KT Corp (KT) 2012 Q4 法說會逐字稿

(interpreted) Good morning and good evening. First of all thank you for joining this conference call and now we will begin the conference of the 2012 Fourth 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 Fourth Quarter Preliminary Earnings Results by KT's CFO, Mr Bum Joon Kim.

(interpreted) Good afternoon I am Youngwoo Kim, IRO of KT we will begin the Fourth Quarter 2012 Earnings Call. You can join the conference call via the website and can look through the presentation slides as we make the presentation.

Since Q1 of 2011 KT has been presenting consolidated numbers based on IFRS accounting standards. But from Q4 of 2012 pursuant to the revisions to the Corporate Accounting Guidelines announced on October 17th, gains and disposition of assets such as real estate, have been taken out from operating profit to be included in the non-operating revenue side.

Also in Q4 2012 consolidated figure business result of a total of 61 companies including KT and kt Sat which was spun off from KT last December and new entities like the media hub and KMP Holdings, which kt Music acquired are all inclusive.

With that our CFO Bum Joon Kim will begin the presentation.

(interpreted) Good afternoon I am Bum Joon Kim, CFO of KT. In recent years, the world, Korea included, has been undergoing a transformative change known as the smart revolution. There's a change where fixed and wireless broadband connects the entire world with the joining of cutting edge ICT technologies. As a result, connection is possible anytime, anywhere and a huge global single market with no borders, tariffs and constraints of transportation costs has been created. And the products that are traded in this market are the virtual goods.

In 2012 we learned for certain that we had the competitiveness and leadership required for opening up a new era of virtual goods based on KT's world's best fixed wireless broadband network and its biggest All-IP subscriber base in Korea.

We solidified our number 1 position by securing All-IP subscriber base of more than 26 million, which includes more than 6 million media subscribers, 10 million smartphone subs and 8 million for broadband and smart home subs including Kibot.

Our sales through the mobile payment service, MoCa service, with strong base of membership companies and Genie K-POP which is Korea's first global music service and olleh TV Now, which is the in-screen service with the best content space, we have launched a variety of virtual goods services, further strengthening our service competitiveness.

Based on KT's top quality All-IP network infrastructure and the biggest IP customer base, we will lead the fixed and wireless convergence market where virtual goods will be consumed seamlessly anytime, anywhere by launching a diverse array of handsets, services and rate plans. Through such efforts in 2013 we plan to generate more than KRW25 trillion in revenue on a consolidated basis.

May we now move on to 2012 business results. In 2012 with the inclusion of BC card and kt Rental in the consolidated figures and due to improvements in the business performance, operating revenue increased 11.8% year-on-year to KRW23,790.3 billion. With declines in fixed line revenues and focused investments into LTE which drove up depreciation costs and other general expenses, operating profit declined 30.6% year-on-year to KRW1,213.8 billion. Due to the fall in operating profit, net income fell 23.5% year-on-year to KRW1,111.5 billion. EBITDA is lower by 4.9% year-on-year recording KRW4,481.6 billion.

Next is on our performance highlights for major subsidiaries. BC Card, kt skylife and kt Rental all showed a robust improvement in 2012. For BC Card with growth and revenue and cost savings, operating profit showed a growth of 38.1% year-on-year. Based on subscriber growth, kt skylife's revenue increased 20.2% and operating profit 91.3% year-on-year showing a significant growth. Revenue and profit for kt Rental also went up. With higher operating profit from kt skylife and the inclusion of BC Card and kt Rental in the consolidated statements, contributions made by subsidiaries on the operating profit side amounted to KRW196.7 billion growing 138.4% year-on-year.

I will move on to the breakdown of the operating revenue. Declines in fixed revenue and sluggish wireless revenue have been covered by expansion in new growth businesses such as Media, Content and Financial and Rental, driving up operating revenue 11.8% year-on-year. Despite difficulties such as rate cuts and subscriber declines, wireless revenue was similar to that of last year through early recovery of LTE competitiveness that led to the increase of ARPU. Fixed line revenue fell 8.0% YoY due to the fall in revenue of fixed line telephony business.

