KT Corp (KT) 2014 Q4 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 2014 fourth-quarter preliminary earnings results by KT. We would like to 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, and then Mr. Kwang-suk Shin, CFO, will present earnings results and entertain your questions.

(Interpreted) Good afternoon. I am Youngwoo Kim, IRO of KT. We will now begin Q4 2014 earnings presentation. Our call is being webcast via the company's website, and please refer to the presentation slides as we present the business results.

Please note that since Q1 of 2011, KT has been presenting consolidated numbers under the IFRS accounting standards. With that, let me invite our CFO, Kwang-suk Shin for his opening remarks and presentation on 2014 business results.

(Interpreted) Good afternoon, I am Kwang-suk Shin, CFO of KT. In 2014, the SKT sought to overcome difficulties towards improvement of corporate fundamentals, it focused on ruthless business innovation and set its vision and target of becoming the global number one KT and achieving of Gigatopia. For a bigger leap, we brought to work, the Company's cohesive spirit. As a result, KT was able to recover its core business performances, reaffirming our number one DNA that stood steadfast in times of crisis.

First of all, in the wireless business, subscriber growth continued on KT's strong brand value and stronger channel competitiveness. Also, by acquiring more high-value users, ARPU growth expanded, laying the basis that will expedite earnings turnaround. Especially the net pay plan introduced in time for the Handset Subsidy Act, is leading service competition by acquiring more than 1.2 users in just 70 days.

For the wireless business, after declaring the age of Gigatopia last May, we were the first to bring nationwide commercialization of giga internet in October. Since then, broadband subscriber net addition has been growing and IPTV recorded 890,000 net gains, sustaining a fast pace of growth. BC Card, KT Rental, KT Skylife and other major subsidiaries are also growing at scale as business leaders that spearhead the market.

Whilst 2014 was the year where laying the basis for a turnaround in growth and improvement in fundamentals was the key, in 2015, we will start to see profitability and performance based on that very foundation.

There are three key strategic directions for 2015. First, KT will strengthen competitiveness in its core business with differentiated product strategy befitting the new eng and customer first services, we will grow our wireless business. Based on the Giga Internet, we will also continue to hold on to our market leadership in the wireline business.

Secondly, KT will explore and foster telecom based converged giga service business such as next-generation media and IOT and bring forth visible results. By concentrating on areas where KT can maximize its ICT capabilities, we will open up an era of true Gigatopia.

Thirdly, following last year's efforts, we will continue rigorously to innovate our business management infrastructure. To become agile toward market changes, we are expanding employment and will continue to optimize corporate-wide and Group companies' business structure so as to bring improvements and profitability.

Through such efforts, in 2015, we will strive to achieve above KRW24 trillion in revenue and although it's difficult for us to communicate specific profit guidance because of uncertainties in operational environment, we plan to undertake activities with a focus on profit improvement. CapEx is planned at KRW2.7 trillion.

This year, we expect the Handset Subsidy Act will take root in the market as we move away from the transitional period and market accordingly will require a new competitive paradigm. Also, in the global environment, IOT needs are expanding fast, demanding us to respond quickly with our future businesses.

Based on regained competitiveness in the telecom business and unwavering corporate enhancement efforts, KT will lay the basis for solid performance and also secure leadership and ICT convergence services as our future growth engines.

In 2014, there was a temporary decline in profitability on the back of business-rationalization efforts to make a sounder financial position and adjustments in the Group's portfolio of companies. For this year, our efforts will start to bear visible outcome in profit and growth improvements.

Going forward, we will gain stronger trust from our shareholders, investors, and customers and continue to enhance corporate value. Now, I would move on to business results for 2014.

2014 operating revenue fell 1.6% year on year to KRW23,421.5b on declines in fixed line and merchandise revenue despite improvements in wireless, media and finance businesses. Due to one-off items such as the ERP expense in the first half of the year, operating profit recorded KRW291.8b in loss.

Net income posted KRW965.5b in loss, EBITDA is down 20.9% year over year coming in at KRW3,483.5b. Next is on highlights on subsidiary performances.

BC Card revenue went up 6.6% year on year driven by growth in purchase volumes on credit and text cards, and its operating profit rose 10.5%. On subscriber growth, KT Skylife revenue was up 4.1% year on year but operating profit fell 20.4% year on year due to one-off expense items.

On greater momentum in the rental market, KT Rental revenue increased 20.9% year on year. Operating profit rose 12.3%. Next is on the highlight fourth quarter the Company's financial position.

