KT Corp (KT) 2014 Q1 法說會逐字稿

Good morning. I am Youngwoo Kim, KT's IRO. We will now begin Q1 2014 earnings conference call. Our call is being webcasted, so please refer to the slides as we make the presentation. Since the first quarter of 2011, KT has been presenting consolidated numbers, under the IFRS standards. As such, Q1 2014 consolidated statement reflects both KT and its subsidiaries. With that, I would like to ask our CFO, In Hoe Kim, to begin the presentation on the first quarter results.

Good morning. I am In Hoe Kim, CFO of KT. Last year owing to a temporary weakening of our competitiveness in the telecom business both operationally and financially we posted results that fell short of expectations of our shareholders and investors.

KT hence has declared a state of crisis management, implemented business rationalization and the inevitable personnel restructuring, focusing all of our business management activities on the recovery of business competitiveness. We have revisited investment and cost structure from the very starting point, closely analyzing competitiveness of each business line and business status, and are doing our utmost to make improvements. Through such efforts, we will strengthen telecommunications competitiveness and maximize efficiency of Group management. Moreover, underpinned by the best quality network resource, owned by KT, we will create growth engines for the future in various arenas.

KT has been a number one company for many years, actually a company of the people, with 100 years of history behind it. We will for certain overcome this crisis, no matter what, and make KT number one again. I thank all of you for supporting us through the difficult times. We will do our best to return your support, by creating greater value.

From now on, I will walk you through Q1 2014 business results. Q1 2014 operating revenue declined 4.2% year over year to KRW5,846.1b, on fixed-line revenue and merchandise revenue decline. Operating profit declined 58.6% year on year to KRW152b, on top-line decline and increase in service expenses, such as sales costs. Decline in operating profit and loss in disposition of assets made impact with net loss coming in at KRW41b. EBITDA declined 13% year on year, coming in at KRW1,083.9b.

This year we expect wireless revenue to show a higher growth rate, but we expect continued fixed-line revenue declines and cost burden. KT plans to focus Company-wide capabilities in regaining telecommunications competitiveness and profit structure improvement.

On the next page, we will look at subsidiary performances. For BC Card, with growth in purchase volumes on credit and check cards, there was a top-line growth of 6.2% year on year. With the suspension of telemarketing operations for its commerce business, operating profit declined 10.1% year on year.

KT skyLife recorded a revenue and operating profit growth of 2.4% and 2.9% year on year, on the back of sustained increase of monthly subscription, and home shopping fees, and advertising revenue.

Market share for KT Rental continues to trend upward, with its top line growing 20% year on year. However, with increases in depreciation and other incidental costs, arising from increase in the vehicle fleet, operating profit declined 1.5% year on year.

Through strengthened portfolio efficiency of Group companies, we will strive towards a single KT, where all companies think and move the same way. We will also enhance the value of KT Group by creating converged synergy, underpinned by ICT.

Next is on the breakdown of the operating revenue. Despite growth in wireless, media and content, financial and rental revenues, operating revenue declined 4.2% year on year, on fixed-line and merchandise revenue declines. Despite the fall in subscribers, due to operation suspension, with continuous rise in LTE subscribers and ARPU, wireless revenue recorded a growth of 1.5% year over year. Fixed-line revenue declined 6.7% year on year, on sustained decline in telephony revenue.

Media and contents revenue continued its strong growth trend, with 17.7% year-on-year growth, driven by IPTV subscribers and PPV revenue growth. Financial and rental revenue showed a year-on-year growth of 7.6%, continuing with its sustained growth trend, on the back of top-line stability at BC Card and robust revenue growth from KT Rental. With the decline in mobile handset sales volume on operation suspension, merchandise revenue declined 15.1% year on year.

Next is on the operating expense. Operating expense declined 0.8% year on year, coming in at KRW5,694b. Driven by fall in real estate development cost, cost of services provided fell 11.7% year on year. Also cost of merchandise on lower handset sales declined 18.7% YoY. SG&A increased 16.2% year on year, on tighter LTE marketing competition during January/February time period.

Next is on the highlights of the Company's financial position. Debt to equity ratio at the end of Q1 is 173.3%, which is a 2.4 percentage points increase QoQ. Net debt came in at KRW10,061.8b, a 6.9% increase Q on Q, with net debt to equity ratio increasing 6.7 percentage points Q-on-Q.

