KT Corp (KT) 2014 Q3 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'll begin the conference of the 2014 third-quarter preliminary earnings results by KT. We would like have welcoming remarks from Youngwoo Kim, KT IRO, and then Mr. In Hoe Kim, the CFO, will present earnings results and entertain your questions. (Operator Instructions). Now we would like to turn the conference over to Mr. Youngwoo Kim, KT IRO.

(Interpreted). Good afternoon. I am Youngwoo Kim, IRO of KT. We will now begin Q3 2014 earnings conference call. Our call is being webcasted via the Company's website and you can refer to the slides as we make the presentation. Please note that since Q1 of 2011 KT has been presenting consolidated numbers under the IFRS accounting standard. With that, let me introduce our CFO, In Hoe Kim, to begin the presentation on Q3 business results.

(Interpreted). Good afternoon. I am In Hoe Kim, CFO of KT. Since the beginning of the year KT has been strengthening competitiveness in its core telecom business, improved cost structure, realigned Group's company portfolio, implementing strong corporate enhancement efforts. As a result, since Q3 we are seeing visible recovery in both growth potential and profitability.

First, in the wireless segment, subscriber growth continued, underpinned by KT's brand value and competitiveness in the distribution channel. ARPU growth also expanded, solidifying the basis for turnaround in performance.

Broadband internet subscriber growth also strengthened with IPTV net addition coming in at 270,000 subscribers, its growth trajectory continuing. Also major subsidiaries such as BC Card, KT Rental, KT Skylife are showing meaningful growth and scale as leading companies in their respective markets.

On October 20, KT launched Olleh Giga Internet for the first time in the domestic market. Olleh Giga Internet provides 1 giga BPS speed, which is at most 10 times faster than broadband internet that supports 100 mega BPS commercialized back in 2006. This speed allows 4 gigabyte sized full HD movie or 1,000 music titles to be downloaded in just 33 seconds.

Moreover, we adopted a technology that eliminates interference between electrical wires, commercializing Olleh Giga Wire, enabling up to 300 mega BPS Giga services. So even users living in old apartments can benefit from Giga services without the need to replace the network loop on the premise.

In the future KT will bring forward a paradigm shift in telecom through different array of giga services such as Olleh Giga WiFi, Olleh Giga UHD, etc. Along the way we will create new growth engines, taking a step further than a mere network upgrade in order to facilitate development of the ICT industry.

Market recently is undergoing a transition into a new framework of competition since the implementation of the Handset Distribution Act. Although initially there were some controversies, I believe that was just the market getting used to the new paradigm of competition. And soon we expect the market, consumers and operators will all find a new balance.

KT is doing all it can to make sure the framework brought on by the Handset Distribution Act takes firm root in the market. We try to alleviate market jitters during the initial implementation phase and expand on practical benefits for customers. Accordingly, we launched [Net] pay plan which provides lifelong tariff discount without any attached penalties. Also, wideband safe unlimited reduces data usage charge, an unlimited data plan for youngsters, was also launched. Also we are working together with manufacturers to reduce list price of handsets and expand on the membership point usage, implementing measures to improve on service quality.

In the future, in the spirit of Handset Distribution Act, KT will refrain from value destructive subsidy competition, improve customer service, strengthen network quality, launch diverse products to meet consumer needs in order to work towards a service-based competition.

KT will further strengthen its corporate improvement initiatives and, based on regained telecom competitiveness, solidify sound profit foundation and make necessary preparations to secure a leadership in the field of ICT convergence services. Through such efforts we wish to win back unwavering cost from shareholders, investors and customers and continue to enhance corporate value.

With that, I will move on to business results for Q3 2014. Q3 2014 operating revenue increased 3.9% year on year to KRW5,955.6b driven by growth in wireless and media revenue. Operating profit increased 8.9% year on year to KRW335.1b on stabilized market and lower labor expenses. Net income declined 45.7% year on year to KRW74b, with EBITDA recording 7.2% year-on-year growth, coming in at KRW1,280.3b.