Media Contents revenue continued to show a strong growth with 33% growth year-on-year. Financial and Rental revenue also increased by a large degree year-on-year basis with the inclusion of BC Card and kt Rental, and improvements in the business results.

Next is on operating expenses. Operating expense increased 15.6% year-on-year to KRW22,576.5 billion. With the impact from BC Card and kt Rental, general expense increased 36.6% year-on-year. With active LTE marketing, selling expense increased 20.5% YoY but in a KT standalone basis, actual marketing expense reflects the handset price adjustments and gains on sales of handsets only increase 0.8% due to lower handset demand.

With the elimination of 2G migration costs and equity method impairment loss and investment securities of kt Tech which existed the previous year, 2012 non operating P&L turned black at KRW208.6 billion.

Next is highlights from the financial position. Debt ratio as at end of Q4 is 162% with the inclusion of kt Rental in the consolidated statements, a slight increase on a YoY basis. Net debt declined 7.6% QoQ due to the securitization of handset ARs, account receivables. So accordingly net debt to equity ratio declined 5.6 percentage points improving the overall financial gearing.

Next is on CapEx. Due to a focused investment into LTE 2012, annual CapEx was 11.8% higher year-on-year at KRW3,710.6 billion. To provide you with the breakdown, Wireless including LTE was KRW2,105.2 billion, Fixed Line KRW1,106.2 billion and others KRW499.2 billion recording 98% implementation against KRW3.8 trillion of guidance. CapEx guidance for 2013 is KRW3.5 trillion which is KRW200 billion less than the previous year.

Moving onto the business results for each of the services. Despite around KRW220 billion reduction in Wireless service revenue on the back of KRW1000 cut in basic fees and free provision of SMSs and around KRW60 billion of interconnection revenue declines from adjustments and interconnection rates, with the increase in ARPU driven by expansion of LTE subscribers, Wireless revenue only fell 0.8% year-on-year. Wireless ARPU continued to trend up owing to an increase in LTE subscribers reaching KRW30,697, 2.4% growth quarter-over-quarter. On a YoY basis the increase is 6.5%.

As at the end of 2012 smartphone subscribers reached 10,250,000, accounting for over 60% of total subscriber base. Out of this there are 3.9 million LTE subs, so in just a year since the launching of this service last January the 4th, 4 million subscribers were attained at a record speed. KT plans to efficiently acquire LTE subscribers by utilizing a variety of virtual goods services such as olleh TV Now and Genie and also through differentiated rate schemes all underpinned by seamless, fixed, wireless networks.

Next is on the Fixed Line business. With reduction in subscribers and traffic and increase in bundling discounts with broadband services, fixed revenue fell 8.0% year-on-year recording KRW6,392.3 billion. Total subs at the end of 2012 for Fixed Line telephony is 18,670,000 and broadband showed a continuous net addition trend securing 8.04 million subscribers. Broadband plays a core infrastructure in smart home services such as the IPTV, Kibot 2 and smart home pad and an essential service in bundling packages that help increase customer retention. Therefore we will continue to expand its subscriber base. We launched the smart home phone HD on January the 4th which has been selling an average of more than 2,000 a month facilitating the expansion of the All-IP subscriber base upon which virtual goods will be consumed.

Next is on our Media and Contents business. Media and Contents revenue increased 33% year-on-year to KRW1,67.9 billion on the back of steady growth of subs and ARPU. Especially for the Media business value accretive revenue such as PPD and home shopping commissions increased by a large degree with annual ARPU growing 8% year-on-year, showing a qualitative growth at the same time. As of end of 2012 kt Group's Media subscribers, which includes IPTV and skylife, surpassed the 6 million mark strengthening our position in the for-a-fee broadcasting market. We are targeting 5 million IPTV subscribers this year and based on value accretive growth such as the growth in PPD, we will seek to achieve qualitative growth through continuous improvement in ARPU.

