KT Corp (KT) 2012 Q2 法說會逐字稿

(Interpreted) Good morning and good evening. First of all, thank you all for joining this conference call and I'll begin the conference of the 2012 Second Quarter Preliminary Earnings Results by KT. This conference will start with a presentation, followed by a Q&A session. Consecutive interpretation will be provided for your convenience. (Operator Instructions). Now, we shall commence the presentation on the 2012 Second Quarter Preliminary Earnings Results by KT's CFO, Mr. Bum Joon Kim.

(Interpreted) Good afternoon. I am Youngwoo Kim, IRO of KT. We will now begin the Second Quarter 2012 Earnings Conference Call. You can join the conference call via the web (technical difficulty) on our website and can look through the presentation slides, as we make the presentation. Just would like to remind you that from Q1 2011, KT has been presenting its performance on a consolidated financial statement, based on IFRS accounting standards. From Q2 2012, the statement reflects a total of 53 companies, including that of KT. With that, our CFO, Bum Joon Kim will begin the presentation.

(Interpreted) Good afternoon, I am Bum Joon Kim, CFO of KT. To KT, second quarter was a time where we felt both concerned and hopeful. Concerned, because we started off second quarter with LTE launching later than our competitors, but hopeful in that we were able to successfully build our nationwide network and to acquire sizeable subscribers in a short term, leading to a Wireless ARPU and its revenue turnaround earlier than expected.

Going forward, KT will regain its market leadership in the LTE space, with continuous enhancement of quality experienced by customers and to differentiate its services. We will also accelerate growth in Media and Finance, where performance is becoming more visible, so as to achieve combined growth between telco and non-telco businesses. With that, we will begin the second quarter earnings presentation.

Second quarter operating revenue increased by 8.1% year-on-year to KRW5773.3 billion, due to the inclusion of BC Card in the consolidated financial statement. However, with 10% increase in operating expenses, operating profit declined 14% year-on-year, to KRW371.7 billion. Net income, due to fall in operating profit and NTC sales gain reflected in second quarter of 2011 declined 43.4% year-on-year to KRW238 billion. EBITDA declined 2.4% year-on-year to KRW1145 billion.

With that, I would know like to move on to the results of KT's core subsidiaries. KT's core subsidiaries BC Card, KT Skylife and KT Rental have all shown stable growth following the first quarter. Q2 operating revenues for three companies have increased 3.2%, 14.8%, 1.2% year-on-year respectively.

Also with the continued growth trend of the subsidiaries' operating profit, contribution to the consolidated operating profit has risen by 5.8 percentage points quarter-on-quarter, to 16%. BC Card, KT Skylife and KT Rental all have leadership in their respective markets, and we expect their contribution to further grow going forward. Also, KT Rental's results will be fully included in the consolidated financial statement from the third quarter.

Next is the breakdown of operating revenue. Wireless and Fixed revenue declined 1.9% and 8.5% year-on-year respectively and merchandise revenue also fell 18% year-on-year with reduced demand for Wireless handsets. However, Media and Contents revenue increased 32.6% year-on-year and financial revenue increased quite significantly, due to inclusion of BC Card, which was consolidated from Q4 2011. Next is on our operating expense breakdown. With an impact from a decline in Wireless handset demand, cost of merchandise fell 22.2% year-on-year. Further, cost of service provided also declined 15.7% year-on-year, due to a reduced interconnection fee. However, with the inclusion of BC Card and the consolidated financial statement, general expense increased 51.7% year-on-year and selling expense rose by 15.5%, with active LTE marketing.

Next is some highlights from the statement of our financial position. Q2 asset liability equity showed a year-on-year growth of 10.6%, 14% and 5.8% respectively. Net debt declined 2.9% quarter-on-quarter on the back of securitization of accounts receivables of the handsets, which we began from 2012. Net debt to equity ratio, once again fell and recorded a 3.8 percentage point quarter-on-quarter decline to 75.6%.

In the first half, KT sold off KRW1372 billion of accounts receivables and will continue to do so for newly generated handset receivables in order to strengthen our financial gearing.

