KT Corp (KT) 2011 Q3 法說會逐字稿

(Interpreted). Good morning and good evening. First of all thank you all for joining this conference call and now we'll begin the conference of the 2011 third quarter preliminary earnings results by KT. (Operator Instructions). Now we shall commence the presentation on the 2011 third quarter preliminary results by KT's CFO, Mr. Yeon-Hak Kim.

(Interpreted). Good afternoon. I am Yeon-Hak Kim, CFO of KT. Only a short while is left until the end of 2011 and I wish everyone good health as the season is known for its precarious weather.

KT has exerted its efforts to stabilize the telecom market and improve service quality during the third quarter and as a result achieved steady growth of its subscribers based on its core businesses. In the third quarter smartphone subscribers increased 1.07m, WiBro 170,000, Broadband 95,000, IPTV 220,000, VoIP 180,000 respectively and as such our subscriber number based on PC, IPTV, smartphones has surpassed 17.5m.

Going forward to further strengthening our edge in the existing Fixed and Wireless network, we will continue to expand customer window and business scope into various arenas, i.e. content, financial and telecommunications convergence, global business and solutions based on BC Card, Cloud and N-Screen initiatives.

Up until the third quarter KT has adopted 3G Cloud Communication Center, CCC structure in the Seoul area improving data speed significantly over the competitors and we plan to enhance quality directly felt by our customers by expanding the structure to the entire Seoul and metropolitan area by the year's end. Also we are operating 94,000 Olleh WiFi zones and with WiBro Public Egg we are smoothly handling KT subscribers' data demand in subways and buses in Seoul, Incheon and Busan areas.

In the fixed-line market based on outstanding quality of KT network, we are leading the broadband and VoIP market. And with innovative services such as OTS which bundles satellite TV channel and IPTV VOD, we are leading for-fee content delivery market. LTE, which is receiving quite a significant interest lately is being prepared so that service may be launched in the near future. We plan to introduce world's best quality LTE service that adopts the CCC structure whose effectiveness has been proven in 3G and we will do our utmost possible to satisfy customers.

With that allow me to now report on the earnings performance for the third quarter 2011. You may also take part in the conference call via webcasting at KT's website. Since the first quarter we've been providing comparisons and analysis based on IFRS consolidated figures. Third quarter consolidated figure reflects performance of 36 companies including that of KT.

In third quarter 2011 with lessened marketing competition in the Wireless sector, merchandise revenue declined KRW225.8b year on year, which drove total consolidated revenue decline of 6.2% year on year and 6.6% QOQ to KRW4,992.2b. As cost of goods sold and SG&A, which are incurred in accordance with merchandise revenue, declined 25.2% and 13.5% QOQ respectively, and as labor cost also fell 3.2%, consolidated operating profit increased 19.4% quarter on quarter to KRW516.4b.

In terms of consolidated net profit in the third quarter there was an impact of KRW166.1b of NTC-related income from discontinued operations which is a one-off item in the second quarter and FX translation loss of KRW60b due to a weaker won in the third quarter, bringing the figure lower by 39.2% QOQ and 40.7% year on year to KRW255.7b. KT's Q3 standalone CapEx is KRW768.1b.

Next is performance of each business line. In terms of the Wireless business, Wireless revenue declined KRW59.5b or 3.3% year on year to KRW1,735.5b on the back of per-second billing, increase of revenue discount plan subscribers and bundling discounts. Nevertheless, over the previous year subscribers increased by 560,000 and based on 6.32m smartphone subscribers, data revenue showed a growth of 46.6% or KRW181.1b, showing a continued growth of the business fundamentals.

In the fourth quarter although the impact of rate cut will come under full swing and there will be cost related to 2G to 3G conversion, Wireless subscriber growth is continuing and within the year, LTE service will be launched with a more rational rate plan and better customer experience over 3G. And as such we expect performance from the Wireless business to improve going forward.

