KT Corp (KT) 2013 Q3 法說會逐字稿

(interpreted) Good morning and good evening first of all. Thank you all for joining this conference call. Now we'll begin the conference of the 2013 Third 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, will present earnings results and entertain your questions. This conference will start will start with a presentation followed by a Q&A session.

(Operator Instructions)

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 our Third Quarter 2013 Earnings Conference Call. Our call is being webcasted and you can follow the slides as we make the presentation.

Since Q1 2011 we have been presenting consolidated performance based on the IFRS standard. Also please note that Q3 2013 consolidated statements include 62 companies, including kt. We will now have our CFO, Bum Joon Kim, begin the presentation on Q3 earnings performance.

(interpreted) Good afternoon, I am Bum Joon Kim, CFO of kt. In mid-September kt launched world's first wideband LTE services, providing faster speed and better quality to the LTE user base, thereby opening up a new chapter in the history of LTE communication.

Aside from the wideband LTE service launch, in Q3 we laid the basis for growth for the kt Group companies on the back of continuous growth of our Group companies and active overseas expansion.

Since joining kt Group, kt skylife, kt rental, BC card and other major subsidiaries are posting better performance. Also companies that were newly established last December, such as kt sat, kt media hub and kt estate are making substantial contribution to the Group's bottom line through leveraging their capabilities in their respective field.

Most of kt Group companies, including major subsidiaries, are leading the growth of the Group, showing great improvement in performance with our contribution to operating profit coming in at KRW160.8 billion, which is a large increase quarter-on-quarter.

We are committed to leading the virtual goods ecosystem based on our world's best network infrastructure and Korea's biggest all-IP subscriber base. Also through further strengthening of ICT capabilities we will become a global ICT new frontier providing smart life services.

I would now like to walk you through our Q3 business results.

Q3 operating profit -- revenue, excuse me -- declined 7.3% year-on-year to KRW5734.6 billion on the back of decline in fixed and wireless revenue and merchandise revenue. But service revenue alone, excluding merchandise revenue, increased 1.2% year-on-year to KRW4935 billion.

Operating profit increased 22.7% year-on-year to KRW307.8 billion, driven by significant improvement in subsidiary performance. Net income declined 63.1% year-on-year to KRW1356.3 billion, due to a fall in non-operating revenue and an increase in other operating expenses.

EBITDA increased 6.2% year-on-year, coming in at KRW1194.5 billion.

Next is on our key subsidiaries business highlights.

For BC card despite declines in merchant fees and processing fees, with growth in credit and check card usage volume and cost controls the Company is posting sound performance.

For kt skylife this year there was a subscriber growth of 310,000, leading to a sizeable growth in monthly subscription fees, home shopping fees and advertising revenue, pushing up operating profit by 53.6% year-on-year.

Going forward, through expanding our package channels, new products development and UHD service launch, robust growth is expected to continue.

kt rentals vehicle fleet stands at 85,000, growing 32.6% year-on-year with market share increase of 2.0 percentage points year-on-year to 24.4%. Thanks to activated sales, revenue increased 30.1% year-on-year and operating profit 21.9%, sustaining a high growth trajectory.

New spun-off companies such as kt media hub, kt sat, kt estate are also posting sound performance. Other companies like kt ens and kt telecop's performance also improved by a large margin, making operating profit contributions by subsidiaries 5x larger on a year-on-year basis, recording KRW160.8 billion.

We will continue to maximize their expertise to gain competitive edge in non-telecom sectors and also maximize synergies with kt so as to lead the ICT convergence trend.

Next is on the breakdown of operating revenue.

Despite the positive trend in media and contents, financial and rental, due to overall weakness in fixed and mobile revenue, operating revenue edged down slightly year-on-year. Wireless revenue declined 2.3% year-on-year due to declines in subscribers and interconnection revenue on the back of suspension of sales activities. Fixed line revenue fell 6.7% year-on-year with continuous fixed line telephony revenue decline.

Media and contents revenue on the back of continuous subscriber growth increased 31.7% year-on-year, sustaining a high level of growth. Financial and rental revenue on the back of kt rental revenue growth continued its growth trajectory, increasing 4.0% year-on-year.

Merchandise revenue declined 39.1% year-on-year with the fall in sales of wireless handsets.

Next is on operating expense.