Next is on our Financial and Other Services revenue. Financial and Rental revenue showed a strong growth year-on-year reaching KRW3,574.3 billion with the inclusion BC Card and kt Rental in the consolidated financial statements and with better business results. Other Services revenue increased 1.2% year-on-year to KRW1,241.5 billion thanks to the revenue growth of other subsidiaries. This wraps up the performance highlights for Q4 2012.

(interpreted) Please refer to the materials which we've circulated for more details we will now begin the Q&A session.

(interpreted) (Operator instructions). The first question will be provided by [Yang Jung Eun] from Korea Investment and Securities. And the next question will be provided by Josh Bae from UBS. Mr Yang Jung Eun please go ahead with your question.

(interpreted) I would like to ask two questions, the first question has to do with your 2013 outlook for the LTE business. Basically, how many subscribers are you planning to target? In Q4 and also ARPU actually increased 2.4% on QoQ basis which was quite encouraging. So in 2013 how far do you think that the ARPU will go?

The second question has to do with KT's view regarding the market's competitive landscape to come in the first quarter and any forecast for the second quarter as well.

Thank you for the question. Our 2013 outlook for LTE we're looking at close to 50% of our total network being LTE subscribers. I think for the ARPU it's safe to say that we'll probably increase by the year end by about 8% from the current level.

In terms of your question regarding our outlook for this first quarter and second quarter, I think it's important to point out what was the difficulty that we had last year which was actually late entry into the LTE market. So now we have everything ready including handsets, network, pricing schemes it will not, in our view -- our plan is to not be as expensive as last year.

Also I'd like to point out that you know we look for a market that is much more stable than last year. From our perspective, I think, you know as we mentioned earlier we are a much more competitive standing now. And the changes in some of the contracts between the subscriber and network operators are getting more tighter. So I think it'll reduce churn rate, so overall we hope to see a much cooler market this year.

Just to add a little more, I think I just want to point out to our investors that the ARPU of the new sign-ups of LTE is still quite strong, so we are quite happy with that. And we hope that we will continue to see an increasing trend in ARPU like we did last year as we promised earlier.

(interpreted) The next question will be presented by Josh Bae UBS and the following question will be presented by Kim Hong Sik from NH Securities. Mr Josh Bae, please go ahead with your question.

Yes hi, thank you for the call. My first question is a follow up regarding your Wireless business. 2012 looks to have been a tough year as you mentioned with your Wireless subscribers recording a net loss. Could you please let us know what your planned targets are for 2013 in terms of overall Wireless subscribers? Your competitor that announced results earlier this week looks to be targeting another strong year in terms of subscribers, so how do you plan to respond to that? And are you comfortable with being number 3 in terms of LTE subscribers?

My second question is on your investment plans. There were press reports that KT submitted a bid for Maroc Telecom, which I think was a bit of a surprise to the market. If you could share with us what your criteria are when you're considering M&A opportunities? How much capital are you willing to commit to M&A opportunities, what your hurdle rate is? What kind of geographical areas or business areas are you looking for? That would be very helpful, thank you.

To answer your first question, the Wireless business last year was pretty tough. I mean I've mentioned it many times, without a network it's hard to sell something that's good. So it was ready and if you look at our marketing cost expenditure on a half year/half year basis, you know, we did a lot of saving in the beginning and then we actually spent some money last year in towards the second half. I think, what I'm trying to say is that all in all we have an internal target for LTE, as I mentioned earlier, 50% of our total subs. It's hard to say about the overall growth of the market because it is very, very penetrating at this time. I know your comments regarding our competitor, but I really can't address that.

I think overall we are hoping that the market calms down and, you know, we have a very good competitive offering to our subscribers, including TV, wireless, fixed line, everything. So we will find the fundamental benefits that KT can sell to our subscribers.