As of end of Q4, debt to equity ratio stood at 186.5%, up 0.4 percentage points Q-o-Q. Net debt was KRW10,885.8b similar to last quarter's figure with net debt to equity ratio recording 92.3%.

Next is on CapEx. 2014 CapEx came in at KRW2,514.1b shaving it down to around 93.1% of KRW2.7 trillion guidance we communicated at the beginning of the year. KRW900.5b was spent on wireless, KRW1,283.2b on fixed line and KRW330.4b spend on others.

Next is on the performance highlights of each business segment. In Korean, I said that the percentage was 91.3% but it actually is 93.1% against the guidance.

Wireless revenue edged up 4.8% year on year to KRW7,314.8b on ARPU growth driven by LTE subscriber expansion. In 2014, there was net addition of 870,000 against the total subscribers and in particular, LTE subs rose significantly to 10.81m, expanding the LTE proportion to 62.4%. Q4 ARPU was KRW35,283, up 9.7% year on year.

Next is on the wireline business. Wireline revenue recorded KRW5,538.3b, down 7.2% year on year. Although PSTN revenue erosion continued, broadband subscriber base continues to expand driven by positive responses from the giga internet subscribers.

Next is on media and content business. Media and content revenue came in at KRW1,508.2b, up 11.3% year on year. KT's IPTV achieved 5.86m subscribers through 890,000 net adds in 2014 alone. As such, we continued to solidify our leadership in the pay TV market.

Next is on the finance, rental and other services revenue. Finance/rental revenue increased 8.0% year on year to KRW4,169.7b on growth expansions from BC Card and KT Rental. Other services revenue declined 15.3% year on year to KRW1,430b on IT Solutions and real estate revenue decline.

This brings me to the end of 2014 earnings presentation. For more details, please refer to the materials we provided earlier. From now on, we will take questions.

(Interpreted) (Operator Instructions). Jong In Yang, Korea Investment & Securities.

(Interpreted) I would like to ask two questions, first, since the introduction of the Handset Subsidy Act, we briefly saw a reduction in the amount of subsidy provided, and now, we are seeing that it is starting to edge up slightly. And also, there has been a significant competition in the rebate aspect as well, so could you provide an overall picture as to what the current competitive landscape is? And also, can you share with us what your fourth quarter SAC number is and also what you forecast SAC to be for the first quarter and onwards.

Second question, has to do with the MVNO business, we recently have seen the market share of MVNOs increasing and some even forecast that the share will increase to above 10%. So when such expansion of MVNO service does materialize, what kind of an impact will it have on wireless players, especially on their topline? And since KT is providing MVNO service through its subsidiary, KTC, I would like to understand what your MVNO strategy is.

(Interpreted) Now, since the enforcement of the Handset Subsidy Act, the market participants are looking at various ways to maximize the benefit that goes back to the consumers and the users. Yes, there were some controversies over certain programs might be compensating for the residue value of used phones, and yes, there were some ups and downs and fluctuations in market competition.

But I believe that under the spearheading of the regulatory authority, the market participants as well as consumers will strike a right balance and equilibrium within the realm of the law itself. So we believe that gradually, the market will start to stabilize.

Especially, KT is going to stay away from disruptive competition in subsidies and leads the -- lead the effort towards market stabilization.

Now, Q4 SAC compared to the third quarter SAC, it increased a little more than 20% so therefore, despite the fact that the sales volume had declined quite significantly by 20%, selling-related expenses regarding the wireless had not fall as much.

Now in terms of the forecast for marketing expenses for 2015, well, since the adoption of the Handset Subsidy Act, aside from the subsidy aspect, there are certain changes in providing more -- different services and also, we see more increases in the number of handset replacement subscribers and there is also a move to reduce the list prices and players are attempting different service competition. So we would have to wait and see how the market environment evolves going forward.

Now, however, we believe that subsidy-related fiascos and overheating of competition for the MNO services will not take place and the market is going to become more stable and we will be able to see less of a volatility in terms of marketing spend going forward.

Now, the MVNO market is mostly for the low-end ARPU customer so it is distinctly different from the market that MNO targets.

MVNO players also at the end of the day, they make use of the KT network and they pay the telco, and that translates into profit for KT. So if the KT-affiliated MVNO players are able to attract subscribers from other companies, then this is a great -- a good way for KT to maximize the utilization of the network that it owns.

