KT Corp (KT) 2013 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 now we will begin the conference of the 2013 second quarter preliminary earnings results by KT. We would like to have welcoming remarks from Mr. Yung Il Kim, KT IRO and then Mr. Bum Joon Kim, CFO who will present earnings results and entertain your questions. This conference will start with a presentation followed by a Q&A session.

(Operator instructions)

(Interpreted) Now we would like to turn the conference over to Mr. Yung Il Kim KT IRO

(Interpreted) Good afternoon. I am Yung Il Kim IRO of KT, we will now begin the Q2 2013 earnings conference call. You can join the conference call via the website and can follow through the presentation slides as we make the presentation.

Since Q1 of 2011 KT has been presenting consolidated numbers based on the IFRS accounting standards. Q2 2013 consolidated statement includes performance of 60 companies including KT, same as the previous quarter. With that our CFO Bum Joon Kim will begin the presentation.

(Interpreted) Good afternoon. I am KT's CFO Bum Joon Kim, KT has made bold pursuit in the non-telcom market to lay down the basis for future growth and has built its capabilities in the virtual goods space and expanded its OIP subscriber base. The second quarter was when such effort towards OIP and making inroads into the non-telcom market came to fruition.

Over the past year LTE continued to record a fast growth and in the fixed line market IPTV continued its growth trajectory based on the broadband internet. We now also start to see positive outcome of Group wide management with subsidiary companies excluding KT making KRW155 billion of operating profit contributions which is 180% higher compared to the previous year's figure of KRW55.5 billion.

As such we will live up to being a global leader in telecom by enhancing corporate value with a focus on all IP platform and be a respected company, one that is socially responsible. Let me now walk you through our Q2 business results.

Q2 operating revenue on the back of revenue growth from wireless, media/contents and financial/rental business recorded a growth of 0.8% year-on-year coming in at KRW5,757 billion. With wireless (inaudible) growth and contributions from Group companies, operating profit increased 0.7% year-on-year to KRW348.3 billion. EBITDA increased 9.8% YoY to KRW1,228.1 billion.

Net income declined 43.3% year-on-year to KRW133.4 billion influenced by a fall in other operating revenue and a rise in non-operating expense. Next page is on key subsidiaries business highlights.

KT Skylife and KT Rental generated steady performance in Q2 as well; especially KT Skylife saw 45.1% growth in operating profit year-on-year and KT Rentals OP increased by 2.9% year-on-year, continuing with their steady growth trend.

On top of key subsidiary areas operating profit growth companies that were newly set up end of last year such as KT media hub, KT [Sat] and KT Estate have been included in the consolidated figure, leading to a 180% increase in operating profit contribution from subsidiaries with the figure reading -- recording KRW155 billion. Next is a breakdown of operating revenue.

Aside from the fixed line revenue, operating revenue recorded a year-on-year growth on all of the business lines while this revenue on LTE subscriber growth which led to (inaudible) increase recorded a growth of 0.7% year-on-year. Media and contents revenue increased 35.3% year-on-year sustaining its high growth rate.

Financial and rental revenue continued to grow at 14.3% year-on-year due to the inclusion of KT Rental and the consolidated statements in Q3 of last year. Merchandise revenue declined 15.8% year-on-year due to a fall in handset sales volume. Next is on operating expense.

Operating expenses saw a rise of 0.9% year-on-year coming in at KRW5,408.8 billion. Selling expense came in at a level similar to the previous year. Cost of service provided increased 17.0% year-on-year due to the impact from cost of real estate development and content sourcing.

Cost of merchandise fell 20.1% year-on-year due to a decline in handset sales volume and its ship out price. Next is on highlights of the company's financial position.

Net debt declined 1.6% QoQ to KRW9,928.8 billion and net debt to equity ratio fell 2.1 percentage points QoQ to 75.9% recording an improvement in financial position. Next is on capital expenditure.

