With regard to your second question regarding IMEI blacklist, I understand that KCC at this point is considering the adoption of this system. But with regard to whether it will actually go ahead with it and what the timeframe is like, or what that method will be, whether they will allow blacklisting or white-listing or allow both of these methods, it is not determined at this point.

From our perspective, considering the fact that non-inspected terminals will be distributed and that there will be direct distribution by the manufacturers will work as a negative factor. However, from KT's perspective, there would be no differentiation in terms of handsets amongst the handsets that are provided by the carriers, and there would -- this could lower the overall marketing expense on our part. So this is a positive aspect.

So, once again, there are pros and cons that exist with regard to this type of plan. But at this point, nothing has been determined and it is very hard to say one way or the other what our position is, but we are reviewing this potential.

(Interpreted). The next questions will be presented by Mr. Stanley Yang from Nomura Securities. And the following questions will be presented by Mr. Josh Bae from UBS. Mr. Stanley Yang, please go ahead with your question.

(Interpreted). I would like to ask two questions. The first has to do with the fact that now the handset manufacturers are adopting multi-carrier strategies that means that a one-carrier smartphone lineup is not going to be all that different from another carrier. In this environment, what is KT's differentiating strategy vis-a-vis competitors when it comes to your smartphone lineup? And if differentiation is impossible, do you think that going forward we can expect the MNP market to stabilize?

Second question has to do with your PSTN. Now, your PSTN subscriber reduction is slowing. However, on the revenue side, it seems that the revenue decline was quite significant. When do you see that the reduction in the PSTN revenue to slow?

(Interpreted). With regard to your first question, as you have correctly mentioned, starting this year you will see that when it comes to the wireless -- the mobile handsets, amongst players you don't see any significant difference. Therefore, it is more important to compete against the services and the quality of network. KT is leading a change in the competitive rule -- in the competitive landscape, whereby we will not focus on competition based on provision of subsidies, but by providing differentiated and competitive services to our users.

In that regard, I believe that KT has strength in terms of competitiveness. The fact that there is lessened competition on subsidy and also lessened competition on marketing and MNP going more -- becoming more stabilized, it all works for KT since KT has less of a room to increase the subsidy that it gives to its customers and we are better positioned to compete based off of the network abilities and capacity that we have. So we will not be at a disadvantageous position in this changed paradigm.

And also, when it comes to the network services, KT, once again, based on its 3W network, has a very strong network competitiveness. It has strong WiBro and WiFi capabilities. And on top of that, we are currently transforming our 3G network into a CCC platform. And compared to our competitors, we are more certain -- most certain that we could be more efficient as well as competitive.

And on top of that, KT was the first player to introduce iPhone in the market, and we did have certain dominance with regard to that product for a certain period of time. But I admit that with regard to other types of products, like Galaxy S and other overseas manufactured handsets, we were late in bringing that into the market. But currently, as you would see, with regard to Galaxy S2 and other overseas developed handsets, we can now source these products at the same timing and at the same terms and conditions. So that helped us in further enhance our competitiveness.

And also, since we have one more year of experience of selling iPhones, we were able to accumulate a know-how, and therefore we are certain that we will not lag behind in the iPhone arena either. So, in this changed paradigm of competition, KT is not at a disadvantageous position.

With regard to your second question, you are correct, yes, we have -- we were able to significantly reduce the fall in the PSTN subscriber number about by half. But unfortunately, as you know, last year there were certain issues regarding the fixed line flat rate plan, and we had to therefore convert all our subscribers into a new pricing plan. And that brought about an impact of KRW13b in terms of revenue and the profit side as well. But there are no other factors that will negatively impact the revenue line item, so starting next year we will see stabilization and you do not need to expect any significant reduction in revenue number.

(Interpreted). The next questions will be presented by Mr. Josh Bae from UBS. And the following questions will be presented by Mr. John Kim from DSK. Mr. Josh Bae, please go ahead with your question.