Operating expense declined 8.6% year-on-year to KRW5426.8 billion. Cost of service provided increased 14.7% YoY on the back of higher content sourcing fee -- sourcing cost.

Cost of merchandise declined 43.4% year-on-year on the back of decline in handset sales. Marketing expense with lower level of handset sales posted a saving of 17.8% year-on-year.

Next is on the highlights of the Company's financial position.

Net debt stands at KRW9618.1 billion, decreasing 3.1% QoQ with net debt to equity ratio at 72.6%, falling 3.3 percentage points QoQ, overall showing improvements in the financial soundness.

Next is on capital expenditure.

In Q3 with wideband LTE investment and investment into broadband network enhancement to improve our core competitiveness, CapEx increased 20.2% year-on-year, coming in at KRW711.9 billion. To break down the figure, wireless CapEx is at KRW205.9 billion, fixed line KRW349.6 billion and others accounted for KRW156.4 billion.

On a Q3 2013 cumulative basis the implementation rate is at 51.7% against the annual guidance of KRW3.5 trillion. In Q4 we expect higher level of investment compared to Q3, but starting next year we expect downward stabilization.

Next is business results for each of our services.

Wireless revenue declined 2.3% year-on-year to KRW1713.8 billion on the back of slower subscriber acquisitions due to suspension of sales activities.

Wireless ARPU declined 0.9% QoQ with slower subscriber acquisition, but overall [of which] trajectory was maintained, posting 4.5% year-on-year growth, coming it at KRW31,332.

Considering speedy improvements in subscriber trends since the launch of wideband LTE we expect Q4 ARPU to recover to the level of first half of the year.

At end of Q3 smart phone subscribers accounted for 67.7%, or 11.06 million, with LTE subscribers accounting for 41.8%, or 6.82 million, showing a sustained growth trend which we expect will drive wireless revenue growth going forward.

Based on the golden spectrum of 1.8 gigahertz wideband LTE, kt is committed to providing differentiated service quality and customer benefits and will exert our upmost effort to recover kt's distinctive fundamental competitive edge.

Next is on our fixed line business.

Fixed line revenue declined 6.7% year-on-year to KRW1462.4 billion on the back of subscriber and traffic decline. Broadband internet revenue posted a growth of 2.3% year-on-year due to ARPU improvements with reduction in bundling discounts.

Lease line revenue increased 0.6% year-on-year on the back of kt sat revenue growth. kt will continue to endeavor to overcome declines in fixed line revenue by expanding its IP subscriber base, underpinned by steady growth in broadband internet.

Next is media and contents business.

Media and contents revenue posted a growth of 31.7% year-on-year, coming in at KRW351 billion, driven by sustained growth in subscribers. kt media Group currently has 6.67 million subscribers, solidifying its undisputed position as Korea's most premium for a fee broadcast service provider.

Also through Olleh TV Mobile which has 2.6 million subscribers kt is a sole provider servicing all three terrestrial broadcasting channels in Korea with a solid position as a leader in fixed and mobile digital broadcasting market.

kt will further solidify its web based TV service called Olleh TV Smart, to bring unlimited services on the web to the TV platform, thereby opening up an era of TV-centric home contents usage.

Next is on the financial, rental and other service revenue.

Financial and rental revenue posted a growth of 4.0% year-on-year, coming in at KRW976.9 billion on the back of kt rental's revenue growth. Other services revenue increased 23.8% year-on-year to KRW430.8 billion on the back of revenue growth from [SI] businesses, including kt ens and improvements in performance of subsidiaries such as kt telecop.

This has been Q3 2013 business highlights for the kt Group.

For more details please refer to the materials that we've circulated. We will now begin the Q&A session.

(interpreted) Now Q&A session will begin.

(Operator Instructions)

(interpreted) The first questions will be provided by Mr. [Kim Hue Jae] from Daishin Securities and the next question will be provided by Mr. [Yang Yong-in] from Hangul Investment Securities. Mr. Kim Hue Jae please go ahead with your question.

(interpreted) Yes I would like to ask you three questions. Could you please first of all explain your dividend policy after year 2013?

Second question is that in the month of October we are seeing a smaller number of people actually moving to another carrier through MNP but still your number of subscribers is declining. Could you explain as to what your subscriber strategy is after October?

Third question is this quarter you have achieved a better performance in terms of contribution by subsidiaries to your bottom line, much higher than the guidance that you've shared with us in the second quarter. Could you once again walk us through the guidance?