Now, MVNO is a market that currently is being promoted at the national level, and KT is going to make sure that it responds to the market in an agile and flexible manner so that it does not lose its leadership.

(Interpreted) Hong-sik Kim, Hana Daetoo Securities

(Interpreted) I would like to ask two questions. 2014 actually, for KT shareholders, was an unhappy year for us since the equity price did not rise and we weren't able to receive any dividend. And so -- but this year, KT Rental and KT Capital sales process is bound to come to a closing and we expect the net debt to decline. So for this year, can we expect and hope for dividend payout and some increases in your share prices?

The second question is that in the fourth quarter, there seems to be quite significant one-off expense items, do we have to look forward to or do we have -- should we be prepared for a similar level of one-off expenses for this year and can we also expect some improvements in your operating profit?

(Interpreted) KT since last year, have been exerting its efforts to turnaround its telco business to improve on its business structure and also to maximize efficiencies in the expenses aspect. And accordingly, we had a significant amount of ERP-related costs and also, we sold certain invested securities which led to quite a bit of loss.

But in 2015, based on that restructuring that was undertaken last year, we believe that we will be able to lay a firm basis for improvement in profitability. Although we are not communicating a specific profit target, we do understand that showing you the actual outcome of such improvement is what is most important. So the Company -- the overall company is going to be exerting its outmost efforts to bring that outcome.

Now, the dividend payout policy for this year, we will reflect on the mid- to long-term dividend policy of the Company and also refer to the financial structure of the Company, the financial position of the Company and make a decision accordingly through the BOD.

In terms of the dividend for 2015, we will closely monitor the performance and the earnings and communicate to the market in a timely manner.

Now, in terms of the one-off expanses, KT's total asset amounts to about KRW33 trillion, and with the development of technology, there are certain assets whose efficiencies will lag behind, so in terms of improving on the financial structure -- in order to improve on the soundness of the financial structure, we are doing away with such assets.

And I understand that much of those low-efficiency assets have already been dealt with over the period of 2013 and 2014, so in 2015, we expect the size of such assets to reduce quite significantly.

So in a nutshell, if I were to elaborate and if you look at the Q4 numbers, in the process of improving on our corporate structures and conducting the restructuring, there were inevitable one-off expenses and also some seasonality factors that impacted the numbers.

But this year, we expect the outcome of such restructuring to become more visible and therefore, we will be able to reduce the basic cost base and also we will minimize on the seasonality aspect so we can expect for a better profitability.

(Interpreted) Moon Jee-hyun, KDB Daewoo Securities.

(Interpreted) I would like to pose two questions. Can you please explain as to what your strategic direction is for this year, especially comparing that to last year, how would it change for this year? I ask this question since recently the Company has further strengthened its future convergence business unit. So it will be helpful if you could shed some more light on this aspect.

Second question has to do with your media business. Since KT has the biggest number of pay TV subscribers, in light of the changing regulatory environment, and also we hear that Netflix is going to launch into Korea, which could trigger the increases in OTT, how would you paint the picture for your media business going forward?

(Interpreted) As was already released via the press, our CEO has mentioned that last year was a year where we make the adequate preparations, and this year will be the year where we will start to reap outcome from that preparation.

For the past year, KT has set a future vision for itself and did its utmost to make sure that its telecom business becomes a growing -- growth business. And based on such efforts, we have -- we are focusing on future convergence businesses and global businesses, and in these two arenas, starting this year, we will be able to see some benefits.

To be a little more specific, KT has selected five convergence business and service areas. First, being the smart energy; number two, integrated security; third being next-generation media; fourth, healthcare; and fifth, intelligent transportation system.

Now we made certain changes in the organization to enhance our implementation capabilities and also to improve on the efficiencies. We've also exerted efforts to explore new business opportunities and to foster those opportunities.

We have actually entered into an alliance or partnership with KEPCO in order to discover new business models, and also we are focusing our efforts to bring more benefit from such new initiatives.

So starting this year, we will be able to see some visible outcomes in core businesses, including the IoT and the energy business.

Now from a mid- to long-term perspective, in terms of the core areas such as Giga IoT and smart energy, based on their revenue growth, we are looking at moving from about KRW300b of revenue in 2014 to growing to about KRW2 trillion by 2017.

Now unlike the telecom service business where the growth is currently stagnant, if you look at the media content business, it is still growing and it's going to become an important cash cow for KT.