Yes. Hi. Thank you for the call. I have two questions regarding the IFRS introduction. First is regarding your guidance. I remember you guided for KRW20.5 trillion revenue and KRW3.2 trillion CapEx, but this is based on KGAAP parent only numbers. So could you please let us know what these numbers would be under IFRS, both on consolidated and parent only basis?

My second question is regarding your dividends. I understand that you plan to pay out more than 50% of your normalized net profit. Will you be using the IFRS consolidated numbers for this? Also, what's your definition of normalized profit? The other revenue booked from Skylife and the potential gain from NTC stake sale, would those be included in your dividend calculation? And what about the FX gains?

(Interpreted). In terms of the guidance, we will have to make more specific calculation. But at this point, based off of KGAAP number of KRW20.5 trillion, because once again the handset related sales number are going to be taken out, I think that under IFRS this number would translate into around KRW20 trillion.

In terms of CapEx, there's not going to be any significant change to that KRW3.2 trillion that we have communicated. But of course, because of this trend of data explosion, we are planning to get additional frequency band, and it could require additional investment. So there is possibility that CapEx could increase going forward. But at this point, we are maintaining our CapEx guidance of 3.2% (sic). Once the allocation of additional frequency band is all complete and our relevant investment related plans are confirmed, we will once again communicate back to you.

And we actually have no plan to provide guidance based on the consolidated basis because, as you know, there are 38 companies who are consolidated and these companies undergo change very frequently. For instance, we have sold off NTC, and also BC Card is going to come into the picture soon. So, therefore, we will not be giving you a consolidated guidance number. But you could safely assume that because KT accounts for 90% of the total statement going forward, you could just -- you could refer to the KT related numbers and that would not pose any problem to your analysis.

With regard to our dividend policy, I can say that even if we adopt IFRS we are going to pay out more than 50%, based on our adjusted net income -- adjusted net profit. And once again, I mentioned that KT's dividend will be based off of KT's standalone net income, not on the consolidated numbers.

Now, then there's the issue of how much we are going to normalize. Of course, all the revenues that are -- all the income that is created from operational activities, yes, more than 50% of that will be paid out as a dividend. But Skylife is a subsidiary that will be consolidated -- it will be consolidated, so that is irrelevant. And for NTC, regarding the gain from the NTC sales, we have to wait for the BOD decision.

In the past, if you look at the proceeds that -- the gains that we had gotten from SKT share sell-off, that number was normalized into the calculation. But once again, we have to wait for the decision to be rendered by the Board of Directors meeting, and once that is confirmed we will communicate to you.

In terms of the FX gains, would that be included in your dividend calculation?

And also, if there's any information on your sensitivity to earnings on the FX rate changes, that would be very helpful. Thank you.

(Interpreted). When it comes to FX gain, up to date we have included that into our dividend calculation, but it is currently under discussion. If, for instance, this level is too high or too low, and if we think about the shareholders' expectation, then normalization will be possible. However, we still -- we would have to wait for the decision to be rendered by the Board of Directors Meeting. But up to date, our track record is that we had included this number into the dividend calculation.

(Interpreted). The next questions will be presented by Mr. John Kim from DSK. And the following questions will be presented by Mr. Neale Anderson from HSBC. Mr. John Kim, please go ahead with your question.

Yes. Thank you for the opportunity. I have two questions. First is on spectrum. It's gotten to a point where KT is experiencing some reported spectrum capacity issues, with only about a quarter of your subscriber base currently using smartphones. Even if you succeed in securing additional 20 megahertz band and 2.1 gigahertz, how long do you think this spectrum will last before you start experiencing capacity issues again? And how much more spectrum do you think KT might need at current rate, if you were to look three, four years out?

Second pertains to your mention of a tariff cut. From what I understand, at least technically, the regulator doesn't have the legal right to impose tariff cut directly on KT. Considering there is renewed demand for a tariff cut coming from political and consumer agencies so soon after you have implemented per-second billing, what kind of strategies do you have in terms of dealing with the tariff cut demands? If KT doesn't comply with the demand, how might this affect KT's business? Thank you.