Thank you for your question. I'll answer the first question and then we'll have the Chief Operating Officer of our sales answer the current marketing environment and then I'll go on with the subsidiary companies.

With respect to dividend policy, it's quite clear in the second term of our CEO we have mentioned that we will keep a flat rate of KRW2000 per share during his term. So at this point that is still in place.

(interpreted) If you look at the performance of October, some of the positive aspects that we are seeing is that the actual sales volume is significantly higher compared to the month of September. If you look at the number of subscribers, the MNP subscribers moving to Skt and LG Uplus, there's been a significant reduction in the number of subscribers leaving our services.

I believe that this is due to the fact that the consumers are really accepting the concept of wideband LTE and I believe such trend to continue for the time being and in the months of November and December as well.

To address your third question, just be clear third quarter earnings increase over that of second quarter is about KRW5.7 billion. In the beginning of our forecasting we had some smaller amounts of profit that we thought would come from BC Card, skylife and other companies, but as it turns out, as the year was going forward, a lot of these companies performed a lot better than we expected so they are increasing at this time.

To name a few, kt rental, skylife all improved over that of second quarter and then also the ones that are unexpectedly doing well are kt capital, kt ens, ktds, kt submarine, media hub. These companies are doing quite well at this time.

To look at the fourth quarter, I think it might not be as good as third quarter for these companies; it's a year-end so I wouldn't expect this much, maybe around, the same or a little bit lower.

But one other comment that I'd like to give is that three recently spun-off companies like kt media hub, kt sat and kt estates are 100% wholly owned so their profits should be looked at the same as kt at this point. It has sort of a bit of a -- the number being deleted from kt but added there. So in essence it should be looked at the same company.

(interpreted) The next questions will be presented by Mr. [Yang Jung In] from [Hangung] Investment Securities and the following questions will be presented by Miss Moon Ji-hyun from KDB Daewoo Securities. Mr. Yang Jung In, please go ahead with your question.

(interpreted) I would like to pose three questions. The first is could you provide an overall picture with regards to the reduction of CapEx in year 2014?

Second question is that in the fourth quarter I would like to understand how much of asset sales is going to take place, especially capitalizing on your idle assets?

The third question, this quarter your ARPU was not very good. What is your outlook for ARPU for the fourth quarter and next year?

I'll address the first question on CapEx. It is clear that we want to bring CapEx down from this year. Last year was quite high and this year was again quite high and I mentioned this in the second quarter earnings call as well. We're still going through the business plan but I would say a soft target at this time which we'll clarify and define towards the end of this year but it will be clear to say near KRW3 trillion, around there, is what will help your modeling.

To address your below the operating line activities, in the third quarter this year we had a total revenue of KRW 130 -- I'm sorry -- KRW13.4 billion in revenue from the copper sales and we did not have any real estate sales in the third quarter.

Looking at fourth quarter, we will have a little bit of additional copper wire sales but this is again -- because the global copper prices are still kind of falling a little bit, I think I mentioned the second quarter KRW30 to KRW60 billion. I think it's still around there but perhaps the top side is a little less than KRW60 billion.

To give a little bit more clarity on real estate liquidation in the fourth quarter, I think we're looking at a little less than KRW100 billion in the fourth quarter of this year. Again this is because it's transaction based; the numbers could change.

(interpreted) In terms of the ARPU number, yes this quarter ARPU was not very good because of the double data promotion. Because of that the additional revenue from the data services had actually declined and also there were lower levels of acquisition of LTE subscribers.

But we've decided that this double the data promotion is ended and we will not do it again. Also if you look at the trend for subscription acquisition -- subscriber acquisition in October we are seeing quite positive trend and we expect that trend to continue going forward. So we expect ARPU to improve and grow in the fourth quarter and next year our ARPU growth target is at 4%.

(interpreted) The next questions will be presented by Miss [Moon Ji-hyun] from KDB Daewoo Securities and the following questions will be presented by Mr. [Tan Kong] from Deutsche Securities. Miss Moon Ji-hyun, please go ahead with your question.

(interpreted) I would like to ask two questions. The first has to do with your wireless services. You mentioned during the last quarter's conference call that you would put in effort to recover and improve your distribution and sales network. To what extent were you able to achieve that recovery?