With your question on what you saw in the newspaper regarding Maroc Telecom, Maroc Telecom would be one of many things that we would look at -- I know you've heard that we were looking into Telecom South Africa. All those things we looked at in terms of, sort of a, [close force] management. You know, it's much like -- Telecom South Africa, we looked at opportunities for not just equity ownership, but we want to go out and sell our business, our corporate business. So Maroc Telecom came into our radar screen and it's in very early stages. So there is really nothing more that I can say about Maroc Telecom.

In terms of how we look at the investments, yes, much like any business opportunity that we see, we have our own hurdle rate. We also have additional premiums in hurdle rates for various parts of the world as well as even internally in Korea. We define it by risk factors and we have various stages from A, B, C or D and we add upon much more tighter hurdle rates for the more risky ones. So this is including everything, country risk, [solvency] risk, all that. So we have our own internal guideline and this one again, we will consider all that stuff.

Yes, thank you. If I could just follow up -- should we be thinking that it is possible for KT to make a multibillion dollar investment outside of the core business?

That would be difficult to say. You know, that answer would require how much resource we have and what the investment target would be. But I think out of -- the key part of your question is, out of our core area -- and I think that is very slim. I think we will stick with our core as we did, like I said, in Telecom South Africa where we want to sell our products to them as well as having equity ownership.

Thank you.

(interpreted) The next question will be presented by Kim Hong Sik from NH Securities. The following question will be presented by Stanley Yang from Nomura Securities. Mr Kim Hong Sik, please go ahead with your question.

(interpreted) I would like to ask two questions. The first, KT [Pa], you've spun off your real estate subsidiary. My question is, if we were to look out four or five years along the road, what would be your real estate subs contribution to your operating profit on an annual basis?

And second question is, that KT does have a very good asset value but from, I guess, the investor's perspective there are some, I guess, less than satisfactory utilization of that asset value to prop up your prices. So what -- going forward, what are some of the measures that you are going to use to really try to, you know, make use of these good asset values to really be reflected in the equities market?

Thank you for the question. Yes we spun off the real estate business in order to find more expertise in this business, as well as not be stuck inside KT. We think it will be a much better run. And we brought in a new CEO to run this business. The overall revenue for the real estate business should be greater than that of 2012 and it should be a slow increase with the current plan that we have for the next few years. Now because there was recently spin off, I think they will probably have more ideas and when their ideas are released to us, we will relay to the market.

(interpreted) The next question will be presented by Stanley Yang from Nomura Securities. Mr Stanley Yang, please go ahead with your question.

(interpreted) I have a question related to your 2013 guidance for depreciation labor costs and marketing costs. If you could provide us with the range, that would be appreciated.

Second question is that your fixed line revenue continues to decline. Once the speed did slow down to a certain extent but in the third quarter and in the fourth quarter the trend turned more aggravated and I think that this is -- the fall in the fixed line revenue is one of the biggest factors behind the lower profitability. I also think that OTT players like KakaoTalk, they not only cannibalize the wireless space but they could also impact the fixed line aspect, which does concern me. So do you think that the decline in the fixed line revenue will be further accelerated because of such OTT players and for 2013, so do you also project that your fixed line revenue to decline and if so, to what extent? And also what is your long term view?

To answer your questions, I can't go into exact details of the 2013 questions you asked but I can give that the depreciation was increased slightly on a standalone basis and it will increase more on a consolidated business. Marketing costs, we're expecting it to go down slightly this year. And labor costs, well for the KT standalone, it will increase just slightly.

Could you repeat your second question for me? I didn't understand the connection between fixed line and KakaoTalk.

(interpreted) So I guess the logic there is that of course KakaoTalk will eat into the SMS revenue but also I was wondering whether KakaoTalk is actually having an impact on the decline in the PSTN revenue because people are using less of their home phones. They would just send, for instance, KakaoTalk text messages. So mobile to fixed or fixed to mobile, I think that is also being impacted by the widespread use of KakaoTalk services and that will have a negative impact on your top line as well. So that was where I was coming from.