Smartphone subscribers of 6.74m as of October end is expected to rise to 7.5m by the end of the year. Going forward, because growth of usage pattern will be centered around data such as videos and games, we at KT will fully leverage our network know-how not only in the Fixed WiFi, WiBro and 3G networks but also soon to be launched LTE in order to provide services that surpass the expectations of our customers.

Next is on the Telephony business. With slower decline in PSTN subscribers, Telephony revenue fell 0.9% QOQ and 11.5% year on year to KRW946.4b. VoIP subscribers increased steadily to over 3.15m and its revenue grew 10.4% year on year to KRW77.3b. Fixed-line subscribers combining both PSTN and VoIP stands at 19.23m as at the end of September, which is 43,000 less compared to the previous quarter. We intend to sustain our home customer base through bundling of various services and through innovative products such as Smart Home Pad.

For the Internet business on the back of subscriber growth Internet revenue showed a growth of 1% QOQ and 5.6% year on year to KRW666.6b. For broadband, through FTTH we are providing high quality services and by bundling it with IPTV and voice over IP at a reasonable price, total subscribers increased 95,000 QOQ to 7, to over 7.72m subscribers. IPTV recently has been receiving good quality reviews by customers and thanks to superior competitiveness of Olleh TV Skylife we were able to secure 2.84m subscribers as of end of September. As total subscriber increased 1.05m over the past one year, revenue also grew 53.1% year on year to KRW79.3b.

Next is on Other services revenue. With KT Skylife's revenue being reflected from this year, Other services revenue increased 28.8% year on year to KRW378b. KT Skylife's revenue of KRW117.1b is included in this quarter's consolidated figure.

Labor cost for -- next is briefly on operating expenses. Labor cost for Q3 declined 3.2% quarter on quarter as 3% wage increase according to the collective bargaining agreement in May was retroactively and fully reflected in Q2. But on a year-on-year basis, as Skylife is included in the consolidated accounts, subsidiary labor cost increased KRW3.25b, a 10.5% increase to KRW700.6b. Depreciation cost increased 1.4% quarter on quarter to KRW751b on the back of depreciation costs related to the spectrum. As the total Wireless market stabilized bringing a decline in new subscribers, SG&A fell 25.5% year on year to KRW442.8b.

For more details please refer to the pre-circulated earnings material. This marks the end of Q3 2011 earnings presentation. We will now begin the Q&A session and we will be more than happy to entertain any questions you may have.

(Interpreted). Now Q&A session will begin. (Operator Instructions). The first questions will be provided by Mr. John Kim from Deutsche Securities Korea and the next question will be provided by Mr. Stanley Yang from Nomura Securities. Mr. John Kim, please go ahead with your question.

Yes, thank you for the opportunity to ask questions. I have two. First is on your performance, operating performance year to date. If the management had to place a grade on your year-to-date operating execution, can you share what would it be and why?

And also given your year-to-date Wireless ARPU trend is grossly different from what the management was predicting or forecasting at the beginning of the year, can you shed some light or insight on why this is the case?

Second is on your shareholder return policy. Your year-to-date operating profit is roughly flat year on year, but down about 10% if you remove the disposal gains from NTC's stake sale. So I recognize there is no decision on this yet and this is subject to your Board's decision. However, if you had to make a recommendation to the Board on whether to return half of the gain proceeds to the shareholders today, can you share where the management stands? Thank you.

(Interpreted). Regarding your first question giving a score to our performance, it's actually hard to give ourselves our own score so I would like to leave it to the market to determine what that score is.

Regarding -- and also we had originally expected, us and the market as well, that with the increase in the adoption of smartphones that ARPUs would also rise. However, there were certain measures such as unlimited data plans and revenue discount pricing plans which were implemented in order to lessen the burdens that were being borne by the customers. And because of that we were not able to witness any growth in the ARPU.

However, if you look deep into this Wireless situation, we are seeing increase in data usage and also the Wireless subscriber number is increasing and also per handset the voice minutes of use is actually being sustained at the adequate level. What this shows is that although there is increase in traffic and increase in the number of subscribers, that is not well translated into the growth in the revenue. And of course the reason behind that is regulation and other issues or other reasons that currently exist.