Next is on our CapEx. Before explaining about the second quarter CapEx, let me first talk about 2012 annual CapEx guidance adjustment. KT has decided to continuously improve service quality felt by customers through the adoption of VoLTE and multi-carrier and LTE coverage expansion. To that end, we have decided to increase LTE CapEx by KRW300 billion. Accordingly, LTE CapEx will increase from the previous KRW1 trillion to KRW1.3 trillion, driving the total CapEx from KRW3.5 trillion to KRW3.8 trillion.

Now on Q2 CapEx. Q2 CapEx with increases in CapEx for Fixed line businesses, including Internet and lease line rose 11.3% quarter-on-quarter to KRW998.5 billion. With a gross in Wireless CapEx for the LTE network, build out for first half 2012 accumulative CapEx increased 26.8%, compared to first half of 2011, to record at KRW1895.9 billion.

Next is performance breakdown by different services. Wireless revenue increased 1.4% quarter-on-quarter, to KRW1740.1 billion on the back of ARPU increase triggered by LTE subscriber growth. Particularly, Wireless ARPU turned to a positive trend for the first time in eight quarters and showed a growth of 2.5%, quarter-on-quarter, to record a [KRW29,447].

Q2 smartphone subscribers are 9.14 million, accounting for 55.4% of total subscriber base of which LTE subscribers are 1.17 million and as of July end, LTE subscribers stand at 1.54 million. In the second half, with further upgrades in our LTE network and services, as well as the use of the strategic handset, we will more efficiently acquire LTE subs, so that we can achieve 4 million subscribers by the end of the year.

Next is on Fixed line business. With decline in subscriber and traffic and an impact from the increase in broadband bundled discounts, Fixed line revenue fell 8.5% year-on-year to KRW1611.3 billion. Q2 total subscribers for Fixed line telephony is at 18.96 million. This is 110,000 less than the previous quarter, which is showing alleviated declining trend.

For broadband Internet, although already a saturated market, there was a subscriber growth of 50,000 in the second quarter, recording total subscribers at 7.97 million. In particular, bundled subscribers account for 69% of total subscribers, pushing down the trend rate to around 1%, significantly helping to stabilize the broadband Internet business. Especially, as we see IP based Smart Home service take off with a variety of screens being added, like the IPTV Smart Home, on top of the broadband Internet, we expect revenue per household to continue to grow.

Next is on Media and Contents business. Media revenue, on the back of continued growth in subscribers and ARPU increased 42.5% year-on-year to KRW233.1 billion. KT is leading the IPTV market, especially IPTV services, based on our competiveness in network and content.

In Q2, there was subscriber net addition of 250,000, leading to a total subscriber of 3.57 million. On a Group wide basis, total subscribers stand at 5.59 million. We recently integrated multiple numbers, Media and Contents related divisions within our Company into a single organization. Through such efforts, we plan to strengthen our capabilities in Media and Contents business and grow them into a core growth driver.

Next is on Finance and other revenues.

Financial revenue, with the inclusion of BC Card in the consolidated financial statement from Q4 2011 showed a strong growth year-on-year to record at KRW844.1 billion. Other services declined 0.2% year-on-year, recording KRW292.8 billion, due to SI revenue fall, despite 58% year-on-year growth in revenue contribution from subsidiaries.

This has been 2012's Second Quarter Earnings Presentation. Thank you.

Please refer to the circulated document for more details. We will now start the Q&A session.

(Interpreted) Now Q&A session will begin. (Operator Instructions). The first questions will be provided by Mr. [Yang Jong-in] from [Hankuk] Investment Securities and the following questions will be presented from Mr. John Kim from Deutsche Securities Korea. Mr. Yang Jong-in, please go ahead with your questions.

(Interpreted) Yes, I would like to ask two questions. The first question has to do with KT's second half of the year marketing strategy. This question has to do with the balance between your efforts to obtain market share and also to gain profit. In the second half of the year, are you willing to increase your spending in order to acquire more subscribers and also so that you can regain on the market share that you had lost in the first half of the year?

The second question is on your demonetization of your real estate assets and your copper cables. If it is difficult for you to provide specific numbers, can you at least provide us the direction, or the magnitude, in terms of 2012 and 2013, what the magnitude is going to be vis-a-vis 2011?