Oh I see now. Okay, I understand. You're right. Anything that -- products that are made to make usage more easier on the wireless side will definitely cannibalize fixed line, it's true. If you look at the subscriber trend, it's actually improving for -- subscriber losses in the fixed line is improving. However, the ARPU has been slowly falling for the last three years. I think for -- in 2008 it was around KRW16,000 for a fixed line but now it's down to about KRW10,800 to KRW10,900. So it's coming down and that's the tough part that we're trying to overcome right now.

But if you look on the year-on-year decrease in fixed line, it is improving in terms of, you know, slower reduction. So I think this year we see it falling from -- I think last year we lost KRW330 billion to roughly around maybe a little bit over KRW220 billion will be the total loss.

(interpreted) Currently there are no participants with questions. The next question will be presented by John Kim from Deutsche Securities. And the following question will be presented by [Si Yung Park from Barclays]. Mr John Kim, please go ahead with your question.

Yes, thank you for the opportunity to ask a question. I just have one. I understand that in spite of the operating suspension during the month of January, the mobile number portability traffic, despite the fact that LGU was not participating, remained at an extremely high level. So Mr Kim, given that you have also observed the sector for a very long time, what do you think -- or what kind of measures would be necessary for the industry to sustain an extended period of stabilized marketing environment?

Thank you for the question. Whenever a new -- you're right, I've been here for a long time -- whenever a new network is a launched there is kind of a fervor of operators trying the switch over the subscribers and that's probably what you're seeing right now. I think in the beginning, it was -- last year was our operators -- our competitors. This year, sort of, we are ready for LTE. But, you know, I believe that, you know, we are going to try as much as we can to cool down the market and focus on profitability this year. Last year was just -- you know, we had to, sort of, sustain because of our network issue. But this year, you know, it's better and we hope that it will bring a much stabler market as we go towards more of second quarter/third quarter.

You know, there has been some regulatory measures like a more stiffer contract but beyond that I think it is really up to the operators. Like us, we are focused on profitability, so hopefully that will kind of proliferate into the other carriers and we will see a cool down in the market.

(interpreted) The next question will be presented by Si Yung Park from Barclays and the following question will be presented by Kim Hong Sik from NH Securities. Mr CM Park, please go ahead with your question.

Hi, thank you for the opportunity. I have two questions. First of all, due to the reclassification related to the account changes, what would have been your operating profit if we'd sticked to the old standards, and can you provide us some details as to what the other operating gains and the other operating losses are? I did notice that it did increase significantly on both accounts coming into the fourth quarter.

Then secondly, can you just provide us some CapEx breakdown for 2013 guidance please? Thank you.

(interpreted) To respond to your second question first, for CapEx this year we are -- the guidance is KRW3.5 trillion, KRW200 billion less than the previous year. To break that down, wireless is KRW1.1 trillion, fixed is KRW1.1 trillion and others is KRW500 billion.

To answer your first question, the fourth quarter operating profit would have been the old IFR version, it would have been KRW200.4 billion.

(interpreted) To give you the breakdown for the 2013 CapEx guidance, for Wireless it was previously KRW2.1 trillion. That will come down to around KRW1.6 trillion. For 3G and LTE the CapEx will decline but there is also investment into multi-carrier networks, so that will make up for that.

In terms of the wireline or fixed line, from previous years, KRW1.1 trillion, there will be a slight increase to around KRW1.2 trillion. That's because last year we were focused on LTE so fixed line investments kind of lagged but come this year we're going to make some improvements in the broadband network with broadband equipment, facilities, and also make investments in the leased lines as well.

In others, line item, we're looking at about KRW700 billion, so it's about KRW200 billion more than the previous year.

So can you provide some breakdown on what the other gains and the other losses were that kind of made up for the KRW150 billion or so in operating profits?

Yes, there was a -- in the fourth quarter we had a real estate disposal gains of KRW110 billion and also cable sales -- copper cable sales -- of KRW153 billion.

(interpreted) The next question will be presented by Kim Hong Sik from NH Securities. Mr Hong Sik, please go ahead with your question.