Next is on capital expenditure. Q1 2014 CapEx declined 31.5% year on year, coming in at KRW357.2b, on reductions in wireless and IT infrastructure investment. The breakdown is KRW177.7b for wireless, KRW122.8b for fixed-line. And others account for KRW56.7b. The implementation rate is at 13.2% on a Q1 2014 cumulative basis against a CapEx guidance of KRW2.7 trillion.

Next is on business results for each of the service sector. With the business suspension, there were difficulties in subscriber acquisitions. But with ARPU increase, driven by LTE subscriber expansion, wireless revenue increased 1.5% year on year, recording KRW1,783.4b. As of Q1 end, LTE subscribers account for 52.4% or 8.63m subscribers, with wireless ARPU recording KRW32,902, an increase of 5.7% year on year. Since the resumption of operations on April 27, subscriber acquisition is ongoing quite actively, as we expect wireless business recovery to come under full swing.

KT will refrain from value-destructive subsidy competition and take leadership in migration to service-centric competition. To respond to such change in the competitive paradigm, we will continue to focus on attaining competitive edge in network capability, develop differentiated product, further evolve our distribution network, and improve customer service capacity.

Next is on the fixed-line business. Fixed-line revenue, driven by declines in telephony subscribers and traffic fell 6.7% year on year, to KRW1,420.1b. But broadband Internet revenue increased 2.3% year on year, on the back of ARPU improvements, driven by reductions in the size of the bundling discounts.

KT will continue to expand broadband-based IP service subscribers in order to overcome the erosion in the fixed-line revenue.

Next is on the media and content business. Media and content revenue, on sustained subscriber growth, increased 17.7% year on year, to KRW369.6b. Even under fierce competition among broadcast service providers, during Q1 2014, there was net addition of 190,000 IPTV subscribers. With 5.16m subscribers, KT's IPTV continues to solidify its market leadership. Especially for the media business, value-add revenue, including paid content, increased 25.5% year on year. As such we are seeing a growth by large margins in value-add revenues.

IPTV is targeting subscriber net addition of 800,000 plus this year. And on the basis of value-add revenue growth, including PPV and home shopping fees, we will lead to a -- which will lead to a continuous ARPU improvement, we will strive to have qualitative growth.

Next is on financial and rental, and other service revenues. Financial and rental revenue, on the back of stable revenue of BC Card and active growth of KT Rental, increased 7.6% year on year, coming in at KRW986.5b. Other services revenue, with declines in real estate development revenue, declined 30.7% year on year, to KRW299.2b.

With that, I will end the earnings presentation for Q1 2014. For more details, please refer to the materials that we've circulated. From now on, we will take questions.

Now Q&A session will begin. (Operator Instructions). Kim Hoi Jae, Daishin Securities.

I would like to ask three questions.

The first question is that since the April 27, KT is the sole provider that had resumed its operations. And KT had not been levied any additional operational suspension by KCC. So I think this is a window of opportunity for KT, and that the marketing environment will work quite favorably, to the benefit of KT. So during this period of time or even after, do you have any differentiated marketing strategy that you wish to implement, to leverage this advantage?

Second question is with the inauguration of the new CEO, he has really emphasized a streamlining of the organization. Of the business portfolios that KT has, you have telco as well as non-telecom related business. I would like to understand in what type of business that KT is going to focus on and try to nurture further, going forward. And in which of the subsidiaries would your focus be on, going forward?

Third question is that this year, you do have a need for quite a bit of capital spending for this year, I believe. So do you have plans to resume real estate sales or copper line sales this year?

It is true that during the period where KT is the sole operator conducting its business, in terms of subscriber acquisition and expansion of market share, that it is a favorable opportunity. However, we are going to stick to our marketing strategy of having a service-centric competition, based on the premise that the market stabilization is a priority.

During the business suspension period, KT has exerted a lot of effort in making thorough preparations, in terms of its distribution and sales network, as well as with our service offering. In line with the compliance of the government guidelines, KT is developing a differentiated product, as well as means to maximize the benefit that the customers will enjoy. So such approach is going to continue on, going forward as well.

