KT Corp (KT) 2011 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 2011 fourth quarter preliminary earnings results by KT. (Operator Instructions). Now we shall commence the presentation on the 2011 fourth-quarter preliminary earnings results by KT's CFO, Mr. Yeon-Hak Kim.

(Interpreted). Good afternoon. I am Yeon-Hak Kim, CFO of KT. Going into 2012, the Year of the Black Dragon, I hope that everyone achieves what you have planned for the New Year.

During the last year KT in the Wireless area had tried to provide better services by increasing smartphone use, introducing the 3G CCC or cloud communication centre structure, and migrating customers from 2G services. On the Fixed-line side, the Company has focused on creating innovative services in the pay-TV area through IPTV OTS services and creating new markets by utilizing smartphone devices.

In addition, KT introduced the fair-price program to lead innovation in the wireless distribution market and prepared for future growth via convergence businesses by including Skylife and BC Card as affiliated into the KT Group. Internally we continued to improve the way we work by increasing smart working and engaging in BIT or business and information system transformation projects to improve system fundamentals.

In 2012 on the Wireless side KT will complete its LTE network in 84 major cities and major transformation facilities by April. By applying the LTE Warp virtualization technology, which optimizes the CCC structure, we will be able to provide service quality that differentiates us from our competitors. In the Fixed-line area KT will continue to differentiate its network quality and increase its competitiveness in the media market as well as lead the paid contents delivery market by improving the quality of contents provided and increasing usage of N Screen, which connects user TVs, computers and smartphones.

With that, I would now like to present the earnings results for the fourth quarter 2011. You may also take part in this conference via webcasting at KT's website. Since the first quarter of 2011 KT has been providing comparison and analysis based on IFRS consolidated figures. Fourth quarter consolidated numbers include the results of 52 companies, including 18 newly added affiliates such as BC Card and Enswers.

Fourth quarter revenue was KRW6,379.1b, which is a 24.7% increase year on year and 27.8% increase quarter on quarter, driven by the proceeds from real estate disposals and the contribution from the newly consolidated BC Card business. Revenue for the full year 2011, which also includes the consolidated numbers of Skylife and BC Card, was KRW22 trillion, representing a 8.1% growth from 2010 revenues of KRW20.3 trillion.

Fourth quarter operating profit dropped 16.7% year on year to KRW287.6b mainly due to an increase in depreciation and merchandise purchase costs, and also an increase in other business expenses due to the inclusion of BC Card. Full year operating profit was KRW1,957.3b, representing a 4.5% decrease year on year due to a decline in Wireless and Telephony revenue.

Fourth quarter net profit of KRW210.6b represented a decrease of 17.7% when compared to the previous quarter due to a decrease in operating profit, but represented an increase of 12.5% year on year driven by a decrease in income tax expenses. We talk about 2011 full year net profit. Year-on-year operating profit decreased, but the impact of discontinued operating gains/losses due to the sale of our equity stake in NTC resulted in full year net profit of KRW1,442.2b, representing year-on-year growth of 7.8%.

In terms of dividends, excluding some proceeds from asset sales but taking into consideration the expectations of our shareholders, we have decided on KRW2,000 per share. The actual CapEx for the full year was KRW3.3 trillion, an increase of KRW261.3b year on year mainly due to an increase in Wireless investments such as the introduction of the 3G CCC structure.

Now let me talk about the performance of each business. First, the Wireless business. Wireless revenue was KRW1,718.5b, representing a decrease of KRW42.2b year on year due to the impact of the KRW1,000 base rate cut and free SMSs implemented in the fourth quarter. However, during the past year smartphone subscribers grew 4.92m to reach 7.65m, representing 46.2% of total subscribers. In addition, WiBro subscribers increased 370,000 to reach 4 -- 740,000 subscribers, which shows the Wireless business driven by data services is still growing.

