KT Corp (KT) 2012 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 will begin the conference of the 2012 first quarter preliminary earnings result 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 2012 first quarter preliminary earnings result by KT CFO Mr. Bum Joon Kim.

(interpreted) Good afternoon I am Bum Joon Kim, CFO of KT. I would like to thank everyone for taking time and participating in this earnings call for the first quarter of 2012.

The first quarter was meaningful period for KT because we were able to achieve higher than expected growth in the non-telecom business areas and to confirm the possibility of the turnaround of our core business amid a challenging market environment.

First, on the wireless side we were able to achieve coverage at a surprising speed, using a simple plug and play of LTE equipment to our existing 3G network, alleviating concerns that we were achieving LTE coverage later than our competitors.

As a result, in only four months we completed building out our 4G LTE network nationwide in 84 cities and core areas of the KTX and highway as of the end of April.

Going forward, KT will regain its leadership in the LTE market, through its LTE technology, which applies work visualization technology and LTE optimized services, such as Genie and olleh TV now.

In the fixed line business we showed our potential to recover to a growth trend. The pace of fixed line telephony revenue declined has slowed down dramatically and broadband internet subscribers during the first quarter grew by almost 100,000, further strengthening our market leadership.

In addition, IPTV, driven by our strong network quality and differentiated OTS service grew by 240,000 subscribers in the first quarter, further solidifying our position as a media player. Moreover, we were also able to successfully route innovative services that created new markets, such as Keyboard and Smart Home Pad and to create a base for global expansion.

At the Group level, affiliates that were newly included and which are leaders in their respective industries, such as BC Cards, Skylife and KT Rental posted strong performance which has improved our outlook on synergy creation and growth in the non-telecom business areas.

In addition, by utilizing Group companies which were either newly acquired or established, such as (inaudible), Ustream and [Nexstar], on top of our existing strong network. We will continue to diligently prepare to grow into a global media distribution Group that distributes virtual goods such as media and content.

Now let us begin the presentation on the first quarter 2012. You may also participate in this conference call via webcasting on our website.

KT has been providing IFRS consolidated numbers for comparison and analysis since the first quarter of 2011. First quarter 2012 consolidated figures include 52 companies, including KT, as was the case in the previous quarter.

First quarter operating revenue grew 9.1% year-on-year to KRW5757.8 billion due to the consolidation of BC Card.

Operating income decreased 20.3% year-on-year to KRW574.7 billion, due to the disposal gain on Skylife investment stock, accounted under the equity method and recognized in the first quarter of 2011.

Net income decreased 26.6% year-on-year to KRW407.6 billion, due to the decrease in operating income.

In addition, KT's standalone CapEx increased 30.3% year-on-year, to reach KRW897.4 billion, due to the increased wireless investment to build out LTE coverage.

Next to provide you with a breakdown for each business. From the first quarter 2012 the Company has introduced a BIT or Business Information system Transformation and has thus changed the way we organize our business lines. This will be explained through our separate material.

First is our wireless services. Wireless revenue decreased 1.3% (sic-see press release)year-on-year to KRW1716 billion due to an increase in bundling discounts and the additional KRW 1,000 base fee discount and free text messages that started in fourth quarter 2011.

Though the market was concerned about wireless competition in the first quarter, smartphone subscribers increased by 880,000 to represent more than 51% of our total subscriber base. And WiBro subscribers increased by 70,000, to reach 830,000 subscribers, showing that we have achieved steady, quality growth in data services.

In the second quarter, which is when our nationwide LTE network will be completed we are planning to start full-fledged efforts to secure subscribers based on our world class network quality and service optimized for LTE. In addition, we expect the wireless growth trend will naturally recover in the second half of this year, as LTE subscribers account for a larger portion of our subscriber base. We expect to be able to achieve our year-end target of 4 million subscribers.

Next is the fixed line business. Fixed line telephony revenue decreased 8.8% year-on-year to KRW886.8 billion due to a more moderate decline in subscribers and traffic.

In particular, with regards to the fixed line telephone revenue it decreased to KRW853 billion, which represented a slowdown of only 40%, which shows that the fixed line telephony revenue is declining at a much slower speed -- a much slower pace.

Going forward we believe it will further -- it will decelerate further, which we expect will strengthen the stability of this business.