(interpreted) I think one of my previous questions was not answered so let me reiterate the question. My question was, KT has very good assets, so how are you going to realize the value of these assets? For instance you could actually set up a real estate sales company through which you would sell your assets and actually realize the value, or you could actually conduct revaluation of the assets that you hold. So what are your plans?

Also, last year although your results weren't all that great, you did pay out KRW2000 per share as dividends. This year we are hoping and expecting better profit numbers to come in, so if the profits actually improve, then can we actually expect a better dividend payout?

First of all, I apologize for not addressing your second question the first time. To address it, yes, we will capitalize on a lot of the buildings that we have, and this is through our initiatives in the All-IP. So as we go All-IP, we are not going to need all these buildings that we have and we will use the real estate company to develop it.

In terms of asset revaluation, no, we have no plans to revalue assets at this time and we will continue to extract cables going forward as well.

To address your question on dividends, we have committed to a minimum of KRW2000 per share starting last year and up to next year, three years, starting this [term]. Having said that, it could be theorized that yes, it could go up, but I think a more closer answer would be that we have to look at all our growth strategies and our financials at that time for addressing higher than KRW2000. But it's not to say that it's out of the question.

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

Yes, hi, thank you for this opportunity. I guess I wanted to go back to your guidance on essentially marketing, labor costs and depreciation. It appears that for your parent business with marketing expected to fall only slightly and depreciation going up slightly from last year, it seems that that profit improvement from your core operation will likely sort of remain pretty much the same year over year. Correct me if I'm wrong there, and if you can share with us any sort of profit guidance if you have any, and if you don't, I just wanted to know why as a sector we have not been able to get EBITDA guidance, not just from KT but from all telcos? Thank you.

Yes, thanks for the question. I would like to give a profit guidance but you know, we have not done that in a while. It's mainly just the fact that it makes it very easy for our competitors to figure out our marketing cost, you know, it's as simple as that. Our marketing department is very sensitive with the issue so we haven't done it in a while.

But to address your overall questions, just a couple of big headlines. You know, we do see increase in wireless revenue because of the fact that we'll have more LTE subscribers, which leads to higher ARPUs. Also on the fixed line side, we see decrease in PSTN by roughly around KRW300 billion but we should have that being made back up by IPTV's revenue growth of roughly around KRW200 billion. We should also see some slight increase in our broadband business. I think I mentioned earlier regarding market costs, which we should see a slight decrease since last year. So overall we do see increased expansion in margins this year over last year.

Thank you, Tom, that was extremely helpful. If I can follow up, what do you think will be the regulatory environment this year in regards to potential tariff cuts?

I guess the first one I could address is the elimination of the subscriber sign-up fee. You know, any kind of tariff rate cut is very painful for us. It goes directly down to the profit line. So whatever happens, we have to make it up somehow, so it's tough. If this happens, I think we could see an annual revenue reduction of roughly KRW120 billion. There's really nothing I can add about how we are dealing with that. I mean, that's for our CR department, and as I get more clarity on that I will let the market know.

Overall I mean, you know, our stance is that we look for a no tariff reduction because natural competition itself is bringing down tariffs anyway, so it's difficult to say exactly how this will play out.

Thank you.

(interpreted) The next question will be presented by Kim Dong-joon from Eugene Investments and Securities. Mr Kim Dong-joon, please go ahead with your question.

(interpreted) In terms of the sales of the copper line and real estate, I think last year it all amounted to about more than KRW400 billion, but I think this year we will continue to oversee the sales of copper lines and real estate. But overall on the profit side, would it have an increasing impact or a decreasing impact, can you give us some guidance?

(interpreted) Now, the real estate and the copper line market, it's very unstable so it's hard to give you specific guidance per se. But I can provide you with a direction. For this year according to our plan, the amount or the degree of sales coming from these two would be lower than the previous year.

If there are no further questions we will close the Q&A session. Thank you very much for your interest and time and for joining us today. This has been olleh KT's Q4 2012 Earnings Conference Call. 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.