Thank you for the question. First of all, to us, LTE is very important, obviously for various reasons. ARPUs are very high and it's adding to the accretion of our current ARPU which has fallen for eight straight quarters and has finally showed a rebound. So it is very important to us. As I said in my first opening statement, first half of the year posed a lot of challenges for KT.

As a late starter of LTE for various reasons that everyone is now quite aware of, it's been difficult for us to acquire subscribers in the first half of this year under the circumstances. And I believe we have done as best as we could have done in this time. And I would characterize the first half of this year as a very abnormal marketing environment and rather than calling the second half of this year cooling down, it would most likely be going back to normal is how I would characterize it.

So as I said earlier in my opening statement, we still have a target to reach LTE subscribers of 4 million by the end of this year, but it is very important that people hear that we are -- we will reach that amount under the normal circumstances and not use high marketing dollars to acquire that sub. We currently welcome the cool down marketing environment, or going back to normal. This is what we would consider a normal operating environment.

(Interpreted) The next questions will be presented by Mr. John Kim from Deutsche Securities Korea and the following question will be presented by Mr. Stanley Yang from Nomura Securities. Mr. John Kim, please go ahead with your question.

Yes, thank you for the opportunity to ask a couple of questions. First, pertains to the management's plans for your overseas business expansion. A couple of weeks ago, I recall reading one of your senior executives' comments, that by year 2014 KT's hoping to increase its international, or global business, 8 to 10 fold, to about KRW4 trillion. Should we anticipate, or take this as sizeable international M&A transactions that could be around the corner over the course of next -- a year or so?

And then second question. Just want -- looking for some data points on your bundle service discount program, (inaudible) or I guess that would be (inaudible) together. I've read that KT's been de-emphasizing the program and restructured some of the discount benefits. Can you share -- how many subscribers do you have on this program, how much discounts have the subscribers on average received and to which businesses have you been applying the discounts? So if you could share your thoughts on whether the program was more beneficial than its discounts that would be quite helpful? Thank you.

Thanks for the question. In terms of the over-expansion, there are many facets of going overseas. We look at it in terms of equity investment, consulting, infrastructure management, solution, various kinds of co-management that we were working with to go abroad. The first instance that came about that we were trying to initiate was with South Africa Telkom.

As you recall, Telkom expansion was quite interesting in that we had a various strong interest in buying a good portion of the Company. At the same time KT would defer or transfer our knowledge to Telkom and so thereby we have both equity interest as well as the Company benefitting from it. It was a nice deal. Right now it's sort of -- technically it's on hold, but those are the kind of ideas we look at as well, for the future.

So it's hard to say in detail how we're going to go about doing it, but those are all included in there. Fact-wise we did KRW600 billion last year and as our head of that department mentioned, we're looking at KRW4 trillion by year 2015. This also includes an inorganic growth as well. So we don't have plans to give right now -- there are many things in the pipeline, nothing I can reveal right now. But again, as you can see by the Telkom deal, we are very careful as to how we go about overseas. Internal checkpoints are very severe and it seems that Telkom was an interesting one at that time, but we do look at a lot of things. But at this time there's nothing that I can open to.

In terms of your question regarding the bundling product, (inaudible), it was quite popular the beginning of -- in the middle of last year when we launched it. It served its purpose for the time being as we were looking to acquire some subs. We have a figure which I have to check for the final numbers, but you can ask the IR team a little bit later. And we did add, for the qualification of this bundling program, another triple-play so we can actually give more benefits and also -- to our consumers.

Just a quick follow-up question. So should I assume that the effect of the bundled service discount was also beneficial to the firm? That similar types of bundled discount packages are likely down the road?

Bundling definitely -- any bundling shows definite benefit to our Company and benefits to consumers. In terms of this particular program, it showed significant decrease in churn rates. I think I can state it went down significant from about 1.7% overall, down to 1.2% I believe. So it does show benefits. And we will continue to design pricing schemes, as well as bundling, so that we hold them to the long run. I mean that is one of the pure benefits of KT with all of our products as well as TV and Fixed line and Wireless, those are all fair game to us in terms of designing what's maximum benefits to consumers as well as us.

Just a follow-up answer to that, those numbers were related to our broadband consumers.