For broadband internet though, there was a steady decrease in the subscriber base. Revenue decreased 5.6% year-on-year to KRW455 billion, due to the revenue discount from bundling. Amid a saturated market environment we were still able to increase broadband subscribers by 100,000 in the first quarter, to reach 7.92 million, based on our fundamental product competitiveness.

In particular the number of subscribers who are signing up for both broadband internet and IPTV at the same time are increasing, which is generating high value-added and continuously dropping the churn rate, which is increasing our expectations about the possibility of a turnaround in the overall fixed line area.

In particular, the value of subscriber growth in the broadband area will become more evident as smart home based services that connect with keyboards and smart home pads increase in the future.

Next is the media and content business. Media contents revenue increased 24.3% year-on-year to KRW230.5 billion, driven by a steady increase in IPTV subscribers.

First quarter IPTV had 240,000 net additions, which enabled it to reach a total of 3.32 million subscribers, showing KT's competitiveness and potential in the media business.

With the conversion to digital broadcasting around the corner, KT will secure over 4 million subscribers this year and use this enlarged subscriber base to achieve quality growth by increasing services such as advertisements, commerce and end screen.

The finance business posted KRW836.3 billion in revenues due to the impact of BC Card which was included from the fourth quarter of 2011. On a standalone basis BC Card's revenue grew 2.5% to KRW783.7 billion.

In the future the Company will combine the customer base of KT and BC Card to create and lead a new telecommunications finance conversion to market.

Next is the revenue from other services. Other service revenue increased by 10.2% year-on-year to KRW261.5 billion, due to the impact of AHC networks, which was included with BC Card.

Lastly I would like to briefly touch upon operating expenses. Labor expenses in the first quarter grew 7.3% to KRW733.7 billion(sic- see press release), due to an increase of KRW33.3 billion in labor expenses for subsidiaries, as a result of the consolidation of BC Card.

Depreciation increased 5.7% to KRW763.2 billion year-on-year, as CapEx increase, driven by the increased investment in the wireless area to build out LTE coverage.

SG&A decreased 22.4% year-on-year to KRW431.5 billion, due to a decrease in wireless marketing expenses.

For the other details of the results please refer to the material we have distributed in advance. With this we would like to end our presentation on the first quarter 2012 performance.

Now we would be happy to take any questions you may have.

(interpreted) Now Q&A session will begin. (Operator instructions). In order to allow as many Q&A chances as possible within the limited time we would appreciate only two questions per each participant.

The first question will be provided by Kim Hong Sik from NH Investment Securities and the next question will be provided by John Kim from Deutsche Securities Korea. Mr. Kim Hong Sik please go ahead with your question.

(interpreted) Thank you. There are two questions that I would like to ask you. If you look at your results it seems that from your affiliates, such as BC Card and Skylife that you have had very strong performance and therefore rather than on a KT standalone basis your consolidated performance is much better.

On the non-telecommunications side the expectations that we have actually are very large. Therefore the question that I would like to ask you is that if you look at this year and next year and maybe further down the road, to compare your consolidated performance and then your non-consolidated profits, what would be the gap between the two and what do you think this trend will be like going forward? That's the first question that I would like to ask you.

Then the second question, right now if you look at your wireless ARPU it seems that the decline was smaller than we had expected. Was this mainly due to the impact that in case of the bundling discounts that you were providing that the wireless bundling was less than we had expected, or are there other factors behind this? In addition to that, when do you believe that the wireless ARPU will start to recover and pick up?

Thank you for your question. To address your first question regarding our subsidiary company or non-telco core business. As you can see by the year-on-year growth it's been a significant growth from the perspective of how much it's adding to our operating income.

Overall it's difficult to mention how much it will impact our operating profit. Obviously we're looking at increasing more on a quarter-on-quarter basis and we're watching this very closely. From a big picture standpoint we have outlined and communicated with the market that overall non-core revenue should increase an additional KRW18 trillion by year 2015.

So in line with that I think we do see increasing operating profit, but for now I think it's actually contributing to about 10% of our operating profit ex-KT and how much it's contributing to KT. We will continue to monitor and communicate clearly with the market how much our non-telco business is going to impact our operating profit and that's one of the biggest directives -- one of the drivers that we have, so we will keep a close watch.

In terms of the comment in the ARPU we have a big picture of ARPU in sort of the moderate case rebounding from the current levels in third quarter. In a better scenario we expect the ARPU to increase in this quarter as well, albeit really slow.