So because of that we believe that we have much room that we can improve and currently other competitors are also putting in their -- they are also thinking about ways to improve the situation. And we are also thinking about rebalancing our pricing plan and rate plan and we will be implementing those rebalancing in the near future.

Regarding the shareholder dividend-related policy, my answer would have to be same as the answer that I have provided last quarter. Once we get our earnings results and the performance number, we would -- based on those numbers, the BoD will make the decision. From the management's perspective what we will be recommending to the BoD is that we would like to maintain our past payout ratio policy of paying out more than 50% of our net income.

If you look at our past practices there were cases where we normalized one-off profit or one-off expense items. For instance, when we sold the SKT stake and there was a profit that was generated, and we have taken that out of our net income calculation. And also when there was restructuring-related expenses also we normalized that. And for SKT sales proceeds we also normalized that as well. So we will be maintaining our past practices and maintaining the policies and the BoD will be making the final decision.

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

(Interpreted). So with regards to your cumulative operating profit, up until the third quarter it's about 2% lower compared on a year-on-year basis. And if we assume that in the fourth quarter there's not going to be any significant difference in the magnitude of the operating profit compared to last year's Q4, then could we expect that this year's profit level to be quite similar to that of last year?

One of the reasons why that your operating profit was not able to increase is because there was less of an impact coming from the smartphone adoption and your PSTN, slower business in PSTN was much bigger than originally expected. So can you provide us as to at least the rough picture as to what your earnings outlook is for the coming year?

Now of course I understand that this will have to be based on your business plan and it may be a little too early for me to be asking you the earnings outlook for next year. But at least on key items, for instance on PSTN revenue, do you expect that revenue decline is going to be smaller in terms of its magnitude compared to that of this year? And how big of a revenue do we expect from the Wireless, IPTV or your real estate related revenues that could actually make up for and offset the decline in PSTN?

And my second question has to do with the cost side. Regarding the increases in marketing costs and also considering that CapEx expenditure is going to increase and there is a higher level of amortization on frequency spectrum, that will mean that network cost is also going to increase. So next year you would have to withstand such cost increases but at the same time will be able to generate profit. So do you expect that you can actually fairly and favorably generate profit next year?

(Interpreted). At this point it is difficult to make a very accurate forecast of what the profit is going to be in the coming quarter, the Q4. But the management at KT had exerted its best efforts in order to maintain the profit level similar to that of last year and we had internally set that as our internal target.

But considering the fact that there's an impact of rate cut and the reduction of the basic fee of KRW1,000 which effect is going to be -- which effect is going to start to be reflected in full swing in the fourth quarter, and also you have to consider the fact that our 2G services is going to be terminated and in the third quarter the related expenses were about KRW30b, and in this fourth quarter we expect about expense of about KRW80b to be spent on the 2G to 3G conversion. So that is why -- these are one of the reasons why we can't have too big of an expectation for high level of profit in the coming quarter.

As you have correctly mentioned, we are currently developing and devising our business plan, so at this point I will not be able to provide you with the exact figures. Now having said that, there are some positive and negative signs that we can consider.

If you look at our PSTN business for the past four years we have seen decline in the revenue in the amount of about KRW550b to KRW600b. And of course since we were not making an investment into the Fixed-line, the operating profit number actually directly reflected those declines in revenue. But we expect this decline in the revenue to slow down starting from next year because if you look at year before in the first quarter every month we had seen a churn-out of about 150,000 subscriber. In the third quarter there was a churn-out of about 160,000 but in the month of October that number had declined to 37,000. Therefore there is a clear sign of lessening of revenue decline in the PSTN space.

Now on the Wireless side we still feel that up until the first half of next year things would still be quite difficult because there has been the cut of the basic fee by KRW1,000 and we are providing 50 SMS text messages free of charge. So there are some of these factors and items that has a downward pressure, that is exerting a downward pressure on our revenue and profit line item. And also from next year there is going to be competition to acquire LTE subscribers. So once again that is another reason why we're expecting it will be quite difficult up until the first half of next year in the Wireless sector.