To be a little more specific, on top of what was just mentioned, we have lowered the dedicated handset ex-factory price or the shipment price, thereby lessening the burden that the customers will bear when purchasing these handsets. And also, we have further solidified and strengthened the competitiveness of our fixed and wireless bundled products.

Especially when customers upgrade their handsets, there were quite a bit of cost burden that was incurred. But we've provided the so-called sponge plan, as well as providing the contents integration package. And through the alliance marketing with financial institutions, we were able to lessen that burden.

So all-in-all, during this sole operation period of KT, we believe we can recover our sales capabilities that we had enjoyed in the past. And we expect to solidify the basis for continuous subscriber net additions.

Relating to your second question, about the strategies for our subsidiary companies, I guess I would have to touch upon the basic principle, in terms of our Group Company strategy. Basically, we want to lay the basis for a single KT and strive to become a number one KT, and generate and create synergies amongst different entities, and have a business management that's centered on customers.

And also we want to strive towards number one subsidiary companies. And what that means is, if I were to elaborate, through differentiated strategies and approaches, we want to strengthen the fundamentals of such companies.

In terms of how we will achieve the vision of single KT, through a systematic business management and strengthening of communication, we wish to attain a single KT vision.

In terms of generation of synergies, as you know, in our Company portfolio, we have ICT, media, contents, financial, rental and real estate. So amongst these various businesses, we will identify items that could give us maximum synergy. And we'll come up with more detailed and specific plans, accordingly.

The last principle, I believe, is most essential. And our new CEO is always emphasizing the importance of this principle, which is placing the customer as number one priority in all of our business activities. So for all the Group companies, our objective will be to have the customer as priority, to have a customer-centric approach in setting up our business objectives.

To respond to your third question, we do not yet have a confirmed plan, as to the sales of real estate and copper cables. But we will communicate with you, if there are any further developments. The basic premise is that we will continue to identify real estate assets or idle spaces, with which we believe we can reap higher expected returns. In those cases, we will go ahead with the process.

Yang Jong In, Heungkuk Investment Securities.

If you look at your mobile or wireless ARPU, there's been an increase of 2.3% quarter on quarter. And your wireless service revenue also increased 2.2%. In Q1, the reason behind such increase in your ARPU, is it because in Q1, the number of -- the seasonal factor was limited, in terms of the number of days of operation? So could you explain as to why, unlike other operators, you've seen an increase in ARPU?

And can you also share with us the percentage of your subscribers, taking out a fixed rate tariff plan?

And in terms of your LTE subscriber ARPU, can you provide some color as to what the trend looks like, compared to the first quarter?

And does KT have any plans to enter into the MVNO business through its subsidiary? If not, what is the reason?

Now to respond to your first question, about why, compared to our competitors, our ARPU in Q1 was higher, KT's LTE penetration is about 52%, which is relatively lower, compared to other players.

So with the LTE conversion still ongoing at KT, there is actually a higher room for ARPU growth for our Company. And also, the newly-acquired subscribers in the first quarter were of high quality.

So as we sit here today, we believe that in terms of the ARPU growth, compared to 2013, about 5% to 6% growth for this year will be possible.

Relating to your question about the LTE subscriber ARPU, as of Q1, the ARPU figure is KRW44,700.

In terms of the percentage of subscribers taking out our fixed-rate tariff plan, most of our smartphone users are taking out that pricing plan and the number of subscriber is about 11.43m subscribers.

Lastly, on your question about the MVNO business, we are thinking about this quite long and hard. Nothing has yet been confirmed. We are continuously reviewing the possibilities.

Stanley Yang, JP Morgan.

I would like to ask two questions. It seems like for this quarter, the decline in PSTN revenue was quite large and quite significant. So could you provide us as to on an annual basis, what would be the revenue declines for your fixed telephony?

And with regards to the headcount restructuring that was recently implemented, now what kind of cost saving impact would it have as of next year?

Now the reason I ask is because it seems like the decline in PSTN revenue, if you were to combine the cost savings of this year and next year -- excuse me. If you combine the declines in PSTN revenue for this year and next year, it seems like that amount is going to be bigger than the savings that you can enjoy from personnel restructuring.