To address your question as to why our ARPU is falling slower, I mean we all understand there was tariff reduction of KRW1000, SMS, (inaudible) and so those are being offset by new subscribers in smart phones as well as LTE subscribers coming forward.

(interpreted) The next question will be presented by John Kim from Deutsche Securities Korea and the following question will be presented by Yi Dong Sup from SK Securities. Mr. John Kim please go ahead with your question.

Yes, thank you for the opportunity. I'd also like to ask two questions. First is on your wireless. Related to the previous question, as you know your wireless ARPU dropped 5% year-on-year, or about KRW1500 per month, despite your smartphone user base more than doubling from 3.8 million to 8.2 million over the same period. So given that smartphone users were originally expected by the management to feature higher ARPU, I don't think we can blame the ARPU decline entirely on tariff cut. So what did KT and the competitors miscalculate with respect to your ARPU outlook last year and how do you ensure the same outcome doesn't repeat again with LTE? That's my first question.

Second is on your DPS. Just so that everyone understands clearly. Your minimum KRW2000 per share DPS and 50% of net profit payout, are you going to base this on your consolidated or KT separate earnings? Also your second half earnings for 2011 was worse than 2010. So on a year-on-year basis are you expecting your second half earnings for this year to remain flat or be on a declining trend?

First let me address the question regarding dividends, it is KRW2000 minimum and that's based on KT standalone.

Regards to your question regarding ARPU, yes there was more than just the tariff reduction that has impacted the fall in tariff for the last year -- I guess from the first quarter last year to the end of last year. In the beginning of the year we anticipated X amount of ARPU reduction because of our revenue discount or smart sponsor. As we wore on, more and more subscribers -- a lot more percentage of our subscribers were signing up for these programs. In the beginning of the year it was 23%, by the end of the year it came up to close to 50%, or 48% to be exact. So that combination made extra discount on our ARPU and that added to a certain amount. Now on top of -- I'll stop here for now.

Therefore, our early anticipated ARPU reduction in terms of, not the external factors but internal factors, actually grew a little bit bigger than we had anticipated. And you take into account of the tariff reduction towards the end of the year, and it all totals up to a lot more than 5%, but in our view we made up a lot of the other extraneous forces due to up selling of the tariff. So, in essence, I think it could have been worse but I think we stopped it off at negative 5%.

Now, looking forward, just to mention about LTE and the value accretion that we may look forward to is (1) we are signing up for much higher tariff plans. We are incentivizing the sales force in a different manner so that they sell the higher tariff scheme; that's (1). (2) we want to try to minimize or reduce some of this tariff or bundling savings, to meet what the market demands, (3) there is no unlimited data plan in LTE. So all these lessons learned from 3G and the competitive environment, we hope to use to our advantage so that, going forward, our ARPU goes up -- and we do see ARPU increasing from here on because of these forces and, as I mentioned earlier, as we hit 4 million LTE subs, with these basic guidelines, we believe that we will increase ARPU.

Just a quick follow up question; your thoughts on second half earnings and, just so that I understand correctly, expansions and non-telco business, based on your comment, is not going to help raise KT's dividend then? Am I correct?

My comment would be that we are doing everything to increase corporate value for KT. That includes our subsidiary company being brought up to our parent company level and showing the increase in operating profit. Regardless, in our view, you should think differently from where the profits are coming from for the dividends. Dividends are KRW2001 per share at this time, or better, but right now, as we are saying, that our subsidiary companies are adding to our value, and I hope our shareholders can see that, what's going on.

The answer to your last question, regarding the outlook for second half; we have an annual target that our Company is trying to achieve, our first quarter did pretty well. If you look at the numbers, our wireless -- our market share didn't move much, at the same time, we acquired subs at a very reasonable price, not too expensive, so therefore we had pretty good profits for the first quarter. Going forward, there's a lot of changes that are coming up, everyone's talking about our Company addressing the LTE market, so it's hard to say on a quarter-on-quarter, half-to-half year, but for me, overall comments that I can make is we will try to achieve an outcome that's much similar to last year, that would be the overall comment.

But just to add a little bit, as you recall, there was an extra KRW180 billion one-off cost in shutting down 2G at the end of last year, so I guess you could assume that's not going to happen again, so that will add value -- add profits in the second half. We hope that all three players can acquire subs at a reasonable cost and we have better in the second half; that would be our comment.