(Interpreted). With regard to the spectrum, because currently the allocation process is undergoing, I cannot provide you with the specific Company strategies. But when it comes to 2.1 gigahertz, we are utilizing 20 megahertz, and out of the 9 -- in the 900 megahertz we have already bought 10 megahertz. And for 2G we are making use of 1.8 gigahertz spectrum, and this could be reallocated for other uses, like the LTEs. And for WiRO, we are using 2.3 gigahertz, which can be further utilized.

And currently we are making use of the 3G network and we -- by adopting a new concept of CCC, we are responding to the customer needs. If we get 2.1 gigahertz spectrum, we believe that with that we will be able to secure minimum amount of capacity that is needed. If that fails, then of course there we would need to use our contingency plan. I think this is all I can say about the spectrum and frequency issue.

Regarding the movement of tariff cuts, there is a government wide task force team that has been installed, and they are discussing main issues regarding the telecom market. And I understand that they will come out with a report in the month of May. Currently, there are a lot of discussions that are undergoing and it's hard to predict what the conclusion is going to be. That is why it's difficult to say what the impact is going to be.

KT's position is this. This communication related, telecom related tariff and rate is not really a cost. If you look at it from the Company's perspective or consumer's perspective, I believe that this tariff has -- is seen from a light of an investment, investment that will enhance productivity. So if one was to cut this tariff rate too significantly, then that will curtail investment and that will harm the overall ecosystem where there are handset makers, equipment makers and other content providers. All of these parties to the ecosystem will suffer.

Therefore, there would need to be certain level of profit that could be secured, in order for the ecosystem to run without any troubles. So, if there's a certain move that actually curtails the investment by the telco operators through an excessive amount of tariff cut, this would be quite undesirable. So that is the opinion that KT has provided.

(Interpreted). The next questions will be presented by Mr. Neale Anderson from HSBC. Mr. Neale Anderson, please go ahead with your question.

Thank you. Good afternoon. Two questions from me, please. Firstly, following up on the previous query on selling expenses, it would be very helpful if you could give us your view on whether the increases in selling cost subsidiaries and also the higher retention costs you mentioned are likely to continue. Particularly, what drives the increase in retention costs? Is it related to the growth in smartphone users, for example?

And secondly, on tax, the effective tax rate in the first quarter was quite low at around 17%, I think. Were there any one-off effects here? And can you give us your view on the outlook for the rest of the year? Thank you.

(Interpreted). With regard to increase in expenses, as you know, Skylife has been included in our consolidated numbers as it became our subsidiary. But last year, Skylife subscribers increased significantly. But once again, last year Skylife was not our subsidiary, so their marketing expense was not reflected in our numbers. But as their numbers are being reflected starting this year, since they have higher number of subscribers they now have higher level of marketing expense, and that is 100% reflected in the numbers that we have shown you. So that is why it seems as if our expense has increased significantly.

With regard to the marketing expenses, as I said earlier, the subsidies that we give on the handsets have fallen significantly. But on the other hand, because of our subscriber base has grown in its size, there is certain amount of commission and fees that we pay to the agents, so that they could more effectively acquire new customers. So there are acquisition commissions that we pay to these agents and there are certain mileage services that we provide, which is an indirect type of an expense that is incurred because we have a larger base of subscribers.

Regarding your question on the effective tax rate, the first quarter had a taxed deduction from the Skylife sale, so it does show an unusually lower amount of tax rate due to the higher profit. Going forward, I can give you a guidance -- somewhat guidance for KT only tax rate of 24% this year. But on a consolidated basis, we need a little more time to figure out exactly what it will be with all the other companies involved. So, for now, 24% for the KT only, and for -- we'll give you a little more guidance a little later on the effective tax rate.

Thank you.

(Interpreted). Thank you very much for your questions and interest. This year, our top priority will be customer satisfaction through efforts such as opening up [AS] shops for smartphones. With this priority in mind, we will innovate processes and will spare no effort in completing the mobile wonderland based on the total network of 3W and LTE. Under the foundation of our existing telecom business, we will further expand into global IT media content arena, to grow to become much more than a telecom company.

Once again, our deep appreciation for your time. This concludes Q1 2011 KT's earnings conference call. 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.