Q2 CapEx declined 39.5% year-on-year to KRW603.7 billion with the conclusion of most of LTE coverage investment in 2012. To break the figure down CapEx for wireless was KRW182.2 billion, fixed line KRW228.1 billion and others KRW193.4 billion. Implementation rate for the first half of 2013 was 31.7% against the annual guidance of KRW3.5 trillion.

We expected an increase in the second half over the first half of the year but CapEx since 2012 has started to trend down and will continue as such for the coming three years. Next is on business results from each service.

Wireless revenue on LTE subscriber growth which drove up ARPU increased 0.7% year-on-year to KRW1,752.2 billion. Upward wireless upward trend continued, growing 1.6% QoQ to KRW31,615 this is a 7.4% growth on a year-on-year basis.

Q2 Smartphone subscribers are counted 66.7% of total [sub space] at 10,970,000 subscribers, of this LTE sub and at 6.06 million. In view of the current trend we expect LTE to account for around 50% of the total subscriber base by the end of the year.

Based on KT's biggest fixed and wireless telecom infrastructure in Korea we will develop differentiated tariff plans and packaged products so as to move away from destructive subsidiary competition and focus on offering of better services to customers. Next is the fixed line business.

On the back of subscriber and traffic decline leading to lower revenue, fixed line revenue declined 6.4% year-on-year to KRW1,507.7 billion. Although fixed line telephony revenue fell KRW91.9 billion on a year-on-year basis it is a decline of 12.5% compared to Q1's reduction of KRW105.1 billion which confirms a slower pace of decline.

Broadband internet posted a growth of 2.5% year-on-year. Based on such stable growth trends in broadband internet KT will continue to expand its IP based subscriber volume to lay the basis for a turnaround in fixed line revenue towards growth. Next is on media and contents business.

With continued growth and subscribers, media and contents revenue increased 35.3% year-on-year to KRW334.9 billion. KT Group is solidifying its position as a leading player in the 4AC broadcasting market through a proactive investment and effort in the media sector.

With KT media hub playing a pivotal role as a media and contents company KT will find new growth opportunities and respond quickly and nimbly to market environment, thereby fostering media contents as Group's core growth engine. Last July KT media hub launched olleh tv smart, a world's first web-based IPTV using HTML X5, leading content innovation for TV service where there is a mash-up of broadcast and information. Next is on financial and other service revenue.

Financial and rental revenue increased 14.3% year-on-year to KRW965.2 billion due to the inclusion of KT rental and the consolidated statement in Q3 of last year. Other service revenue on impact from real estate development revenue increased 29.2% year-on-year to KRW378.2 billion. This has been the business highlight for Q2 2013. For more details please refer to the materials that were previously circulated. We will now take questions.

(Operator instructions)

(Interpreted) The first question will be provided by Mr. Yang Jong-In from Korea Investment & Securities, and the next question will be provided by Mr. [Josh Bei] from UBS. Mr. Yang Jong-In, please go ahead with your question.

(Interpreted) Yes I would like to ask two questions. And the first question is -- in the second quarter it seems like the contribution that came from your subsidiary companies have actually increased quite significantly, and originally when you've communicated you have expected that contribution to be around KRW300 billion for the entire 2013. But it seems like you have already reached that level. So to what extent do you expect the subsidiary contribution to be for this year, and could you provide some guidelines?

The second question has to do with your MVNO strategy. Could you explain as to the reason why KT has a bigger portion of MVNO subscribers compared to your competitors? And also could you share with us what your MVNO strategy is, basically the split between your own subscribers and your MVNO subscribers?

(Interpreted) Thank you for the questions.

Let me take the first one regarding our subsidiary companies. Yes, we did earlier communicate that we would have profits -- operating profits -- coming from subsidiary companies at around KRW300 billion this year. But I think we need to communicate with the market, it's going to be a little bit higher than that, maybe close to KRW400 billion, and that's due to some of the improved numbers at our subsidiary companies including the newly-made KT sat media hub and estate as well.