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

(Interpreted) I have a question relating to your marketing efforts for the second half of the year. During the earnings conference call of one of your competitors, the CFO and the other operator said that he expects the second half of the year to be quite -- he expected the market situation to be quite stabilized in the second half of the year, because he said that there was a lot of market competition in the first half of the year. He expects the market will start to stabilize. But you, CFO, Kim, you did not use the word stabilize, but you used the term normalize.

So I'm a little curious whether you think that it is consistent in that way or -- when you're trying to achieve 4 million LTEs by the year's end and you think that the market competition will normalize -- I mean are these two concepts consistent with one and other?

The reason why I say this is that for you to obtain 4 million subscribers by the end of the year, that means you need to add 2.8 million subscribers in the second half of the year and out of the new subscriber acquisition, 70% has to then buy up [LTEs]. But concerning your historical trend, then that will entail a quite aggressive marketing approach. So if you were to gain 4 million subscribers by the end of the year, then does that mean that the [SAC] is going to be driven up? Or do you think that without the increase in the SAC you will still be able to attain 4 million subscriber target or do you feel that because that is going to be driven up, KT is going to actually trigger more market competition?

I would like to point out that heating the markets by spending a lot to acquire subscribers is the last thing that we would like to do at this time. I mean there's many factors other than just SAC costs that indicate a strong subscriber turn in. We were -- again, the reasons for our weak performance in terms of LTE in the first half, it was very obvious we had some network roll out delays and whatnot. And now, with all those things combined in place -- I mean we're looking at better handset offerings soon to come, our network quality's improving dramatically.

We've rolled out basically what we want to do by the end of the first half. So therefore there's a lot of other factors, although some may not be as strong as simple SAC but there are any other things that we've looked at that it will make our network much more competitive than our -- other companies.

So we use a lot of our resources -- our other products, bundling as well, to achieve our target of 4 million subscribers by the end of the year, without spending too much and keeping this current state of sort of neutral environment in the Wireless space.

(Interpreted) The next questions will be presented by Mr. Josh Bae from UBS and the following questions will be presented by Mr. [Kim Hong-sik], from NH Investment & Securities. Mr. Josh Bae, please go ahead with your questions.

Yes, hi, thank you for the call. My first question is just a follow-up on the previous one. If a few months pass in the second half and the market is stable but hypothetically if it seems KT will not reach the 4 million 4G LTE subscriber target and is still behind the competitors, would you still be focused on keeping the market stable or do you think you could turn to focus more on increasing LTE subscribers, even if it comes at the expense of higher subscriber acquisition costs?

Second question is regarding the CapEx. I understand you're increasing your 2012 CapEx budget. If you could give us any guidance on 2013 and beyond that, that would be very helpful? Thank you.

Thanks Josh for the question. Regarding the marketing environment in the second half again, those are hypothetical questions that it's really difficult to answer at this time. You know, we have a roadmap of where we want to go. During that journey, if there's a bumpy part of the road, we'll have to deal with it. And if it becomes too severe, then I guess in the next conference call we may discuss it. But at this time it's hard to reveal our threshold of pain or our decision point at where we'd rather take profitability or growth. I mean that's a little -- I think a little too early at this time. We feel we're ready to go into the second half with a very good set of rules and resources, such as network and our bundling and various other things. So just, I guess I would allow -- I would ask the analysts to wait and see how it pans out in the next few months.

But I want to reiterate, using a lot of money, or subsidy dollars, for (inaudible) is not part of our plan at this moment and I would like to reiterate that again. And we do welcome the current state of our marketing environment.

CapEx increase this year was explained in my opening statement where we do believe that, you know, the importance of LTE and the quality and our next stage of going to LTE, which is VoLTE and multicarrier, all that is included. And so things were happening quicker than we thought, so it was pulled up from next year and we will use it and increase by KRW300 billion this year. So total amount is KRW3.8 trillion. Going forward, starting next year I think we will see a steady decrease in CapEx -- is our forecast. I -- we'll give a clear number, probably closer to the end of the year, when we do our annual business plan as well as budgeting for next year.

Thank you.

(Interpreted) The next questions will be presented by Mr. Kim Hong-sik for NH Investment & Securities and the following questions will be provided by Mr. David Lee from CLSA. Mr. Kim Hong-sik, please go ahead with your question.