Moving on to next page, we will look at highlights from subsidiary performance. For BC Card, with a growth in purchase volume on credit and check card, revenue increased 9.2% and operating profit 83% year over year. KT Skylife revenue increased 8.5% year on year on subscriber growth, but with one-off expenses operating profit declined 67.4% year on year. KT Rental revenue increased 19.5% year on year on growth in auto rental business and operating profit recorded a growth of 19.2% respectively.

Next is highlights on the Company's financial position. As of end of Q3 debt-to-equity ratio was 186.1%, falling 2.3 percentage points QOQ. Net debt came in at KRW10,887.4b, rising 0.8% QOQ. Net debt to equity ratio stands at 91.3%.

Next is on capital expenditure. CapEx for the quarter stands at KRW584.9b, with this year's cumulative figure coming in at KRW1.5 trillion. By the year-end we will use the remainder within the CapEx guidance of KRW2.7 trillion.

Next is on performance highlights from each business segment. Wireless revenue edged up 11.6% year on year to KRW1,912.7b on inflow of higher-quality subscribers which led to ARPU increases. Q3 net addition was 410,000 subscribers, with LTE subscriber figure at 10,250,000, expanding to 59.6% against the total base. ARPU came in at KRW34,829, growing 3.6% QOQ and 11.2% year on year respectively.

Next is on the fixed line business. Fixed line revenue fell 6.2% year on year, recording KRW1,371.4b. Fixed line erosion continued, but there is a sustained growth in broadband subscriber base.

Next is media and content business. Media and content revenue increased 12.8% year on year to KRW396.1b. KT IPTV reached 5.63m subscribers, with 270,000 net additions in Q3, sustaining its robust leadership in the pay TV market.

Next is on financial/rental and other services revenue. Financial/rental revenue increased 9.8% year on year to KRW1,072.9b driven by higher growth from BC Card and KT Rental. Other services revenue fell 12.4% year on year to KRW377.5b on lower revenues from IT solutions and real estate.

Finally, I will talk about operating expenses. Operating expense increased 3.6% year on year, coming in at KRW5,620.5b. Labor costs declined 21.8% year on year driven by the ERP effect. Depreciation increased 6.6% year on year on increases from depreciation costs on spectrum. Marketing expense fell 9.9% QOQ, with stabilized competition in the market.

This brings me to the end of the earnings presentation for Q3 2014. Thank you.

For more details please refer to the materials that we circulated. From now on we will take questions.

(Interpreted). (Operator Instructions). Hue Jae Kim, Daishin Securities

(Interpreted). Last week Chairman Hwang has mentioned by the end of this year that KT might announce a potential reshuffling plans related to your subsidiary, including KT Rental and KT Capital, what specifically, what are your preparations regarding your subsidiaries?

Second question is, with the launch of the Giga Internet, I understand that in just 10 days you were able to garner more than 10,000 subscribers. Your basic rate has been increased. But in terms of adoption of pay-as-you-go tariff system or premium services that guarantees a certain level of quality of service, can you explain as to what your business model that you're envisioning with regards to your Giga Internet business?

(Interpreted). Yes, as you would know, we are currently in the process of the sell-off for KT Rental and KT Capital, and if there are any items that require disclosure, when that time comes we will communicate with the market. But all I can say at this point is that this sales process is currently ongoing.

With regards to KT Sidus FNH, the sell-off has already been complete, and as you know, many of our group of companies are undergoing certain reshuffling or readjustment in terms of company portfolios as I've mentioned during my presentation. And also we have completed the merger between KT Cloudware and KTCS.

And, as I've mentioned previously, in order to further strengthen our ICT competitiveness and capabilities, we will continue to make readjustments in the Company portfolio. And once we have any specific matters that we believe -- once we have any specifics, we will make sure that we do communicate that with the market.

Yes, relating to your second question about Giga Internet, with the launch of KT's Giga Internet, we had simplified our broadband product lineup and we have actually readjusted and made it more simpler. Our plan is to have 100 mega plain-vanilla type of a product and also Giga product which is more of a premium product.