However, if our efforts on various different fronts do pay off we believe that in the second half of next year, from July or August, we will be able to see some turnaround in the Wireless market.

Regarding the cost-related items, I will not be able to share with you any specifics because we are still in the process of writing up our business plan, but next time we would be able to communicate it to you.

(Interpreted). The next questions will be presented by Mr. Sam Min from Morgan Stanley. And the following questions will be presented by Mr. Sean Oh from Merrill Lynch. Mr. Sam Min, please go ahead with your question.

Yes hi. Thank you. So my first question is on capital expenditure. I think year-to-date you are up 24% from last year's year-to-date. If you can provide some more guidance on capital expenditures for this year along with next year, considering that you will be starting LTE, that would be helpful.

And then my second question is obviously on dividends. Clearly this year has been quite disappointing. However, KT's management along with the Board has, in the past has acted favorably for shareholders and your policy has been 50%-plus payout ratio. Considering that you've had some one-offs this year, for example the 2G closure along with obviously some regulatory intervention that perhaps made your performance worse than expected, would that be considered as well along with your proceeds from NTC stake? If you can add some more color to that, we would appreciate it. Thank you.

(Interpreted). Regarding your question on CapEx, at the beginning of the year we've communicated the guidance of KRW3.2 trillion. But we expect the CapEx, the entire CapEx could actually increase by KRW100b to KRW200b in addition to the guidance that we had provided.

I understand that a lot of people are very much interested in the LTE-related initiative. But as soon as KT receives its government approval on LTE-related plans and also on our plans for 2G closure, we will be able to communicate to you the specifics. And, as you know, competitors are quite aggressive in trying to deploy LTE services. So KT is also planning to accelerate its timetable compared to its original plan. So within the year we would also try to deploy it within the metropolitan area. So our time schedule is also being accelerated.

So once again, CapEx is going to be, for this year, KRW100b to KRW200b higher than was originally communicated. And for next year compared to this year's CapEx, the CapEx number can also increase. Regarding LTE deployment, since the deployment schedule is being more accelerated, then that means that after 2013 the CapEx expenditure is going to be lower than what was originally planned.

Regarding what items to normalize when we calculate the dividend payout, because, of course, there are certain expense items and profit items that are one-offs. And all of these items will be thoroughly reviewed by the Board of Directors meeting at the beginning of next year. But regarding what you have mentioned, the 2G shutdown-related costs and the rate cuts from the regulatory authority, now these are actually not necessarily a one-off factor, but these have actually existed in the past operations. So I think these are items that BoD would think would be included in our business operations. That's my view.

(Interpreted). The next question will be presented by Mr. Sean Oh from Merrill Lynch. And there is no question next to Mr. Sean Oh. Mr. Sean Oh, please go ahead with your questions.

Hi. Thank you for the opportunity. I have three questions. How many 2G subscribers do you currently have? And when do you expect to be able to launch the LTE service? Do you expect to receive the approval from KCC in say by the end of this month? That's number one.

Number two, the PSTN revenue is down about [17.4%] while the subscriber count is down 5%. The greater decline in revenues is due to a combination of PSTN subscriber churn as well as the switching from flat-rate plans to standard tariff plans, I believe, but can you please isolate the effects of the switching plans and what the outlook is going forward.

And finally can you -- we all know that the CEO's term is expiring in first quarter of the year, next year. Can you please let us know what the process is with regards to his re-nomination or what developments are necessary for him to be re-nominated as the CEO? Thank you.

(Interpreted). I understand that the current number of 2G subscribers is 180,000. And we hope and expect that within this month we will be able to receive closure-related approval from KCC. And once we receive official approval from the government authority, since the LTE facility related investment is currently taking place, we plan to go right into commercialized services. But, once again, regarding the specific plans for LTE, we're going to set aside a separate opportunity and time to communicate the KT's LTE plan, once we receive approval from the government,

Regarding your second question, yes, as you have correctly pointed out, the decline in revenue is much -- is bigger than the decline in the subscriber number and the reason is three-fold. The first has to do with declining ARPU of the existing PSTN subscribers. Now there's the impact of rate cut, but also people are using, for instance, other alternatives, the wireless zones or the VoIP within their homes. So the overall PSTN sub ARPU is declining and the entire subscriber number is also declining. And because we wanted to reduce the churn rate here for PSTN subscribers we have been providing bundled products and bundled services by providing a discount on the rate.