In the first half of this year we do not believe it will be easy to improve our performance due to the full impact of the rate cuts and the continued impact of discounted pricing plans. However, we believe it will be possible to foresee a gradual growth recovery in the second half driven by an increase in LTE subscribers and rationalization in the rate discount structure. Our target by the end of the year is to maintain a smartphone subscriber base of 11m subscribers or more, of which we want to attract 4m LTE subscribers.

We started commercial LTE services in five core districts in Seoul on January 3. By the end of February we are planning to have service coverage similar to our 3G network in Seoul. By the end of April we are planning to expand our coverage to 84 major cities nationwide and also the KTX and highways. In terms of quality, to differentiate KT from our competition we will introduce a virtualization structure, which is the last stage of CCC, to efficiently handle the explosive data demand by consolidating the operations of our 144 base stations.

Let me move on to the Telephony business. Due to a slowdown in the rate of decline in total subscribers, Telephony revenue posted KRW929.9b, representing a quarter-on-quarter decrease of 1.7% and year-on-year decrease of 10.5%. PSTN subscribers, which had decreased by 1.42m in 2010, dropped by only half or 710,000 in 2011. Total subscribers, including VoIP subscribers, stands at 19.16m (sic -- see presentation), representing a year-on-year decrease of 1%. This year we expect the subscriber decline to slow down further. In addition, the revenue decrease due to the termination of fixed-line flat-rate plans will be eliminated. As a result we believe the decrease in Telephony revenues will be significantly less than last year.

Next the Internet business. Due to the continuous increase in broadband Internet and IPTV subscribers, Internet revenue recorded KRW663.6b, representing a growth of 2.3% year on year. Stable network quality and bundling with IPTV acted as a point of differentiation versus competitors. As a result broadband Internet subscribers reached 7.82m, which is 400,000 more subscribers than last year. The IPTV Skylife convergent service, OTS, gained popularity with customers, enabling total IPTV subscribers to increase approximately 1m to reach over 3.07m. 2011 total revenue also grew 64.3% (sic - see presentation) from the last year to reach KRW315.2b.

In 2012 the switch to digital broadcasting will act as an opportunity to achieve a total 4m IPTV subscribers. Marketing efforts will be focused on increased paid content PPV and N Screen services, which will contribute to achieving both qualitative and quantitative growth.

To move on to other service revenues, other service revenues posted KRW1,158.7b, representing a 309% growth year on year due to the inclusion of BC Card revenues from the fourth quarter. The revenue contribution from BC Card in the consolidated numbers is KRW870 -- KRW807.9b.

Lastly to touch upon operating expenses, labor costs in the fourth quarter totaled KRW748.1b, which was a 6.8% or KRW47.4b increase from the previous quarter. This was because affiliate company labor cost increased by KRW41.9b due to the impact of consolidating BC Card. Depreciation was KRW742.7b, showing a year-on-year increase of 7.1% mainly due to a year-on-year increase in total investments of 8.5%. SG&A was KRW487.8b, growing 10.2% Q on Q due to an increase in the number of handsets sold as the LTE market grew as competitors increased their LTE marketing.

With this I would like to wrap up the earnings results for the fourth quarter 2011 and move on to briefly discuss 2012 guidance. The 2012 revenue guidance for KT on a standalone basis is KRW20 trillion. However, as the situation was last year, please understand we will not be releasing an operating profit target due to the quickly changing market environment. For CapEx, we expect 2012 CapEx to be around KRW3.5 trillion. Investments on the Wireless network to build out the LTE network and improve 3G network quality will increase, while as was the trend last year, investments in our existing Fixed-line legacy business will decrease. For other details please refer to the presentation material that we have distributed.

With this I would like to end the fourth quarter 2011 presentation. Now we would be happy to take some time to entertain any questions you may have.

(Interpreted). Now Q&A session will begin. (Operator Instructions). The first question will be provided by Mr. Josh Bae from UBS and the next question will be provided by Mr. [Bashah Hameed] from [Marabadicin] Corporation. Mr. Josh Bae, please go ahead with your questions.