Basically for our Giga Internet product we will be targeting subscribers who would use big-sized contents like the UHD content and people who require big-sized content real-time transmission. So we will be tapping against that subscriber segment. Through such efforts we believe that we could lay the foundation for a growth trend in the ARPU for the broadband business and also grow our total subscriber base as well as our top line. Also based on such Giga infrastructure that KT has we will make sure that we retain leadership in the ICT converged services market and be at the very forefront of this business.

(Interpreted). Jong In Yang, Korea Investment Securities.

(Interpreted). My first question has to do with your mobile ARPU. On a QOQ basis it recorded a growth of 3.6%. I think that it, this figure, is one of your very highest QOQ ARPU growth figure. So could you provide the reason as to why there was such a significant increase?

And also at the same time can you give us a projection with regards to ARPU growth for this year as well as next year?

Second question has to do with the iPhone launch. What are your strategies to attract iPhone 6 subscribers and what are your strategy to protect your existing iPhone subscribers?

(Interpreted). The reason behind the increase in Q3 ARPU simply put is because we had seen a larger acquisition of new subscribers who were LTE-focused subscribers. And especially subscribers taking out LTE unlimited rate plans, the so-called high-quality subscribers, we've seen an increase on a QOQ basis, which had a positive impact on ARPU growth. For example, if you look at of the new subscribers, new LTE subscribers, the users who had taken out data unlimited plan in Q2 was 30% and in Q3 that increased to 40%.

Since the Handset Subsidy Act, in terms of its impact on the ARPU trend, we think that the rate of growth or the margin of growth of ARPU will slow. However, it will still be in upward trajectory. We continue to expect LTE, user migration into LTE, but we believe that the sales volume itself is going to decline in line with a more stable market. Now we believe that the rate of growth or the extent of growth will depend on percentage of people taking out high-end tariff plans and also the trend related to the strategic devices, strategic handsets like the iPhone and the Galaxy Note 4.

Now regarding your question about our strategies relating to iPhone 6, we have recently received pre-orders for iPhone 6 and, as you know, it was received quite well by the potential users. Now KT has the biggest user base for iPhone and we have the experience of selling the iPhone for the longest and also the biggest in terms of volume. And also through a variety of retention programs that we have developed, we will retain existing iPhone subscribers and also provide differentiated services that only KT can provide.

To cite a couple of examples, we have allowed the use of membership mileage points and use that points to pay the installment payment on the handset price. We've also launched an insurance product that not only covers against physical damage on the handset, but also even if there is a simple problem of malfunctioning button that will also be covered through this insurance. And it's not only that. We at KT, we are the one that has the most adequate and optimal network that supports the iPhone through our wideband LTE network as well as our Giga WiFi support.

(Interpreted). Hong Sik Kim, Hana Daetoo Securities.

(Interpreted). I have two questions relating to distribution strategy. First, since the adoption of the Handset Subsidy Act, a lot of people are wondering where your distribution focus will lie. Would it be on your direct channel or large outlets, or on online distribution channels? Could you provide some color on this aspect?

Second question, National Assembly of the ruling party, Mr. [Kang Hee Chang], is said to soon table a bill regarding the self-purchase of handsets by the users. If that gets adopted and if it gets enacted, what effect will it have on KT? Will it be positive or negative? And, depending on your answer, why would you think so?

(Interpreted). In terms of the channel strategy that we will implement with the Handset Subsidy Act implementation, our position is that rather than selecting one channel over the other, we will be agile in responding to the market as we observe and see how the market reacts. So currently our approach is that after the enactment of the Handset Subsidy Act, we will respond very proactively to the changes that we identify in the market. We will expand on our core direct channel and our dealer channel, and also increase the amount of handling from our sales outlets and also focus on massive scale or large-scale sales distribution points in core commercial zones.

On the online channel side we have recently conducted a total renewal on our Olleh shop, our online shopping mall, in order to provide better service to our customer as well as the distributor. For instance, we are allowing price comparisons of different dealer shops and also there is a customer management system in place. And you can also look at the bundled price simulation. So we are providing a very differentiated service in order to gain trust from our users on this -- through this online shop.