And, as you have also said, there is an impact of about KRW12b because we have adopted the standard rate plan. And that directly actually reduces the profit line item coming from PSTN. But the standard rate plan was begun --- began November 1 so this is no longer going to be a factor that's going to drive down the profit number.

So, once again, there is reduction in the overall ARPU level and the number of subscribers, and the impact of rates discount, but the impact coming from standard rate plan is no longer going to exist. And the subscriber numbers decline has also lessened. So for next year we believe that there will be significantly less in terms of -- revenue and subscriber decline is going to be significantly less next year compared to this year.

Regarding the tenure of our CEO, according to the articles of incorporation of KT, and as you have correctly mentioned, his tenure is up until the general shareholders meeting of next year. So two months before the general shareholders meeting the outside directors will form a CEO nomination committee and they will table this agenda item at the general shareholders meeting. And that meeting is going to approve. And I understand this is the process.

Thank you.

(Interpreted). The next questions will be presented by Mr. Sungmin Chang from JP Morgan. And there is no questioner next to Mr. Sungmin Chang. Mr. Sungmin Chang, please go ahead with your questions.

(Interpreted). I remember during the second quarter earnings presentation we have said that there are some structural reasons that drove operating-related expenses. In the third quarter the figures look better. However, at this point, what is the management's assessment of the cost-related side of your business?

(Interpreted). In the second quarter the operating profit number wasn't very good because there was an additional KRW100b of one-off cost items. In the third quarter those one-off items were not incurred. And also, on top of that, the management had exerted efforts to stabilize the market. However, in the fourth quarter because there are certain big cost items, for instance with regards to closure of the 2G services in the amount of KRW80b, those cost items will be reflected in the fourth quarter. And KT wants to start its LTE services within this month. So, once again, LTE-related cost is going to be reflected in Q4.

And also on the revenue side there was definitely an impact felt from the rate cut. And we, as management, would have to admit that that is actually outside the control of KT's management.

(Interpreted). The next questions will be presented by Mr. Yang Jong-in from Heungkuk Investment and Securities. And there is no questioner next to Mr. Yang Jong-in. Mr. Yang Jong-in please go ahead with your questions.

(Interpreted). I would like to pose two questions. First, recently we've seen a lot of press articles talking about the fourth telco coming into the market by Korea's large companies. So regarding the launch of this fourth telco provider, and also I hear that MVNO large players are currently preparing to launch MVNO and enter into the market as an MVNO, what do you think is going to be the impact of such movement in the industry?

The second is that currently you have 3G and you will soon be starting LTE services. Under this market situation, what will be the role of WiFi and WiBro and how would you utilize these technologies? For instance, KT has focused very much on the WiBro services. And how are you going to strike a balance or have an harmonious approach in all of these different standards?

(Interpreted). Yes, there are many articles that are talking about the fourth telco provider, operator coming into the market. But I would have to be honest in saying that it would be very difficult for that fourth player to build its competitiveness because the current incumbents, the telcos that currently operate in the market, have decades of experience in building out the network, in providing services and regarding its competencies in marketing. So it would take the new entrants a significant amount of time to lay the network and also to build its competencies. So from a short-term perspective the impact is not going to be that great.

Regarding the whole topic of MVNO, as you know, KT is the operator that is quite active in trying to cooperate with MVNO service providers. And, as you know, KT has entered into an MVNO agreement with CJ Corporation. And KT's approach to MVNO is that it wishes to cooperate with MVNO operators so that it can go into the areas and industries that KT does not have a competitive edge on and try to attain convergence, thereby trying to maximize the value of KT-owned networks. And also go into the niche market and increase the market pie and increase the utilization of KT-owned networks so that we can create new market and add new value.