Yes, hi. Thank you for the call. I have two questions. First is regarding BC Card. Could you please let us know how much stake KT Capital holds in BC Card as of 2011 end and how much this will increase to?

Also if you could share with us some thoughts on the financials of BC Card, how much revenue, operating profit, net profit did the company generate in 2011? Also what are you expecting for 2012?

Second is on your dividends. I understand that you announced KRW2,000 dividend per share, which is a little less than KRW500b in total. If you could share with us the thought process in coming up with this number that would be very helpful for us to forecast the 2012 dividend. For example, could you share with us what was included or excluded when you calculated the normalized earnings to calculate the dividends? Thank you.

(Interpreted). First, let me address your question about BC Card. BC Card was included from October 6 so we have around two months of operation. In terms of the revenue it was KRW87.9b and the operating profit was a negative KRW4.1b. The reason for the negative KRW4.1b operating profit was because in the fourth quarter there was an early retirement program and the expenses related to that were KRW20.4b. And therefore it shows that that has been a negative factor on the operating profit.

So for the 2012 forecast with regards to BC Card business it's very difficult to disclose those numbers as of this time because we are still in the process of drafting the business plan for the full year. But if we give you the performance for 2011, the full year in terms of the revenue, the revenue was KRW3.245 -- KRW3.254 trillion and the operating profit was KRW128.1b. We do believe that 2012 will be in line with the 2011 numbers.

With regards to KT's -- KT Capital's ownership in BC Card, as of the end of 2011 it stands at 38.86%. And it is planning to acquire an additional 30.68% to ultimately end up with a 69.54% ownership.

If we talk about our dividends, with regards to the normalization, the NTC sales proceeds were normalized and this was because we wanted to use these proceeds to reinvest for a global M&A opportunity. Of course the operating profits were included. In addition to that at the end of the year there was a real estate sale. And actually that was a sales and leaseback and that should be regarded as a portfolio adjustment to create a virtuous cycle. Therefore, under this calculation we came up with a dividend that would be slightly below KRW2,000 per share. However, taking into consideration the NTC sales and also the expectations of the market we ultimately decided to pay a dividend of KRW2,000 per share.

Going forward we do believe that asset sales or proceeds from asset sales will be a subject of normalization. If you look at past examples, when KT sold its stake in SKT those proceeds were the subject of normalization. However, going forward with regards to our dividend level, not only will factors such as one-time events be taken into consideration, but we will do a comprehensive view of all factors, including the cash flow situation of the business and also market expectations, for the BoD to ultimately come to a conclusion on this issue.

Yes, hi. Thank you. If I may just ask a follow-up, is it correct to understand that the principle going forward is not to include income from real estate asset sales in your dividend calculation?

(Interpreted). Yes, that would be true. With regards to our real estate revenue, there are various sources of revenue. For example, there is revenue from real estate leasing and also real estate development and also from the sales of real estate. With regards to the two, the real estate leasing and real estate development revenue, this would be included in our operating income, which would be subject to dividend payouts. However, with regards to real estate sales and proceeds from such sales, this as a principle would not be included. However, whether we will exclude it 100% or whether we would actually take a different percentage would depend upon the market expectations and also the market situation at that time.

Thank you.

(Interpreted). The next questions will be presented by Mr. Bashah Hameed from [Marabadicin] Corporation. And there is no questioner after Mr. Hameed. Mr. Hameed, please go ahead with your questions.

Okay. Thank you very much. Thanks for the call. My question is can you throw some more light on your 4G strategy going forward? You guys have a WiBro network currently in place and last two quarters have been quite good for you. I see a Q4 or a Q3 growth for WiBro has been almost 95,000 subscribers. And at the same time now we have launched LTE network on January 3, 2012 so what's the strategy going forward? Would you guys be investing more money in your WiBro network for KT? This is my first question.