So if that is the case, then if you compare the earnings of 2013 and 2015, unless you find other areas to make a business turnaround, increase in profit seems unlikely.

So what are your additional cost cutting strategies or measures that you are currently planning or is there any other wireless related turnaround that we can expect going forward?

In terms of the fixed-line revenue erosion, as can be witnessed from the Q1 performance and as was mentioned at the beginning of the year, we expect the extent of the erosion to be in the mid-KRW300b.

On your second question, through the ERP package that we have provided, about 8,300 people will be retiring and that is going to have an impact of KRW700b per annum on the labor cost. But since we have already passed the first quarter of 2014, I think for this year, which is 2014 that is, we will see an impact of KRW460b.

But on the wake of the early retirement, there are some adjustments that need to be made, meaning some increases in outsourcing and also recruiting of new employees. So the improvement on the operating profit level is going to be smaller than the reduction of the labor cost.

If you look at the test cases of 2009, when the ERP package was provided, the operating profit improvement impact was 65% vis-a-vis the labor cost reduction.

But in 2014, through the business rationalization efforts and controlling of the outsourcing cost, we will make sure that the contributions, the labor cost savings makes to OP, operating profit, is higher than that of 2009.

And I would also like to provide some more color as to the additional measures that we will be taking vis-a-vis 2009.

Now, other than the labor cost line item, since I have joined, I have closely -- we are closely looking at various line items in terms of the financial line items. And we are making a very thorough analysis of different cost items and are trying to find opportunities to make a structural cost savings improvement.

So basically in terms of the OpEx and CapEx, we are going to strengthen our control over the cost spending so that the cash leakage will be minimized. So by securing financial soundness, we would be able to regain our growth potential once again, and be able to efficiently allocate the resources that we have.

Now, you have also asked about the turnaround potential. In 2014, we are going to focus on making our cost structure more efficient. And our foremost priority is to focus on restoring our telecom business competitiveness so that we can lay the basis and improve the fundamentals for growth potential going forward.

Also, we've dealt with the labor cost and CapEx is also on a declining trend, which will lead to a gradual stabilization of the depreciation cost. And with the market becoming more stable, the marketing spending will also be stabilized.

This year, if we were to restore our telecommunications competitiveness, we could cautiously project that in terms of profitability, maybe 2014 will be the bottom for us.

So from 2015 onwards, we believe that a gradual turnaround in profit will be possible.

Currently there are no participants with questions. Dan Kong, Deutsche Bank.

I would like to understand whether you could provide some more color on your dividend policy because back in 2009, after the restructuring, dividend payout followed that restructuring. So despite the net loss this year, do you have plans to make any dividend payout considering that last year, you have made at least KRW800 per share dividend payout?

The second question has to do with what your view is regarding the LTE unlimited tariff plan. Now on the back of the introduction of this pricing plan, do you have plans to increase your ARPU guidance or because you think that the market is going to be more stabilized, subscriber acquisition is going to decline? What is your view?

In terms of the dividend of payout policy, the dividend for this year is going to be determined in consideration of our financial performance and cash flow.

Now having said that, in the second quarter, there is a significant ERP expense that is incurred. Many people who were our colleagues left the Company and of course, we respect their decision. And also the people who remain would have to work hard as well. So this is -- a dividend is a point that we are really putting our heads together and trying to find the best solution.

So internally, I just want to voice that we are thinking hard about this issue and discussing about this issue. But once the decision is made, we will come to the market and communicate to you what our decision is.

In terms of the unlimited tariff plan, I believe that the basic growth driver behind a telco is a data-driven ARPU increase. For data heavy users, people who wishes to use data in large volumes, we are providing them data capacity unlimited and increasing the price point and eventually, with a view to increase the ARPU.

But just like other competitors in terms of customers who have taken out a high tariff plan, there could be a possibility of down-selling of lower price points tariff schemes. But having said that, the percentage of people with the high tariff plans is relatively low for us, so there would be a limited impact on ARPU -- potential ARPU decline.

So for KT, if a subscriber takes out this unlimited rate plan, there is a greater room for us to enjoy ARPU growth. And also through the use of various contents, additional ARPU growth, we believe, is possible.

Chung In Young, Goldman Sachs.

I have two questions.