So rather than trying to compete with the MVNO, we would rather want to have an MVNO make use of our network and be compensated for that usage. And through such approach we wish to create synergies.

Regarding how KT will utilize WiBro and WiFi, telcos are currently building out its LTE capabilities. But, as you know, LTE spectrum is a limited resource. And according to a lot of market research forecasts, going forward there will be significant increase of data traffic. So LTE is not going to be enough to cover all those data traffic and that is why we need WiBro and WiFi as well.

And at KT, as you know, we have about 100,000 WiFi zones. And for 3G, when the telco operators introduce 3G services, they also introduce unlimited data usage rate plan which creates a significant explosion of data traffic, but not an increase in the revenue. That is why the service providers are currently making plans, currently designing their LTE pricing plans without the unlimited data usage package. If that is the case then the users are still going to seek WiFi zones and because of that KT will be able to maintain its strength and competitive edge.

And same goes for WiBro, because WiFi can only be used in a limited space although the speed is very fast. And for WiBro it is a nationwide network. So if you make also use of a WiBro Egg, you will be able to switch WiBro signal into a WiFi signal which will help you -- which will help us respond to the data traffic as well.

So these two, WiBro and WiFi network, is going to work supplementary to the LTE network and we will be able to use these networks to respond to the significant data traffic by making use of such networks. So KT has superiority and it has differentiation if we think about the so-called LTE age, and LTE and beyond, the age of data explosion.

(Interpreted). The next questions will be presented by Mr. Kim Dong-june from Eugene Investment Securities. And there are no participants waiting for their question. Mr. Kim Dong-june, please go ahead with your questions.

(Interpreted). I have two questions regarding handsets. First it has to do with your iPhone 4S. If you look at the list of people who have reserved for iPhone 4S, the list looks better compared to iPhone 3GS. And for LTE services they will soon be launched in Korea. So considering the LTE services, do you think the impact of the iPhone 4S is going to be quite significant.

And regarding once you have a 2G shutdown you will be commercializing LTE services, do you already have the LTE handsets well lined up and are you all set and ready to go for LTE?

(Interpreted). Regarding iPhone 4S and the number of people who have actually reserved to get it, it's our Company policy to not disclose that number. But what I'm hearing is that compared to 3GS, and 4, the picture does look better.

When it comes to the 4S handsets people thought that the handset is not as good as what people had expected, but as Steve Jobs has passed away, in the US 4S is actually gaining quite a bit of popularity. You would know that Apple's iPhone is not just about hardware specs. There will be of course better handsets, better than Apple iPhone 4S, but it's more of a various, convenient applications that are being provided which connects to better user experience. So I think that Apple iPhone is immensely competitive in that respect.

And also LTE handsets, because coverage is not there yet, we will not be able to say definitively, but iPhone 4 I believe will continue on with its competitiveness.

Then, as I have mentioned previously, once the government provides the approval we will be starting the LTE services immediately, starting with the Seoul area first. We currently have in stock three types of handset phones and one type of pad device. Once again regarding the specifics, once we begin the services we'll be able to share with you more. And come next year we have about more than 10 or so LTE handset device line up, but if LTE subscriber take off much faster than we had expected we could of course secure more.

(Spoken in Korean).

(Spoken in Korean).

(Spoken in Korean). (Interpreted). Thank you very much for your questions and interest.

KT will consistently implement policies such as the fair-price system to move away from cost-based competition in the wireless market. And, by developing products that can add value, we will lead the market. We will also continue to differentiate service quality vis a vis our competitors in broadband and IPTV, and expand access to products in order to further solidify our market leadership. Also the cooperation with BC Cards, which is planned to be reflected in the consolidated accounts from Q4, we will do our utmost to discover new businesses by entering into the finance market through providing differentiated services to the financial institutions, merchants and cardholders.

Once again I appreciate your participation. And this will be the end of Q3, 2011 Olleh KT's earnings conference call. Thank you very much.

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