And second question is how many LTE base stations do you expect to deploy by the end of year 2012 and who will be the vendors?

(Interpreted). With regards to our LTE strategy, in basic principle for the main focus of our Wireless networks and services going forward for KT it will be a gradual conversion from 3G to LTE services. As I have mentioned, by the end of April we will able to have LTE coverage in 84 cities, which would be the C-grade cities across the nation, in addition to the highways and KTX. Once this is completed with regards to coverage it will be 92% or 93% of the population. Therefore, with regards to our main focus it would be on the LTE side and as that is achieved we believe that there will be a new momentum to see more subscriber growth in this area.

So with regards to our WiBro network, you should consider this as an added on network or an additional network to our LTE services. Right now with regards to WiBro, we already have coverage in 84 cities and therefore the investment related to WiBro going forward will be very minimal if at all and therefore no large scale investments will be taking place in this area. Under our 3G services we had an unlimited data flat-rate package that we had provided and therefore a lot of the data traffic had led to congestion in our 3G network. However, this unlimited data package under LTE services will no longer be provided and therefore our WiBro and WiFi network under LTE will be a diversion for the traffic or a complementary measure.

So with regards for the vendors for our LTE services we actually have selected three, which would be Samsung Electronics, LG-Ericsson and also Nokia Siemens as the main vendors. In addition to that, for our digital equipment we also have selected [Jung-woo], which is a vendor that supplies Cisco equipment. The total LTE related investment for 2011 was KRW100b and for the coverage to expand over 84 cities nationwide, as we have mentioned before, we believe that the related CapEx for that will be KRW1 trillion.

By the end of the year you also asked how many base stations we will have, however this is a bit different in nature than 3G services because we will be using a virtualization technology which enables us to group together the base stations. Therefore, as of now we do not have a definitive number on the number of base stations that we will have by the end of the year.

Okay. Thank you. Thank you very much.

(Interpreted). The next questions will be presented Yang Jong-in from Hankuk 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). So there are three questions that I would like to ask you. The first is with regards to the profitability of your IPTV business. I believe that the time that it's taking to reach breakeven is a bit slower than the company had originally expected so when do you think with regards to the IPTV business that you will be able to be in the black?

Secondly, I also would like to ask a question with regards to the possible acquisition of Telkom. Is there any update on the situation and, if so, please provide.

And thirdly with regard to your CapEx, the CapEx for this year is KRW3.5 trillion. Could you break that down for CapEx related to the fixed line, wireless and other business areas?

(Interpreted). Maybe if I could address your second question first. With regards to the Telkom M&A, as of this time nothing has been decided and we are still in the due diligence phase. Once we do have a more clear picture about the outcome we will be communicating it to our investors via a conference call or other method.

And to address your third question about the breakdown of our CapEx numbers, on the Fixed-line side it will be KRW1.2 trillion, for Wireless KRW1.8 trillion and then for common areas, whether it be IT infrastructure or thereafter, that will be around KRW500b.

And lastly with regards to your question about our IPTV business, as of the end of last year we have reached 3m subscribers and therefore in terms of the contribution to the profits it's actually a positive number, which means that we are able to cover the marginal costs that we have from the business. That have been said, once we are able to achieve a 4m subscribers in the IPTV business and able to generate more revenue from paid contents, we do believe that that will contribute to better profitability for this business, but this depends upon how we see ARPU improving going forward.

One thing that we can say though with regards to the IPTV business is that by bundling IPTV in our broadband services we have been able to strengthen our competitiveness on the Internet side in terms of seeing subscriber growth and the churn rate drop.

(Interpreted). The next questions will be present by Mr. Stanley Yang from Nomura Securities, and there is no questioner after Mr. Stanley Yang. Mr. Stanley Yang, please go ahead with your questions.