With regarding your second question, I think I'm going to hand over the mic to our Chief Operating Officer of our [TNC] department. He is in charge of the entire strategy for our wireless side, so he will explain in detail. I forgot to mention his name is Mr. [Chung Mo-Ku]. He is the Executive Senior Vice-President of TNC.

(Interpreted) Yes, I am Chung Mo-Ku. In terms of the MVNO market, this is a newly-forming market and the government has the intention to further promote and facilitate the MVNO market going forward. As you know this market is mostly for [low-R2] subscribers and it's a different segment altogether compared to our existing subscriber segment, so we do believe that it is helpful to be a leader in the MVNO segment.

According to our internal analysis, MVNO is a market where we do not actually pay [ISAC ], so we do believe that this is a market that does have embedded profit characteristics.

The important share is not KT subscribers split between MVNO and MNO, but how much KT's MVNO service can attract subscribers who have originally used other operators' services. So that percentage is more important, as compared to our own internal split. And considering the trend I think that this is showing a positive trend.

(Interpreted) The next question will be presented by Mr. Josh Bei from UBS, and the following question will be presented by Mr. [Kim Hun-Shi] of NH Investment & Securities. Mr. Josh Bei, please go ahead with your question.

Yes, hi. Thank you for the opportunity. I have two questions.

First is on your promotion to offer double the date for your LTE subscribers. I understand that this is a promotion from July to October, so it's been about a month. If you could share with us what kind of impact this has had. For example, has this helped your subscriber acquisitions; and has it changed the data usage behavior or your subscribers; and also if you're considering extending this program beyond October?

Second is on your real estate sales and copper wire sales. I recall KT booked a sizeable gain on -- in the non-operating line last year from these, but I don't see anything booked in the first half of this year. Can we expect some gains to be booked in the second half, and if so could you please share with us how much this is likely to be? Thank you.

(Interpreted) Let me answer the second part first, and [Mr. Gu] will answer just briefly on your first question. In terms of our - below the operating line potential revenue/cash-flow, copper wire sales were a little bit slow in the beginning of this year and that's kind of obvious because of the fact that copper prices fell roughly about 12% to 15%, so we're sort of watching that trend.

But since we're not you know copper speculators, I think it's safe to say we'll have some copper sales in the second half of this year. To the exact amount I can't say because actually physically we have to remove it, so I think anywhere between probably [KRW30 billion to roughly KRW70 billion].

In terms of real estate, I have to mention in consolidated form so anywhere -- I mean again this is something you can't set in stone, so I will kind of give a range of anywhere between KRW150 billion to KRW200 billion as a possibility in the second half of this year. And that is including KT Corp parent company, as well as KT Estate put together.

(Interpreted) In terms of the outcome of this promotion, we've actually conducted a customer survey and we were able to find out that more than 70% of our customers were aware of this promotion, so the awareness level was more than 70%, and also more than 60% of the customers have turned favorable to KT.

In terms of the date usage behavior, because we started this promotion on 1 July 2013, we do not yet have any data, so it would be difficult for me to say one way or the other. In terms of whether we will extend the promotion, we have not yet made any decision towards - one way or the other, but we are quite steadfast in the fact that we want to further strengthen the benefit that goes out to the customers.

(Interpreted) The next question will be presented by Mr. [Kim Hun-Shi] from NH Investment & Securities. And the following question will be presented by Mr. Neal Anderson of HSBC. Mr. Kim Hun-Shi, please go ahead with your question.

(Interpreted) I would like to ask two question. The first question is that -- compared to the size of your subscriber base and the size of your revenue, on your teleco side your profit is comparatively quite low, especially if you look at LG Uplus -- compare yourself to LG Uplus and that is more pronounced. What is the reason behind KT's lack of ability to generate profit and how are you going to improve this going forward?