Now once this soft purchase system is allowed I believe that it will accompany many different issues and many different changes -- excuse me, it will accompany many different changes. Therefore, I believe that it is very important beforehand to engage in discussions and also to share different feedback and ideas and opinions. And so this whole process of adoption should be prudent. So at this point it would be difficult to say one way or the other regarding KT's position since this bill has not yet been tabled. But even if this bill does get tabled I believe that it will be quite necessary to engage in discussions, extensive discussions.

(Interpreted). [Sam In Jung], UBS.

Hi. Thank you for the opportunity. This is Josh Bae from UBS. I have two questions. First, on the dividends, I think you mentioned on the last call that it may be difficult to pay a 2014 year-end dividend, but looking into 2015 I think the sale of KT Rental and KT Capital should help your balance sheet so I'm wondering how this would help your dividend outlook for 2015.

Second is on the fourth-quarter earnings outlook. In the past the fourth quarter earnings have been difficult to forecast, with some seasonally higher costs at the year-end. Just looking at fourth quarter this year, considering the seasonality and also the fact that the handset subsidy legislation has been introduced from fourth quarter this year, if you could share with us your thoughts on the earnings outlook for this quarter, that would be helpful. Thank you.

(Interpreted). Now responding to your first question about dividend, once KT Rental and Capital sales process is complete, we do expect that the financial position of the Company will become quite sound. Now looking out into year 2015 and beyond for our dividend policy, we will consider our mid- to long-term business plan and also make certain forecasts on our financial position going forward and consult with the members of our BoD to come to a final decision. And so once we decide on the specifics we will communicate with the market.

Relating to your question about Q4 earnings, yes, in Q4 we need to consider some seasonal factors and so we believe compared to Q3 profitability will be slightly lower.

Yes, hi. Just to follow up on the first question, is there a mid- to long-term balance sheet target or a gearing target that you could share with us?

(Interpreted). If we sell off our assets, yes, our financial position and balance sheet would see a significant improvement. However if you look at KT on a standalone basis, because there is a significant level of borrowing, so leverage that we had incurred because of the high level of [ERP] we've implemented, it will be quite difficult to lower that leverage level in a very short period of time.

I believe the key for us is to what extent we can control net debt to EBITDA ratio based on our efforts, aggressive efforts in improving our financial structure as well as improvement of profitability and cash flow. So I think it's a bit too early for us to say and fix the official target, but my personal view is this, it would be nice for us to be at the level that is commensurate to other global telco peers.

So continuing on with answering your second question, we are exerting efforts to try to mitigate the seasonal impact, but admittedly there are certain commission payouts as well as operational expenses that does occur in the last quarter of the year. But in terms of how the handset subsidy legislation is going to impact our cost, as you know, because the breadth of change that we are witnessing in the market environment is just too significant so it's not easy for us to make a clear forecast going forward. But if we continue to see the decline in the handset sales volume we believe that Q4 marketing expenses will be lower compared to the past.

(Interpreted). In Young Chung, Goldman Sachs.

(Interpreted). I have two questions. The first has to do with your Giga Internet. What do you see as a potential percentage of your broadband subscribers who could immediately take out this Giga Internet product? So I would like to understand what your calculation is.

And also within next year's CapEx guidance, how much percentage would Giga Internet account for?

Second question is your PSTN business. On a year-on-year basis your ARPU decline in the past was in the extent of about 9% to 12% but in Q3, according to my calculation, it was only 7%. Now is this a temporary phenomenon or is it due to, for instance, an introduction of your unlimited rate plans? Did it help to mitigate that speed of decline?

(Interpreted). Now in terms of the Giga Internet because this basically is a basic telecom service, meaning infrastructure-based service, it's difficult to provide an all-at-once nationwide service. But fortunately for KT about 48% of our customers basically can enjoy, 48% of our customers can enjoy the FTTH/R facilities and infrastructure to which Giga Internet can be provided immediately. So with the growth in those types of subscribers we will continue to expand on the coverage.

Especially we will focus first on apartment complexes where we see high density of demand. So that will be a priority. And in terms of other regular housing areas we will conduct maintenance type of a typical level of nominal investment and continue on with the replacement of the low-speed network -- low-speed facilities. So basically we will be using CapEx that usually is needed for the Internet loop upgrade and at the same time additionally spend on the Giga Internet related capital expenditures.