(Interpreted). So I would like to ask a question about your operating profit. You have not released a guidance for the operating profit and I believe that that is maybe because you are taking a more cautious approach to your business in 2012. That have been said, I would believe that with regards to your general stance that it would be to try to offset the decline in PSTN revenues through a cost-cutting or by the smartphone services that you can generate in the Wireless side. So if you cannot provide a number could you describe by business area, for example for the Wireless, the Fixed-line and also the cost-cutting efforts that you will be making, what your plans are for the next year?

(Interpreted). As you have just mentioned, with regards to providing an operating income guidance we are a bit cautious and that is because for this year with regards to the business environment we do believe that the environment will be not easy, or challenging, and therefore officially though we cannot give a number for you, internally it is the management's target to try to achieve the same type of numbers that we have seen for last year.

So for the past two years in terms of our operations it has been very challenging. However, we do believe that this year will be the year in which we will hit the bottom and then start to rebound. The first half we do believe will be a bit challenging. For example, on the Wireless side there is the pricing plan, cuts that we have provided in terms of the rate cuts and also the discount pricing plans. So ARPU is on the decline, but we do believe that as LTE comes in with full force that with regards to the second half that we can expect a turnaround in our ARPU numbers. For the first half in terms of the ARPU or revenue according to our accounting policy it will be difficult to see a significant turnaround.

But with regards to our PTSN revenue, if you look at the decline the rate of decline has slowed down a lot. So right now in terms of the churn it's actually one half of that of the past. So to be a bit optimistic maybe around 50% or around 40%. We do believe maybe 40% to 50% will be the decrease in the revenue side. So still on the PSTN side there will be a revenue decline and that will ultimately translate into a decline in the profit because that is a one-on-one situation. But, as you have pointed out, through cost-cutting efforts we will try to offset this aspect.

Overall we do believe that it will be a bit challenging and that is why we are very cautious to share profitability numbers with you, but we do believe that as we go through the first half and then come closer to the third quarter or fourth quarter that we could expect and will expect a turnaround.

(Interpreted). The next questions will be presented by Mr. Josh Bae from UBS and there is no questioner after Mr. Josh Bae. Mr. Josh Bae please go ahead with your questions.

Yes, hi. If I may add another question, could you please share with us any thoughts you may have on the outlook beyond 2012? The KRW20 trillion revenue guidance implies a flat revenue from 2011. Is that the trend we should expect for 2013 onwards as well?

And also in terms of CapEx, would the KRW3.5 trillion in 2012 be the peak or would we see a further increase from there?

And if I may also add a couple of quick follow-ups on my earlier questions, could you please let us know of BC Cards' net profit for full year 2011?

And when discussing the dividend per share you mentioned that you would consider the market expectation for dividend levels. Can we understand this implies that you would try to maintain KRW2,000 dividend per share going forward as well? Thank you.

(Interpreted). Thank you for your question. With regards to CapEx first, we do believe that this year will be the peak for our CapEx numbers and for next year, though we don't have next year's business plan yet, we do believe that the CapEx number will be lower than this year. That have been said, for the business outlook from 2013 and thereafter it's very difficult to give you what we believe the outlook will be. However, in terms of our revenues and profits from the telecommunications business we do believe that the current level is what we will maintain going forward.

And it will be difficult to increase from where we are right now because there are positive factors and then negative factors that will contribute to this type of dynamic. First on the positive side, we do believe that we will get more revenue generated from the increase in our data service or a proper price related to that generation of service. And also that there will be extra revenue that we can generate from B2B type of services.

However, on the flip side of that, on the negative side, we do believe that there will be continuous pressure to cut rates and that there could other be -- there be other types of negative factors that all in all would lead to a situation in which if there is growth on the telecommunications side that would be good news. But our basic stance is to try to maintain the business as is in the current situation and also try to generate more revenues or profit margins from our non-telecommunications side. So that would be our stance over the mid to long term.

In addition, to tell you what the net income for BC Card was in 2011 it was KRW96.7b.