And the next question will be presented by [Yi Dong Sup] from SK Securities, and the following question will be presented by Stanley Yang from Nomura Securities. Mr. Yi Dong Sup, please go ahead with your question.

(interpreted) So there are two questions that I would like to ask you; if you look at the quarterly results within the first quarter, on the competitive side with regards to marketing expenses or sales related commissions, it seems that there has been a decrease in this area which has contributed to stronger profits for the quarter. The question that I would like to ask you is that, is this a situations that would only pertain to the first quarter, i.e. because in the first quarter you were a bit slow in preparing your LTE network and there were not handsets available and therefore you could actually not engaged in full-fledged competition, therefore, as a result of that, this is what happened in the first quarter? Or, is it a fundamental change in the stance of the Company from a big picture level, which means that, in terms of your market share and in terms of your subscriber growth, even if you see a slower trend, you will be more attentive to trying to maintain your profitability? So I would like to ask you whether this is a fundamental change in your stance or whether it was a specific situation that would only pertain to the first quarter?

And secondly, the question that I would like to ask you is with regards to your share price. I actually believe that the share price right now is at a very low level, and therefore, from the CFO's point of view, when compared to the fundamentals of your business, do you believe that the current share price is at an appropriate level? And, if not, if you don't believe that the current levels are appropriate, what plans or what strategies do you have to take that share price to the level that you deem to be appropriate?

I think I can summarize first quarter's actions by KT in terms of how we look at LTE and market share in that we have never used subsidy as the fundamental tool for competing in the market. As you can see by our TV commercials, we were very much getting prepared to launch LTE for the last three months, all the warp commercials and bringing up the top of mind of LTE for KT subscribers as well as potential KT subscribers was a big part of our strategy.

Though it was unfortunate for us to launch LTE later than our competitors, at the same time I believe we were very smart in acquiring subs at a very decent price as seen by a marketing cost reduction. And I think we should be -- I think that should be well noted.

Now, going forward, I think the consumers will soon realize how good KT's network is in terms of our CCC rollout and our incredible speeds that we have done. We are currently -- at many stores around the country we are having speed challenges and I think we are top and people will realize how valuable our network is. Now, going forward, I think, obviously subsidies and the way we use the resource is one of our tools and we may see sporadic increases from here and there, but overall as I mentioned, if you look at it from the big perspective, if we don't change last year's profitability, that means that we have spent very well money without changing or maybe even increasing market share, would be, I would I say the smart way to do it.

To address your second question, my answer has to be, it's undervalued right now. And I'll tell you why; we have not changed fundamentally in terms of profit from last two years. In fact, I see the Company being much more stronger as we roll out a new network, as we acquire some of these new companies that can sell our virtual goods -- soon these will all turn into what we call the big picture where we will see this come to fruition and there is no difference in profitability -- but again, our stock price is down from last year. Now, to me, fundamentally, we're as strong as before yet our stock price is down -- actually, fundamentally we're stronger than before because we have these companies and our stock price is down, therefore, I do see absolutely it's undervalued, in my view.

(Spoken in Korean).

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

(interpreted) So there are two questions that I would like to ask you. First is, with regards to your performance. If you compare KT's performance to the competitors' performance, I believe that overall you performed very well. If you look at the fixed-plan side, structurally you are seeing a decline on this side and even though that it's happening, I think that overall the performance is very strong. And I believe that this is because not only on a standalone basis, but also on a consolidated basis, that there were various effects of your cost savings. However, going into the second quarter, with regards to marketing competition, I think that are various concerns about the whole industry.

So, there are concerns that KT in leading the LTE market, in terms of the marketing stance that you will take, there are concerns on where this will lead going down the road. Therefore, the question that I would like to ask you is, with regards to your marketing expenses; what do you expect that they will be? And if that cannot be on a quarter basis, maybe on a full year basis or on a year-to-year basis. How much in terms of your full year marketing budget are you going to be spending? Would be the question I would like to ask you.

The second question that I have is similar to, maybe, a question that was previously asked, but in terms of your overall performance on a standalone basis versus on a consolidated basis and the strategy that you have going forward, we understand that on a consolidated basis that you want to, going forward, grow your non-telecommunications businesses so that it can be a growth driver for your down the future. However, I think that one of the things that -- or the issues that we have is that on a consolidated basis, for the profits that are generated there, as a shareholder it seems that there are not many areas in which we can actually participate. This is because, for the dividend policy that you have, it's more based upon a standalone performance.