But for KT investments into FTTH/R has already progressed quite significantly so we do not foresee significant level of investment trend. So basically what I'm trying to hit home is that we will be able to absorb the need for CapEx expenditure within the CapEx guidance and minimize our CapEx burden.

Now for PSTN revenue on a Q3 cumulative basis there was about KRW260b decline on a year-on-year basis. So if you look at each of the quarters, in Q1 there was decline by KRW99.6b, Q2 KRW91.2b, Q3 KRW72.7b. So you are seeing, yes, a mitigation in the extent of decline. So this is an outcome that shows that the subscriber decline did slow, but whether this is a secular trend or not, it's a little too early to make that determination. So on a per annum basis, as according to our original guideline, it would be somewhere in the mid KRW300b.

(Interpreted). Sean Oh, Merrill Lynch.

(Interpreted). I have one question. You are in the process of selling off KT Rental and KT Capital. On a consolidated basis what are their respective interest-bearing debts? If you could provide figures on that, that would be helpful.

And also once these subsidiaries are all sold off, what would be the impact on your balance sheet and will it have any impact on your CapEx?

(Interpreted). As of end of Q3 Rental's and Capital's asset is KRW2.6 trillion and KRW2 trillion respectively. Debt is KRW1.8 trillion and KRW1.6 trillion respectively.

So if we were to sell off these two entities on a consolidated basis, it will have a downward effect, a reduction effect on the asset side by KRW4.6 trillion and on debt KRW3.4 trillion. Once again we are in the sales process. Currently the sales process is ongoing. So, as I said before, once we have any need for disclosures or communications we will do so.

(Interpreted). [Giana Soo], Morgan Stanley.

(Interpreted). Thank you. I have two questions. The first, for next year what do you think is the extent of decline from PSTN? What are your forecasts or guidance?

And secondly, after the adoption of Handset Subsidy Act what was your SAC level in the month of October?

(Interpreted). Once again, as I said before, the decline from the PSTN business has slowed, but in terms of specific figure and the amount it's quite difficult to say at this point. But we can provide a ballpark figure. We think that next year there will be declines of about 11% to 12%.

Now SAC after the legislation, the SAC level is similar to other previous normal periods.

(Interpreted). Dan Kong, Deutsche Bank.

(Interpreted). Yes, in terms of your CapEx, up to now you have spent KRW1.5 trillion. So against your guidance, which is KRW2.7 trillion, you still have KRW1 trillion to spend in Q4. So are you planning to do so and, if so, how?

Another follow-up question relating to your increases in ARPU, it seems like when we entered into September there seemed to be a very steep rise in number of subscribers. How was that possible? If you could elaborate on that point that would be helpful.

And also can you explain as to the reason behind the declines in your non-operating line items?

(Interpreted). Yes for CapEx in Q3 we have spent KRW585b so the running rate is at 56%. Usually in Q4 most of our executions are centered or focused in the fourth quarter. So, as I said before, our year-end guidance, which is KRW2.7 trillion, we will be spending the remainder of that guidance. So we will be within the KRW2.7 trillion.

Now Q3 in September there was a steep rise in number of subscribers. And that is attributable to our regaining of competitiveness in our channel, in our distribution channel based on our network quality. So compared to the past our efforts to improve on customer awareness has really improved both from a quality and quantitative perspective. And also in September other operators' operations were suspended so that really -- that helped us on our MNP figures, acquiring of MNP subscribers.

So, yes, in the third quarter our non-operating expense was quite significant. That is because of rise in FX rate, which led to FX translation, smaller amount of FX translation gain. And also there were one-off expenses. For instance, disposition loss on certain assets and also penalties that were levied, and also losses relating to the sale of AFS, available-for-sale securities. So there were a couple of one-off items. After one-off items losses from the disposition of asset and impairment losses, that's all in line with our effort to make improvements on our corporate business portfolio as well as to make our assets more sound.

(Interpreted). Currently there are no participants with questions.

(Interpreted). Now if there are no further questions we will end the Q&A session. Thank you very much for joining us today and for your interest as well as for many of your questions. This brings us to the close of Q3 2014 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.