(Interpreted) I would like to pose two questions. The first question has to do with the fact that one of your competitors, LG Uplus had experienced significant increase in its ARPU. As a result, there no longer exists a gap in terms of ARPU between LG Uplus and KT. And market has a lot of -- I guess market is very curious about this phenomenon. So we're wondering, come next year, even if KT increases its LTE subscribers, would there still be no ARPU gap between yourself and your competitors and what is your view on the significant increases of ARPU of your competitive operators?

Second question has to do with the fact that KT's subscriber trends have not been too good. Could you explain the reason behind that? And once the LTE market becomes more mature, what do you expect KT's market share is going to be? I mean is it going to be flat or is it going to be lower?

It's hard to comment on our competitor's ARPU, but I do see the numbers. It's been a very difficult first half for, I believe, everybody. For me, when I say that, I mean in terms of profitability to some of the operators. For us, (inaudible) a very strict parameter of what we want to do as an operator. We need to produce profits as well as have a good growth, so we try to balance that as much as possible.

We saw the first turnaround in the ARPU for the first time in eight quarters, which is a very positive sign. And with the growing LTE subscribers, which currently we're only at about 7% of total subs, so we will see it grow. And we do see a very good -- I mean high portion and a very high ARPU signup. So we will continue to see growth in our ARPU for the next, I would say, you know, three or four quarters.

In terms of LTE market share, yes, we're currently -- we are below our overall market share. But we -- our forecast is that we will reach our market share portion in the LTE sector by the end of first half of next year. That's when we'll start growing, we'll have more phones, you know, momentum will grow. Our -- currently our advertisements are really doing well, so I think our image is increasing in that respect. So I think we'll see a much better ARPU towards the end of the year; as well as market share gaining back by the second half -- end of the first half of next year.

(Interpreted) The follow-up question is that -- my question was not related to the LTE market share but on your overall market share. What is your projection on the trend for your overall market share? And also next year, with the increase in your LTE subscribers, how much of an ARPU increase can we expect if you can share that with us?

First of all the ARPU question, I -- we see ARPU growing conservatively passing KRW30,000 by the end of the year.

In terms of the overall market share, not just LTE portion, we do see that going back to the normal status most -- towards the first -- end of the first half of next year, about the same time as LTE subscriber gaining back its market share as well.

(Interpreted) The next questions will be presented by Mr. David Lee from CLSA and there is no following questioner. Mr. David Lee, please go ahead with your question.

Hi. Thank you for the opportunity. I just have one question related to mobile data services. Until now, all three mobile players have said that they would not provide unlimited date for LTE. Also, we haven't seen much change in the limits since April, except for your recently introduced new plans that rollover unused data for one month. So things have been relatively stable until now. But my question to you is going forward, is there any possibility that KT becomes the first player to raise data limits for whatever reason?

Thanks for the question. Currently, obviously we don't offer unlimited data for LTE. If you pay -- if you sign up for the KRW62,000 package, you get 6 gigabytes of data. That's quite a bit. That's more than plenty. At this time we have no plans of offering unlimited data on LTE.

(Interpreted) The next question will be presented by Mr. Kim Dong Geon from Eugene Investment Securities and there is no following questioner. Mr. Kim Dong Geon, please go ahead with your question.

(Interpreted) My question has to do with iPhone 5. Of course, you know, we don't know when iPhone 5 is going to be launched into the Korean market. But could you share with us what preparations are being made for iPhone 5's launching and, of course, are you going to launch iPhone 5 is, I guess, the first question? And since KT is focusing on LTE services and the market is dubious where iPhone could actually be based on LTE network, so could you share with us what preparations or any comment that you can make on iPhone 5?

Thanks for the question. I wish I knew all those answers to those questions. Unfortunately, Apple is extremely quiet about these things and we don't find out until the very last minute either. So I couldn't answer when it's going to come out. I couldn't answer if LTE is included in it. There's not much I can answer about the next iPhone. So I'm sorry to give you that kind of an answer, but that's the reality of working with Apple. So, thank you.

(Interpreted) The next questions will be presented by Mr. [Andre Min] from [Kim] Securities. And the following questions will be presented by Mr. [Kim Hue Jae] from Daishin Securities. Mr. Andre Min, please go ahead with your question.