And in terms of the dividend question that you asked, as of the current time of course we can't tell you what next year's dividend will be because nothing has been decided. But one thing that I can say is that for the normalization for this year with regards to the operating profit, when we did the calculations, at the end of the day we came up with a number that was below KRW2,000. However, our directors did understand that with regards to shareholder expectations that it would be at the KRW2000 level and that is why we decided for a KRW2,000 per share dividend.

Thank you.

(Interpreted). The following questions will be presented by Mr. Kim Dong-joon from Eugene Investment & Securities and there is no questioner after Mr. Kim Dong-joon. Mr. Kim Dong-joon, please go ahead with your questions.

(Interpreted). So there are three questions that I would like to ask you. First is with regards to your real estate related revenue in 2012. For the year do you have any plans for a major disposal of real estate assets or a large scale disposal in general?

And in terms of the revenues from this business line, what do you expect? Do you believe that it would be similar to last year's level or do you have other expectations, is the first question?

And the second question that I would like to ask is with regards to LTE services. You did mention that in the second half you do believe that due to LTE that there will be a turnaround in the APPU. I believe that you probably have done your own simulations so how far do you think you can take the ARPU through LTE services? To what level do you think that it can increase, would be the second question?

And the third question is about VoLTE. By the end of this year some of the competition has said that they are going to aggressively push forwards with VoLTE. If you look at the situation with VoIP and what it did for the fixed-line telephony market, it actually led to the contraction in the overall market size. So with the introduction of VoLTE do you think that there could actually be a positive outcome related to the introduction of such services? And when KT is looking at your LTE services, do you expect VoLTE to be one of the services that you will provide and, if so, what is the expect outcome from such?

(Interpreted). So for your first question with regards to our revenue from the real estate related businesses, from real estate leasing, development and also sales we do expect that the total revenue will be similar to last year's levels. But that have been said, real estate revenue in general is something that is very sensitive towards the economic environment and therefore in terms of how we manage it it's not as rigorously managed as we would do for our telecommunication services.

With regards to our LTE services, as you are aware, versus our competitors we have started a bit late in providing commercial LTE services. Therefore, we do believe that in the second half of this year we can see an ARPU up-tick from LTE. But as of right now because we have just started our services and it's in the beginning phases it's difficult to give you a number on what our expectations would be.

And lastly with regards with to mobile VoIP service, of course this is something that we are taking into consideration and we do believe that in terms of the quality of services that we can provide it will be of a very high quality. In terms of coverage, of course in terms of deploying our network we have started a bit slower than our competition. But with regards to building out the whole network in terms of having the same coverage as you have for the 2G or 3G network, we do believe that it will take a couple of years to achieve this.

Therefore for the mobile VoIP services we do believe that positioning this as a premium service would be the better option rather than having it as a price-destructing type of service type. That having been said, of course we will have to look at the competitive environment and see what our competition is going to do. But we do believe that mobile VoIP services is something that is inevitable at the end of the day and we want to push ahead with this service in a way or in a manner that does not negatively impact our revenue numbers.

(Interpreted). Currently there are no participants with questions.

(Interpreted). So if there are no further questions we would like to end our fourth quarter earnings release with some conclusive remarks. Thank you for your questions and continued interest in KT.

In 2012 KT in the Wireless market will refrain from marketing based on subsidy competition to achieve efficiency in the existing 3W -- WCDMA, WiBro and WiFi -- networks and lead the market based on quality through LTE services that apply virtualization technology. On the Fixed-line market the Company will pursue new growth, leveraging the media business as a catalyst. In addition KT will utilize its benefits as a Group to identify new growth drivers and generate synergies with affiliates to ensure growth in non-telecommunication areas such as finance and broadcasting over the longer term.

Once again, I would like to thank everyone for taking time to participate on this call today and with this I would like to conclude the earnings call for Olleh KT fourth quarter 2011. 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.