The first question is what is your wireless subscriber target. Or if you have a market share target, please share that with us.

And secondly, in terms of your wireless distribution and sales network, you said that you are trying to strengthen that network. What exactly are those efforts? What are the areas that you have identified to make the improvements and what strategies are you implementing?

Basically, for our wireless subscribers, our goal is to achieve a turnaround in the overall subscriber base and our [M&O] business. Basically, our target is to maintain the market share for wireless at 30%.

In terms of strengthening our distribution network competitiveness, the basic principle working here is the fact that our customer is the priority, that we will have a customer-centric approach.

So our approach is to increase the loyalty of our sales and distribution network and enter into new stores that are deemed competitive. And also, not just for our traditional distribution channels, but we are trying to grow the niche channels like the online channel and large retail format channels. And also, we want to innovate -- we want to attain a qualitative innovation in terms of the sales skills. That is why we are providing training and basically, our goal is to further strengthen the fundamentals of our sales capabilities.

While we were under business operational suspension, we did make significant preparations to make improvements in our distribution network. Basically, we have increased the number of new doors that we have entered into and also the percentage of competitive mid to large size outlets as well as core outlets have increased.

So for two consecutive quarters, you will see that the share of our handset sales in the distribution channel maintained the higher percentage vis-a-vis our market share figure.

Sean Oh, Merrill Lynch.

I have two questions.

It seems compared to the fourth quarter, your net debt has increased quite a bit. What is the level of net debt that you are forecasting for the second quarter considering I think because of the ERP payments, the level of net debt will be higher for the second quarter.

The second question is in terms of the ERP, we have seen in the press releases different figures. But the overall expenditure on the Company side would be around KRW1.2 trillion according to the press releases. And you have previously said that there is a labor cost savings impact of about KRW700b. So what is your projection for the additional cost coming in from outsourcing -- increases in outsourcing costs and recruiting of new employees?

Now for the ERP expenses, we expect about KRW1.2 trillion and KRW600b will be savings on the labor cost this year and the cash holding. The remaining [KRW600b] is going to be funded through a long-dated borrowing.

So as you mentioned because of the ERP expenditures, we do expect the debt to actually increase this year.

In terms of the potential impact of the increase of the outsourcing cost, once we get a more detailed and specific number, we will communicate that to you.

Chung Youngwoo, CIMB.

I have a couple of questions on your IPTV business.

If you look at the quarterly subscriber trend, the net addition for OTV subscribers were seemingly quite good. I would like to understand what the Company's marketing strategy is for its OTV and OTS services.

The second question is that we foresee that with the introduction of the unlimited data plan, the actual demand for -- demand and consumption for video is going to increase going forward. So I would like to know if the Company has any mid to long-term monetization plans on such demand and usage of the videos. And if you could link that with the mobile IPTV approach, that would be helpful.

As you correctly mentioned, our OTV channel competitiveness has improved, whilst the OTS activation, there were some hurdles that existed.

So basically, these two products are the same, in that they provide the customer and consumer convenience underpinned by its basic product competitiveness. So it is not that we have an intention to focus on one product over the other. But the sales and take-up of such service will be determined by the customer preference.

Now having said that, the OTS service is a product that only KT can provide. It is a hybrid service. It combines the benefits of satellite and IPTV services. It provides high quality and it is a -- customer-customized services so it has a advantage of having a very low churn rate.

And as mentioned before, at the activation phase, there are some hurdles that exist. But currently, we are trying to resolve that problem by applying new technology.

For example, once the UHD service really takes off, the OTS product which utilizes the benefit of the satellite service will be a -- will make great contributions in KT Group leading the UHD market.

Basically, for our KT Group, we think that the two products is going to strike a very natural balance.

The second question on the monetization of the services and the impact of the unlimited rate plan, yes, as you currently mentioned, we are seeing increases in people viewing video files on the mobile TV platform.

So we expect the customers' use of content and paid VOD services will increase going forward. And if so, once we -- once a certain growth level is attained, we believe that meaningful source of new revenue can be created.

If there are no further questions, we will close the Q&A session. Thank you very much for all your questions as well as your interest. Lastly, thank you all for joining us today. This marks the end of Q1 2014 earnings conference call for KT. Thank you.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.