So the question that I would like to ask you is that, on a consolidated basis, not as a cash flow perspective or not as an accounting issue, but from a shareholder's perspective, what thoughts are you giving from the Company level or what are your plans going forward to enable shareholders to maybe benefit from the stronger performance that you may have on a consolidated basis? This is a question that pertains not only to you but I would believe your competitors such as SKT; but over the longer term, what plans do you have or what are your thoughts on this issue?

First of all, to talk about quarterly changes in marketing environment, it's hard to go in detail, but I can mention a couple of things. In the second quarter, obviously, we have gotten our network prepared and we would like to see more growth in LTE so, therefore, we may see a little bit of an up-spike in marketing costs in the second quarter. Some of the uncertainties in the third quarters is that they will be a lot of more handsets being -- coming out. So thereby, possibly a little bit more aggressive/having positive stance for each makers and that could all drive up prices. But in my view rather than looking at those kind of things, I think it's important to see, as a KT shareholder, how we reallocate these resources. At a time when it's really heated, do we go into it? Or when it's quiet, like in the first quarter, we get other subscribers?

So, overall, I just want to mention our budgeting for marketing I can't say, but our profit level is supposed to be around the same level as last year. So you will have to leave it up to us to see how effective we acquire these 4 million subs that we're talking about in the LTE. And we hope, every quarter-on-quarter, we show good numbers with good marketing cost. I think it's hard to just correlate LTE equals big money and low profit. I don't want you to look at it that way, I think you'll see that -- we hope to show you, and we plan to show you, that these acquisitions are at a good price.

Furthermore, I think these huge buys of subscribers in the past, I don't think it's going to happen -- I hope, in LTE market, I think people are selling more long-term contracts than (inaudible) so I hope that the churn rates go down for everybody.

To address your second question, I know I did mention earlier that, yes, the dividends are paid down on a standalone basis, but if you think of it in a big picture, it's really -- it doesn't matter if it's from, just -- in terms of minimum amount, it doesn't matter if it's consolidated or standalone, but my overall comment is -- the top management, including myself, we look at the subsidiary company this way, we invested X amount of money into the Company, is that amount being value accretive to our stock or our Company value? And I think currently some of those companies are definitely yes. Their ROIC is higher than ours, so it's value accretive.

We hope, regardless of the cash flow, the financial standings of the Company as a whole is evaluated by the investors, like yourselves, as a consolidated company, because we are looking at some of these non-telco -- obviously, these are not just completely non-telco, but we have synergies between them -- but look at those companies as consolidated so that we are rewarded for the amount of money that we are investing into these companies and it is showing in terms of the valuation. Now, again, these are obviously non-cash flow coming back, to us unless they pay us dividends, but at the same time, the value of the Company is still better or increasing. So we hope that it is recognized as a consolidated company. I hope that answers your question.

(Spoken in Korean).

The next question will be presented by Sam Min from Morgan Stanley, and the following question will be presented by Kim Hue Jae from Daishin Securities. Mr. Sam Min, please go ahead with your question.

Yes, hi, thank you for this opportunity. I guess my first question is on your non-core, I guess, businesses. I've read on your press release that it contributed about KRW83 billion this quarter and that was up 26%, so a little -- about KRW15 billion to KRW17 billion year-over-year for this quarter. I was wondering if you could first break down, I guess those earnings by either by BC Card, KT Skylife and KT Rental and where do you think -- what business will likely grow the most, going forward? That's my first question.

And my second question is on your sort of standalone KT performance. It seems as though that the PSTN erosion has slowed down -- so there was about three -- I guess, on an annualized basis, maybe erosion of KRW300 billion, which is a lot less than before. But if you look at the marketing expense decline, that was quite significant with churn rate coming down. So, I'm sort of trying to understand or reconcile into second quarter and as well as the second half, as the PSTN erosion continues, and if we expect marketing expenses to come back up again, then we might end up seeing somewhat disappointing results again, especially with the 4 million LTE target, I'm trying to understand how we can continue to see cost savings within the KT standalone business? Thank you.

Let me give you a simple answer for the first one. BC Card was brought into the parent company level at the operating profit level of KRW444 billion -- oh, I'm sorry, this is KRW44 billion -- hold on one second, KRW44.4 billion, Skylife was brought into the parent company level at operating profit of KRW30.2 billion, and KT Rental has currently not brought up to the parent level as fully consolidated. So, from an equity evaluation method, it came in through the net profit level of KRW4.5 billion or they had a operating profit themselves of KRW22 billion. So it shows in our books as KRW4.5 billion, in terms of equity evaluation method.