The telecom business as well as media content business is similar in that service is provided to the customers based on the network. And recently, with more number of bundled products and bundled services, we see positive synergy taking place between the two segments. Now basically if you look at the strategy for KT's media business, the focus and the core is strengthening of its platform.

Basically within KT, we have multiple number of media platforms, ranging from IPTV platform to satellite, mobile, etc. And by using the access that we have to our subscriber base, we can make use of platform to attract as many subscribers as possible and also generate added value -- value-added revenues.

Within the Company, we are providing T-commerce and mobile adds as well, so, various different types of value-added services are currently being provided. And based on competitiveness in these platforms, we will continue to strive to gain growth. So in this aspect, we will continue to closely collaborate and cooperate with companies like KT SkyLife, KTH, KT Music, and [Noise Media], in order to maximize synergies.

(Interpreted) Sam Min, Morgan Stanley.

Yes, hi. My first question is on telephony. It appears that the telephony revenue eroded round KRW373b in 2014. Was wondering if you have any guidance or outlook on the amount of erosion for 2015.

My second question is the disparity between your consolidated operating income versus your parent separate operating income. The disparity is less than KRW20b, but you've pointed out that your three subsidiaries' OP are quite bigger than that disparity. So, can you point out which subsidiaries that are not included in your parent are making these losses, and whether they're one-time or potentially sustainable losses? Thank you.

(Interpreted) First, regarding to your question on the telephony business, 2014 telephony revenue recorded KRW2.6 trillion. To compare to 2013, this is a decline by about KRW356.4b. And also in Q4 there was an adjustment in the interconnection fee related item, bringing down the figure on a Q-o-Q basis by KRW92.8b. But if that interconnection aspect is taken out of the picture, then the decline is KRW76b on a Q-o-Q basis.

Now the outlook for 2015, because of the continuous replacement and migration from the fixed to the wireless, there's going to be continuous decline in the ARPU figure as well as revenues being incurred by -- from the users and the subscribers. But by providing a bundled flat rate tariff plan, we're going to do our best to minimize the impact.

We expect that the total -- or the gross revenue is going to decline by about 11% or 12%. Compared to KRW2.6 trillion of 2014, we expect the 2015 figure to be around KRW2.3 trillion.

For the contributions on the operating profit by the subsidiaries, in Q3 that amount was KRW137.1b, but in Q4 it declined to KRW17.6b, which is a decline by KRW119.5b. So on the subsidiary level, there was a one-off impact of around KRW94b.

If you look at BC Card, due to the early retirement program and the settlement on the fees and commissions, there was a one-off impact of -- amounting to KRW18.7b, and also there was a yearend seasonal marketing expenses that were incurred, pushing down the OP by about KRW47b.

For KTDS and KT Estate, due to the ERP, there was a KRW28b related labor cost that got reflected on its balance sheet. So, Q4, these subsidiaries had turned into losses.

Once again I would like to reiterate that this year we will see visible outcome from such restructuring efforts. We will be able to save on the costs and minimize on the seasonality impact, thereby contributing to improvement on profit.

This year, for -- in terms of subsidiary contribution, we are expecting above KRW500b.

(Interpreted). Dan Kong, Deutsche Bank.

(Interpreted). Since I understand you did not give an ARPU guidance, can you please share with us what your ARPU projection is, and how are you going to drive that ARPU growth?

Secondly, can you please give us an update as to how the KT Rental and KT Capital sales process is ongoing at this point? And also, do you have any additional restructuring plans for your subsidiaries? For instance, like additional ERP at the subsidiary level?

(Interpreted) I would like to talk about the ARPU forecast for 2015. Currently if you were to compare it to 2014, we expect the ARPU growth to decelerate because of the -- in terms of the -- in terms of the growth rate in the LTE penetration, it is slowing, and the overall sales amount is also slowing. However, considering the -- on an absolute basis, considering the fact that the LTE penetration is relatively low and we are seeing increases in the data usage, we expect the ARPU growth to continue.

Now as the sales volume started to normalize, the unlimited tariff plan, which in the past plummeted, are showing signs of rebound. So, compared to 2014, we expect for 2015 that the ARPU growth will post slightly higher than 4%.

For KT Rental and KT Capital, on the 27th and 28th, the main bidding process had started, and currently things are under review.

Now in terms of the upcoming schedule, the sales amount or more specific aspects, please do understand that it will be difficult for me at this point in time to share with you any additional information. But when the time comes, we will communicate these details with the market. And the proceeds from the sales is first going to be used to improve on the financial position.