The second question-- the -- KT has been a company that has created quite some noise in the market related to the 900 MHz issue as well as 2G shut-down initiative, so investors view KT as having political risk. What are your plans to mitigate the investors' concern on this?

(Interpreted) That's -- thank you for the question.

First of all, just a quick identification of where we stand in terms of how our profit and revenue trend is going. KT is uniquely position where you know a lot of our profits are coming from our fixed-line rather than our wireless right now, and wireless as you know it's very competitive, so with the fall in revenue and you know it's safe to say that there's a lot of built-in profit to the fixed-line revenue, it is forcing and squeezing our profit margins and that is a fact and we know this trend.

Secondly you know in terms of the LTE service, we started late so it has become somewhat of a burden to us in the last year/year-and-a-half. So on the wireless side, the late starting of LTE a year-and-a-half ago has made it difficult for us to catch up, but as I said in the first quarter, earnings [were] as well as last year's -- and in the conference call -- we are working in order to turn that around and it is becoming more -- gaining more traction and we should see more of the benefits from what we're working on in the next quarter or two.

So to be a little bit more specific on what we're doing, and to give you a little bit of a tracking point for the next couple of quarters, is we have four major points.

One is that we are going to work on what we call [TOM], [Top-Of-Mind], and raise this because it has fallen since we were a late comer to LTE. So we will be working on consumers' viewpoint of KT in terms of raising the TOM, Top-Of-Mind.

Second is our distribution network, and we have identified some of the issues which I can't go into details here, but we are working to strengthen our distribution channels so that we will be as strong as we were before.

The third is our network quality, which is still -- we're a very, very good network but we will continue to work on -- better network and increase the quality of our network, and lastly, introduce some new products to the market that is uniquely KT using our strong fixed line and our IPTV and our wireless network and offer something that only KT can offer. Hold on, we did not finish that first -- or the second question of the last gentleman.

(Interpreted) In terms of the nine megahertz and 1.8 gigahertz issue we do not believe that is a political issue that's creating a noise in the market. We think that these are initiatives and efforts that we are exerting in order to reduce business and operational-related risk on our side.

(Interpreted) The next question will be presented by Mr. Neal Anderson from HSBC and the following question will be presented by Miss [Moon Ji Han] from KDB Daewoo Securities. Mr. Neal Anderson, please go ahead with your question.

Good afternoon. I've got a couple of questions on the churn rate, I'd love to get your opinion. I mean it's falling steadily at all three telcos, which is great. My first question is what do you think is the primary driver of this decline in churn? Is it lower customer interest in new handsets or is the stricter exit penalties for contracts? Secondly, is it realistic to expect that this lower churn rate would result in a structurally lower level of marketing expenditure in the future or do you think this will be likely offset by further competition? Thank you.

(Interpreted) Yes, the reason why we believe that the churn rate has been trending down constantly is mainly due to two reasons. First reason is that with the introduction of more bundling products and as bundled products account for [a good portion] of the entire -- it increased its portion against the product base, that has driven down the churn rate. Second is the adoption of smartphone and the smartphone prices are much higher so customers have to use this smartphone for much longer than they used to, for instance a feature phone.

(Interpreted) I think one of the focus -- the points to look at is the improvement in broadband churn rate as our IPTV offering becomes stronger and stronger and that's a supporting document toward -- Mr. [Koo] just mentioned that the bundling is helping that in terms of the churn rates.

(Interpreted) And also a decreasing churn rate will have a positive impact on marketing expenditure reduction. However, having said that, marketing expenditure is comprised of many different factors. So whether lowering churn rate will actually lead to marketing cost reduction we would have to wait and see.

Thank you.

(Interpreted) The next question will be presented by Miss Moon Ji Han from KDB Daewoo Securities. Miss Moon Ji Han, please go ahead with your question.