To comment on your future view, or the rest of the year view of these subject companies, BC Card last year had a operating profit of about KRW100 billion -- roughly KRW100 billion, a little bit above, and I think our year is looking at little bit beyond that, not much but slightly above that. Skylife currently does not have a guidance on operating profit, but they're looking at a subscriber growth target of 365 total for the end of the year -- 3.85 million, sorry.

To answer your second question; I think, I've been really waiting for this moment to tell the market how much our PSTN revenue has declined. It has never been a straight slope, it's actually -- it's slowing down every quarter and we hope that this year it slows down even more. Therefore, the extreme difficulties we had in making up the PSTN revenue loss is no longer that burdensome, is what I'm trying to say. And I hope that market really looks at this closely, because it's really helping our bottom or our profit lines tremendously, so it's a very positive trend for us. Now, with that backdrop, with the revenues falling less and less for the PSTN, it's making us easier to make up these revenues. Therefore, on the top line side, we still see -- as I mentioned, as we reached 4 million subs in LTE we're going to see better and better ARPU and higher revenue. Number two, IPTV continues to grow at a very, very fast pace in terms of both subscriber and revenue, which is a very -- another very positive sign. And then, along with that, what I just mentioned; the subsidiary companies are adding in terms of both top line as well as being value accretive on the operating profit level as well.

Just to add a comment on IPTV; I think we are showing slow growth in uptrend in ARPU as well as PPV ARPU. I think, from the standpoint of PPV, we are looking at 11% growth in PPV ARPU year-on-year.

(Spoken in Korean)

The next question will be presented by Kim Hue Jae from Daishin Securities, and the following question will be presented by Josh Bae from UBS. Mr. Kim Hue Jae, please go ahead with your question.

(interpreted) So there are two questions that I would like to ask you. First is with regards to network neutrality and the position that the Company has on this side. There was a case in which there was a blockage, of Samsung's smart TVs' access to the network and also there is also talk about actually asking portals to pay a network usage fee. So I would like to know what progress has been made on the network usage fee that you're planning to levy on the portals? And, in addition, overall what your strategy will be with regards to network neutrality? The second question that I have is on the real estate profits. From the first quarter, is there any changes on your stance towards real estate profit? And there is also talk about dealing with or doing a disposal of your Mok-dong IT Center, so what is your guidance on this aspect?

I'm [Kim Yong Ho] and I'm part of the IR team, maybe if I could address this question with regards to the network neutrality guideline. I think that it is meaningful, because we will be able to take preemptive measures to manage the traffic on the network, so that is a significance that we have. And also, secondly, because management services will be allowed, we will be able to provide quality insured premium services.

And right now we are talking to the smart TV manufacturers in February, because of the free wiring of the internet network, we did block the access from Samsung Smart TV applications to our network. And thereafter, we had started discussions with Samsung and LG, which are the smart TV manufacturers and this is something that is currently ongoing. So we are trying to find a business model that would reflect the value of the telecommunications network but because this is something that is currently ongoing, please understand that we cannot delve into the details.

Secondly, maybe if I could address the portal issue that you said; on this aspect nothing has been decided, so I think that the press reports are moving ahead of -- or are going too quickly and therefore I would clearly like to state that on the portal side nothing has been decided in terms of whether or not we will levy fees, if at all.

Secondly, with -- about the question that you asked for our real estate revenue, last year all-in-all, including real estate disposal proceeds, real estate rental fees that we received over rental revenue and also other sales of real estate that we had; all-in-all the revenue from that was KRW450 billion. This year, we think it will be around KRW500 billion of which 45% will be from the leased or rental revenue and 55% would be from the sales of real estate. So, this is a reference point that you should take, of course, the real estate economy may fluctuate and therefore the system think that we cannot definitively pin down, but I think that for your modeling purposes, that the KRW500 billion number is something that you can use.

The next question will be presented by Josh Bae from UBS, and the following will be presented by [Hwan Jeong Lim] from Korea Investment Securities. Mr. Josh Bae, please go ahead with your question.