Since last year we've embarked on the restructuring of our Group of Companies, the subsidiaries. And in order to further focus and concentrate our ICT capabilities, we have been reshuffling the overall company portfolio.

So if you look at number of our subsidiaries, as end of 2013, it stood at 56. As of December of 2014, it reduced to 51. And once all the other current restructuring process is completed, we expect the number to further decline.

Also going forward, in light of the capabilities and competencies of each of the subsidiaries, their financial position and their contribution to the ICT synergy, we may decide to either, sell, liquidate or enter into alliances by investment via -- through the stakeholdings. So we will continue to reshuffle and organize the business portfolio. However, the size of such deals is going to be smaller compared to 2014.

(Interpreted) Sean Oh, Merrill Lynch.

(Interpreted) I would like to ask two questions. First, can you share with us an outlook for your subscriber number and your LTE penetration?

Second question, every quarter KT has announced all of these one-off expenses. I would like to understand if the new CEO has any plans to look into the details and conduct audit or look at the specifics of these numbers, and come up with plans or ways to make sure that such one-offs don't occur going forward.

(Interpreted) Now in terms of the subscriber forecast for 2015, for the MNO market, the market has already reached somewhat of a saturation point. So it will not be easy to increase the number. So, rather than going aggressively at expanding the market share, we will focus on maintaining the current level of market and also maintaining the current level of net gain trend.

And not only the MNP subscribers, but recently it's become very important to retain the handset replacement or handset upgrade subscribers, so we will focus on retention of long-term customers as well.

Now LTE penetration is continuously trending up. And considering the fact that the LTE handset sales account for 85% of the MNO market, we believe that the LTE penetration will move from 67% at the end of 2014 to 75% in end of 2015, to around 90%, from a mid to long-term horizon.

Yes, it is true that there's been a significant incurrence of seasonal as well as one-off expenses on a quarterly basis. But we at KT have been exerting continuous efforts to minimize this impact. And these expenses were the inevitable expenses that were generated in the past, as we had attempted on various different businesses.

But as we went through 2013 and 2014, a lot of these businesses and a lot of these companies were dealt with. So, going forward, you can expect significant reduction of these one-off factors.

(Interpreted) Sam Min, Morgan Stanley.

Thank you for taking my second question. I was wondering if you can share with us what your core operating income would have been in the year 2014 had you -- if all the one-offs were normalized. And when you said for this year that you will be limiting these one-offs, if you can quantify perhaps what percentage of that could impact core OP, we would appreciate it. Thank you.

(Interpreted) The Q4 one-off expense is KRW88b, seasonality expense if KRW87b. So the operating profit, in consideration of these one-offs, will be around the level of Q3 of 2014.

Now having said that, the seasonal factor could also be incurred this year as well, but once again we're going to do our best to minimize the seasonal expenses. On a consolidated basis, we expect in excess of KRW500b of subsidiary contributions.

(Interpreted) Chung In Young, Goldman Sachs.

(Interpreted) I have two questions. You shared with us your ARPU target of 4.5%, which I think is quite conservative compared to what your competitor has communicated. So I would like to understand the basis for that projection that you've made.

And secondly, in the fourth quarter there seem to be quite a bit of an expenses that were incurred on the non-operating side. Could you give us the breakdown?

(Interpreted) As I previously said that our ARPU target for 2015 will be above 4%, but please be mindful that this 4% is at its minimum.

Now coming back to the seasonality factor, once again KT, in the process of restructuring its overall corporate portfolio, we had focused on improving on the soundness of the financial position and improving on the Group of companies' portfolio. And in that process, inevitably, there were certain losses that were incurred.

To be a little more specific, in order to make our financial position more sound, there's been certain asset disposition and impairment loss related to the base ground stations and certain networks amounting to about KRW130b. And also there were impairments and losses from the disposition related to the invested assets that were undertaken in order to improve on the Group portfolio, amounting to KRW90b.

Of recent, we are making our CapEx spending more efficient and reducing on the size of the CapEx. So, going forward you can expect these impacts to reduce.

(Spoken in Korean)

(Interpreted) Currently there are no participants with questions.

(Interpreted) If there are no further questions, we will end the Q&A session. Once again, thank you for joining us today. This brings us to the end of Q4 2014 earnings conference call for KT. Thank you very much.