Also in the month of October there was quite competitive subsidy spending and KCC has launched an investigation. So could you provide a picture as to what the subsidy spending landscape will be like in the coming months of November and December and how do you view the market going forward?

For the media and contents business there's been an increase in the terrestrial monthly fee level. Since kt has the highest level of VoD related market share what impact will this have on your revenue and your business?

(interpreted) In terms of our sales network, our effort to recover the situation is ongoing. I would have to admit that it will be time-consuming but quite sure that there will be improvement. I think the growth in the sales volume in the month of October is a positive signal to the fact that there is a recovery undergoing.

In terms of the subsidy for October, the reason why the subsidy level was high is because our actual sales volume was high. It is not necessarily because of the per handset subsidy had increased. Our response in the market going forward is that we will maintain a stabilized -- stabilization approach for November and December and we will conduct our activities in a manner that is most efficient.

In terms of our VoD services compared to the second quarter, in the third quarter we have recorded about 20% growth and also on top of that because of such trend we expect that next year we will see also growth by a large margin.

In terms of PTV services, we think there is great potential for growth going forward because only one-third of our users actually make the PTV purchase. So if we can actually increase the rate of purchase then there could be much bigger room for growth. So we will have our strategies and have our strategic focus on those aspects.

(interpreted) The following questions will be presented by Mr. Tan Kong from Deutsche Securities. Mr. Tan Kong, please go ahead with your question.

Thanks for the opportunity. First on your IPTV business, we recognize that it's one of your strong parts but we just want to know that if you have a preference between OTV and OTS? From an NPV perspective which service actually provides a higher NPV because we know that OTS actually you can share costs with skylife?

My second question is on your wireless business. Since you already provide a lot of color on your ARPU now on your subscriber target, what kind of strategies do you have going into 4Q and beyond to actually achieve your subscriber target that your Chairman actually mentioned earlier in October? Thanks.

(interpreted) In terms of OTV and OTS, these are different services that will cater to different needs of the subscribers because there are certain locations and areas where Olleh TV skylife, OTS, cannot be provided and also there are a group of users who prefer more low-end service than OTV provides. So it's not necessarily a question of preference but it's more of an -- it's a complement -- these two products have a complementary relationship.

In terms of NPV, we still believe that IPTV has great potential for growth so rather than talking about NPV for each of the services basically our target and objective is geared towards expanding our subscriber base.

You asked about subscriber acquisitions after the fourth quarter. I believe that if we implement the strategies very opposite to the reason why we lost our subscribers we will be able to kick start and increase our subscriber acquisition.

Actually since the launch of our wide band LTE services customers' awareness level on wide band LTE had actually increased and especially they associate kt the most with the wide band LTE service. And also as the competitors have now also started wide band LTE I believe that when customers are pushed to a situation where they would have to make a choice, when that situation comes I think kt is at a more advantageous position.

Another important pillar is the strengthening and solidifying our sales and distribution networks. There are many programs to achieve that goal and our network has been once more activated. Now what is more important is to make sure that this trend continues so that it is firmly established.

(interpreted) Currently there is no participant with a question. The next question will be presented by Mr. Tan Kong from Deutsche Securities, please go ahead, sir.

(interpreted) A follow-on question. I mean is there actually difference in terms of MPV between OTS and OTV. I mean amongst the subscribers?

That is a very important question as well and it is quite sensitive material so unfortunately we do not disclose that exact MPV per customer. Even our wireless customers these are very sensitive marketing information. So we do not disclose the profitability of each business either. Thank you.

(interpreted) Currently there is no participant with questions. The next question will be presented by Mr. [Hang Sin Teh] from [Hanhai Investment Securities], please go ahead, sir.

(interpreted) For your PSDN revenue there was quite significant reduction during the Q3, is this a structural reason or is this just a temporary one-off phenomenon?

Cumulative revenue decline is KRW320 billion for the year over that last year. We estimated around 300 but it is actually more than that.

We identified in some of the key issues, one would be substitution from fixed wireless. Slowing down of new activations and also the free internet pricing plan. So all that put together has made our -- well we would not want to see softening of the revenue, but unfortunately it is still showing a straight line which is always a challenge to us.

(interpreted) Whilst there are no further questions we will close the Q&A session. Thank you very much for your questions. Once again we thank all of you joining. This has been kt's 2013 Third Quarter Earnings call. Thank you very much.