Yes, hi, thank you for the call. My question is regarding your profit target. First, I'd just like to clarify, you mention that you're targeting for 2012 earnings to be similar to last year's level. Just wondering, which number you're referring to? Last year, KT recorded consolidated operating profit just short of KRW2 trillion. Is this your target for this year or is your target based on another number? Also, if you could share with us how important this target is for the Company, for the management? For example, if we assume things don't go as planned and it turns out that LTE subscriber increase does require large marketing budget, would the LTE subscriber of 4 million be a priority or will the profit target be a priority?

Mr. Bae, thanks for the question. It is -- we would like to have it from consolidated, but this year we are on a standalone basis for our operating -- the targets that I mentioned earlier. We had just shy of KRW2 trillion last year and I think we're looking at the same thing -- obviously, if things change in a material way, we would probably communicate it but at this time, we have no reason to do so; we're comfortable with that. So it is on a standalone basis.

In terms of your second question; I think we can only answer that question if we come to that point in -- the forked road, because it's hard to say. Obviously, from our standpoint at this time after first quarter, we are on track for meeting both sides -- both profit and the LTE subscriber number. We find the subscriber number to be fairly reasonable, nothing outrageous that would stir up the market to a point where we don't want to be, so I think we made this plan from the beginning of the year as achievable within the guidelines of competitive environment.

Yes, hi, thank you. Just as a quick follow-up, if you're assuming -- if you're targeting for your operating profit on a standalone basis to be similar to last year level and if you're expecting contribution from your other subsidiaries to be higher than last year, is it fair to assume that you're targeting for higher consolidated operating profit this year?

Yes, that would be a very safe way of looking at it, as a standalone, we will try to achieve the same level last year -- and, on top of that on a consolidated basis, obviously, our operating profits will be higher. I guess that's the question you were asking?

Yes, yes, thank you very much.

The next question will be presented by Hwan Jeong Lim from Korea Investment Securities, and the following question will be presented by Sung Min Chang from JP Morgan. Mr. Hwan Jeong Lim, please go ahead with your question.

(interpreted) So there are two questions that I would like to ask you. First is a follow-up question about the network neutrality issue, and this pertains to mobile internet telephony. Right now, in the mobile internet telephony space, actually there are some people that are using this service, but the market share is very low and the actual usage is very low, but I do believe that the market expects that this side will grow significantly going forward and that there will be a lot of subscribers in this area. So I do believe that this is an area of concern. How do you prospect or how do you look at this issue? Is the question that I would like to ask you and what do you forecast going forward? The second question that I have is actually a simple question about some of the numbers of the first quarter. Could you provide the smart phone ARPU -- smart phone subscriber ARPU and also the LTE subscriber ARPU?

(interpreted) Maybe if I could address your second question first. For the smart phone subscriber ARPU, the number is KRW35,000 and then for the LTE ARPU, it's KRW52,000. To address the first question that you had about mVoIP; currently we are providing mVoIP services to subscribers that have signed up for a rate plan that is KRW54,000 or higher, so there is limited use in this area. After the mVoIP was allowed, we actually do not see a large impact on voice usage and the reason for that is that for a subscriber that has signed up for a KRW54,000 package, such a person would get 300 minutes of free voice included into that package and therefore there are no real benefits to use mVoIP in such a situation. So, this is the current trend that we're seeing and for the forecast going forward, this is something that we will have to closely monitor. So, I can provide you, I guess, comments about what the current situation is.

The next question will be presented by Sung Min Chang from JPMorgan, and the following question will be presented by Sam Min from Morgan Stanley. Mr. Sung Min Chang, please go ahead with your question.

(interpreted) I just have one question and it is a question about KT's overseas expansion; it seems that you have a very strong commitment for overseas expansion, and I think that there was something that was ongoing in South Africa. Could you update us on what the progress is on that side? In addition to the South African investment, for this year if there are any other potential transactions that you see and can share with us that would be appreciated. Thank you.

Telkom in South Africa represents us with a very interesting opportunity. I don't want the market to think that KT is investing in Telkom just for the sake of buying equity stake; that is one of our options, but at this time we're looking at various ways of looking at Telkom. We would like to work closely with Telkom SA in transferring some of our past experience in terms of both broadband, corporate market and how we see that we can accelerate Telkom's business into these businesses in the short-term. We had various teams visiting and working with Telkom directly in South Africa and through those studies we found lots of opportunities that both Telkom and KT can exploit -- not exploit, but to benefit from.