(Interpreted) In the second quarter you saw a decrease in your Wireless subscribers. These people, are they high ARPU customers or are they people who moved onto (inaudible) services for the benefit of low end tariffs. Even if you can't provide the specifics, can you just, at least, provide us as a -- you know, general picture?

There was some decrease in subscribers in the first half of this year. Again, tough environment but I want to mention that there was stringent rules that we initiated this year which meant we were much more active and forced deactivation of delinquent payers. So a lot of that numbers included in there, it was -- I can't give the number but it was about twice as much as last year, is all I can say. In terms of what kind of people are leaving, unfortunately I can't give that matter to you. It's a bit sensitive to our marketing department. So overall, all I can say is that ARPU is increasing. That's all I can say. Thank you.

(Interpreted) The next question is presented by Mr. Kim Hue Jae from Daishin Securities. And there is no following questioner. Mr. Kim Hue Jae, please go ahead with your question.

(Interpreted) I would like to pursue questions on your Fixed line business. The decline of your PSTN revenue has become much more moderate. Can you provide us as to -- can you provide your projection as to what level PSTN revenue is going to decline? And KCC has recently announced the guidelines that enables the operator to prevent the overload of its network traffic. So what is KT's plan? Are you planning to block certain heavy users or heavy traffic?

Thanks for the question. Our telephony business is a -- it's a combination of both ARPU decrease, as well as subscriber decrease. But this year we're looking at around KRW300 billion to KRW400 billion in revenue loss, whereas last year it was as much as KRW510 billion -- or KRW520 billion in loss. So it is -- the decreasing amount is slowing down; the slope is slowing down.

But rather than just watching the telephony revenue slow down to a flattish level, we're also practically working to raise revenue on the IPTV side, which has increased year-on-year, 55%.

At the same time, we're finding some true synergy between our broadband, as well as our IPTV, working with Skylife. And all these are cumulating into a very good product that has very good retention qualities. The churn rates are going down dramatically. So in fact, because of IPTV as well, our broadband subscriber's increasing for the first time in many years, at a speed that's way beyond expected.

So total net revenue loss for these three products that we internally called Fixed line products, with the telephony, broadband and IPTV, we hope to see the diminishing portion come to a positive in the very near future, is our point. And if you keep track of our PSTN subscriber loss, I think you can extrapolate a positive figure in the near future.

(Interpreted) In terms of your question on the net neutrality guideline that was announced by KCC, due to that guideline, it has been made possible for the operator to actually manage the traffic that is both economically and technically that has been generated by heavy users. And so also, it has become possible for the operator to control a small number of heavy users who use significant, you know, amount of the -- who use significant amount.

From a mid to long term perspective, this actually alleviates the burden on the telco side, in terms of the telecommunication related expenses and also additional revenue source could be made possible through the provision of premium services. However, there has not been any, I guess, definitive decision on the data cap or how this is going to be actually reflected on the tariff plan.

Also, there was a question that was raised by Mr. [Yang Jong] at the very beginning on the real estate and on the copper cables, but we weren't able to respond to that. So I will, you know, respond right now.

In terms of the real estate revenue for this year, although we don't know the exact figures, we would be -- we would think that the level is going to be similar to that of last year. From the mid to long term perspective, up until 2015 we want to increase per annum revenue to about KRW850 billion. And also we're going to expand the Rental business model, for instance, for offices and hotels, so that the Rental revenue can account for 50% of the total real estate related revenue.

In terms of the copper cables, we think that the total installed cable length is about 320,000 kilometers. For this year, we are expecting about -- sales of about KRW100 billion worth of sales of copper cables. But, of course, this will fluctuate depending on the market price and the terms and condition of the contract. Now for these cables, we're going to continuously sell off these cables so that we can increase efficiency of the use of the [idle] asset. So we're reviewing various aspects but we -- and please understand that we can't disclose specific numbers.

With no further questions, then we will now end the Q&A session. We once again thank all of you for your interest and time. Thank you very much for joining us. This will mark the end of Second Quarter 2012 Earnings Conference Call for (inaudible) KT. Thank you very much.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.