(Interpreted) If I can ask two questions. The first is that in the fixed line, especially in the broadcasting sector, we see a very fierce competition. KT Media actually has the biggest number of sales compared to the other three operators, but your net addition trend has recently slowed. So could you share with us what your subscriber strategy is going to be like for your media services like OTS? And could you also share with us the corporate strategy of your Company media hub? And out of your key subsidiaries it seems like the financial and rental company is posting good performance.

Now, from a short term perspective to you have certain plans to focus on one certain subsidiary over the other? I would like to understand what your plans are regarding your subsidiaries, especially because I hear that you have plans to spin off one of your subsidiaries called KT Capital. And also in terms of governance, could you also share with us basically what your direction is for your subsidiaries going forward?

(Interpreted) Thank you for your question. The numbers are -- well, the growth in the media side has not -- I wouldn't say slowed down but it's not as rapid as last year. But it's still a very -- we look at it as a very growing business. I think we did close to KRW450 billion in revenue last year and this year we're slated to do about KRW660 billion, so it's still a pretty solid growth. So from I would say reaching this level, we as KT went as far as we could and so our management decided to spin off the management side of that business and called it Media Hub.

So if you can imagine just sort of the strategic brains of our IPTV and media business to be at the Media Hub level. The first offering that they came out with since being [spinned] off is what I mentioned in my opening speech is the web-based new set top box. And the offering of this set top box is not just the technological advancement but also the management style as well. We went through many iterations of the set top box as well as doing a lot of [prove-out] so that we lower consumer complaints after we launched the product. So it's a new way of launching this product and we feel -- I mean of course we'll continue to improve on it but I think we have gotten to a certain level where the Media Hub is becoming a very solid entity.

So to wrap up on the media side, Media Hub will be sort of the conduit between KT, IPTV as well as Skylife and have the biggest strategy, because media is a serious cornerstone of our growth engine for the future. And to address your second question regarding some of the ownership structure or corporate governance with KT and some of the subsidiary companies, there's not a major shift that's going on. Again, from my perspective we have I think invested close to KRW1.3 trillion in buying and improving or cleaning up the ownership of some of these companies in the last three, four years and it's time for KT to sort of get back some of the investments.

[By the way] I'm not saying I'm covering everything but it is time to look at how the KT Group will function financially and so this -- at the beginning of this year I think a lot of you know that we had some dividend payout to KT from subsidiary companies, not a large amount but it's enough to signal that KT is you know, sort of circulating our investments between us and our subsidiary companies. To be specific on the question you asked about KT Capital, we are looking at many ways of how KT Capital's ownership will increase value as well as synergy.

And so these kinds of things are looked at quite often, it's not something unique and something dramatic but we look at these things because, you know, KT Capital is partly owned by KT as well as [KTH] so we see how we can benefit our shareholders in terms of if we change structure. But it's currently at sort of the initial feasibility study stage, and nothing has been set yet. I need to clarify, it's not at the initial stages, it's sort of we are looking at it right now. Thank you.

(Interpreted) Currently there are no participants with questions. The following question will be presented by Mr. [Kim Hue Dai] from [Penson] Securities. Mr. Kim Hue Dai, please go ahead with your question.

(Interpreted) Yes, I would like to ask two questions. In order for you to utilize the nine megahertz band what issues do you need to overcome and when would that time be? And could you also share with us what your year-end wireless ARPU would look like?

(Interpreted) Thank you for the question. On the 900 megahertz it's hard for me to go into details. Rest assured to our shareholders that we are in discussions with the right people at the right places so that we can get this thing resolved. That's about all I can say. It our ARPU growth for this year I think it still stays and what we communicated earlier, which is on a year-on-year basis about 8% growth in ARPU over last year.

(Interpreted) If there are no further questions we will close the q-and-a session. Thank you for your questions and interest. We will now close [Olleh] KT's Q2 2013 Earnings Conference Call. Thank you very much for joining.