As you know, KT, in both fixed line and wireless, is at the cutting edge in terms of our technology. So telecom is very welcoming -- they are welcoming of listening to our ideas and it's going quite well. But nothing has been said yet at this time. Beyond that, in terms of the equity investment, I can only state what's been disclosed publicly which is that there has been interest in looking at 20% of Telkom South Africa, disclosed by both South Africa as well as us, but nothing has been said and there has been no clarity to the market yet as to how much of that would be KT's and others. So at this time it is still in the study phase. But we see it as a very positive cooperation between two companies with various levels of knowledge base that we can transfer knowledge and also increase corporate value and that's where our equity investment will pay off. We look at both sides of the equation on this one and we think it's a very interesting opportunity.

(Spoken in Korean).

The next question will be presented by Sam Min from Morgan Stanley, and there are no participants with following questions. Mr. Sam Min, please go ahead with your question.

Yes, hi, thank you for the last question. I just wanted to clarify an earlier question and your answer that you're targeting to achieve on a parent basis -- or standalone basis about KRW2 trillion which you did last year. Upon a few one-time items, such as NTC sales, that was about KRW240 billion, also the real estate gain of KRW300 billion. I understand that there is a one-off cost on the 2G shutdown, but I assume that essentially your organic earnings, or OP, for 2011 was lower than KRW2 trillion. So I'm trying to reconcile your expectation that -- or your target to achieve about the same level of profitability as last year on a standalone basis for 2012. I'm only assuming that the only way to really achieve that is to see marketing expenses as low as this quarter throughout the next three quarters, particularly as PSTN revenue will continue to fall. Just offsetting that could be the wireless revenue if ARPU goes up and also if your IPTV continues to do well. So, can you just clarify that that's essentially what you're saying? And am I missing something here? Thank you.

Yes, let me address that. I think in fact you might have even forgotten one of the toughest hurdles that we're going through right now, which is the tariff reduction of 1001 plus free SMS, that's another big one that if you quantify it, it's a big hurdle as well. So yes, overall, your comment and your assumption is correct. We are looking to achieve the same amount of profit levels last year with these difficult hurdles.

So to address all these difficulties in terms of profit lower entities, we look at both top line and cost control. In terms of top line, as we mentioned, we do see some increase in ARPU as well as subscriber numbers in the LTE, so that will help in the top line. IPTV is growing at a rapid pace which is helping top line. And on a consolidated basis -- this is different, but just to say -- these subsidiary companies are going to be value or revenue enhancing. Plus, as I mentioned earlier, that I would really like to have the investment committee take a close eye on, is our fixed line revenue decline and how much it is improving.

And then to address the last part of the equation in terms of the profit, it's cost and we are going through currently some heavy cost reduction efforts this year, so that we hope to achieve, as you mentioned, at the parent level only operating profit of around level of last year. Obviously, cutting cost doesn't always improve corporate value for the long-term. So we do this, but we are also looking at increasing a lot of these subs so we have a much better revenue base for the years to come.

(Spoken in Korean).

The last question will be presented by [Kim Jin Huan] from [HI Investments]. Mr. Kim Jin Huan, please go ahead with your question.

(interpreted) The question that I have is with regards to your merchandise gains or losses. Right now, if you look at that category, it seems to be that there is a deficit of KRW28 billion and it is actually a much smaller on a year-on-year basis and also on a quarter-on-quarter basis. I am not exactly sure of what this indicates, but if it is something that is linked to your handset subsidiaries, should I believe that this is something that is taking place because, for the handset thing which you're paying higher subsidiaries, your market share is actually declining? Is this the right way to interpret it, or is there something else here?

(interpreted) The main reason for the decline in our merchandise profit and loss is because of the decrease in our mobile handset (inaudible) right now and that has led to a decrease in our revenues. To be more exact, that if you look at the fourth quarter, it was 2.45 million whereas in the first quarter of this year it is 1.945 million.

So in wrapping up I would like to thank you for your questions and interest. I believe the slowing pace of revenue decline in the fixed-line telecommunications business and the steep revenue growth in the non-telecommunications business in the first quarter reflected the business diversification efforts of the KT Group and the possibility for future improvement. Going forward, we will build upon this by strengthening synergies with Group affiliates that have a leadership and growth potential in areas such as finance and broadcasting, so that we outperform market expectation.

Once again, I would like to thank everyone for taking time and participating in this call and with this I would like to wrap up the first quarter 2012 earnings call for olleh KT. Thank you very much.