KT Corp (KT) 2015 Q1 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 2015 first quarter preliminary earning results by KT. We would like to have welcoming remarks from Mr. Youngwoo Kim KT, IRO. And then Mr. Gwang-Seok Shin, CFO will present earnings results and entertain your questions.

This conference will start with a presentation followed by a Q&A session. (Operator Instructions)

Now we would like to turn the conference over to Mr. YoungwooKim, IRO of KT. We will now begin Q1 2015 earnings presentation. Our call is being webcasted via the Company's website and please refer to the presentation slides as we presented this quarter's business results.

(Interpreted) 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, Gwang-Seok Shin, for his opening remarks and presentation on Q1 2015 business results.

(Interpreted) Good afternoon. I am Gwang-Seok Shin, CFO of KT. As an outcome of our efforts to enhance competitiveness of our telco business and due to corporate restructuring endeavors over the last year, in the first quarter, we have seen visible improvements in both growth and profitability.

(Interpreted) For the wireless business, growth momentum is continuing on reinforced brand value and channel competitiveness and growing LTE subscriber base. KT therefore is focusing on market stabilization and improving customer services.

(Interpreted) In terms of the fixed line and media business, through a series of innovative product launches, such as the GIGA Internet, followed by GIGA WiFi home, net addition trend in broadband Internet continues with IPTV subscribers surpassing the 6 million mark, displaying a robust upward trajectory.

(Interpreted) Recently the media industry is facing a new competitive framework, for example, like the [talks on] Pay TV market share regulations. Under this new environment, KT would lead a change in paradigm in order to establish a positively reinforcing cycle for the telecom industry.

(Interpreted) Rather than simply going at increasing the subscriber numbers for telecom, IPTV and other B2C markets, we will enhance subscriber quality, bring service improvements and develop new services, so as to grow the entire pie and focus on solidifying fundamental competitiveness.

(Interpreted) KT wishes to bring complete differentiation against our peers and we believe gaining an upper hand in 5G and spreading GiGA infrastructure is key to becoming global number one and are therefore focusing our corporate-wide efforts to lay the basis for such a leap.

(Interpreted) We are also solidifying our future growth engines on top of KT strong GiGA infrastructure. We laid the basis for a battery recharging business for electric vehicles in the smart energy segment and are seeing visible outcomes and forming business alliances with number one players in the financial, transportation and retail industries in relation to IoT opportunities.

(Interpreted) As mentioned in the beginning, we've started to see certain results in Q1 as preparations and plans developed last year came under full implementation.

(Interpreted) Results in terms of market stabilization and cost savings are starting to emerge and eventually we wish to attain complete competitive edge in core businesses, trigger new business growth and differentiate our technology and services.

(Interpreted) Also, KT is committed to enhancing corporate value and we'll continue to win trust from our shareholders investors and customers. With that I will now move on to Q1 2015 business results.

(Interpreted) Before going into the detailed business results, let me first outline some changes in the financial statements arising from the sale of KT rental. kT rental sales agreement was executed in Q1 of this year. As a result, P&L of KT rental is presented as P&L from discontinued operations, applied retroactively from 2014. For your reference, assets and liabilities of KT rental are reclassified under the other current assets and liabilities in the line items of assets and liabilities held for sale.

(Interpreted) Q1 2015 operating revenue was down 3.7% year-on-year to KRW5,436.4 billion, on declines in fixed line and merchandise revenue. Service revenue was up 1.2% year-over-year on positive revenue stream from all businesses, except for the fixed line business.

(Interpreted) Operating profit was up 135.3% year-on-year, coming in at KRW 320.9 billion, driven by stable markets and lower labor costs arising from ERP of last year.

(Interpreted) Net income came in at KRW280.6 billion on higher operating profit and valuation gains and derivatives related to KT rental sales. EBITDA was up 20.3% year-on-year to KRW1,162.7 billion. Next is on performance from each of the key subsidiaries.

(Interpreted) But before I go into the details on our key subsidiaries, let me first talk about our statement on our financial position. Debt-to-equity ratio as of Q1 end recorded 187.5%, up 1.0 percentage points on a QoQ basis. Net debt ratio, excluding net debt of KT rental is 77.7%. Next is on CapEx.

(Interpreted) Q1 2015 CapEx recorded KRW355.7 billion, and by the end of this year, we plan to spend the remainder of CapEx guidance of KRW2.7 trillion. Next is on performances of each business unit.

(Interpreted) In terms of the wireless revenue, despite declines in interconnect and other wireless revenues, driven by growth in LTE subscribers and ARPU, service revenue was up 2.2% year-on-year to KRW1,822.3 billion.

(Interpreted) In Q1, there was a net addition of 170,000 subscribers with LTE subs growing by a large margin to 11.43 million with LTE portion expanding from 62.4% end of last year to 65.3%. Q1 ARPU recorded KRW34,389, up 4.5% year-over-year. Next is on the fixed line business.

(Interpreted) Fixed line revenue was down 8.1% year-on-year to KRW1,305 billion. Fixed line revenue continued to trend down and despite growth in broadband subscribers, broadband revenue declined year-on-year on increased benefits from bundling.

(Interpreted) Currently, we are seeing sustained growth in broadband subscribers driven by positive responses from GiGA Internet and GiGA Wi-FI subscribers and we expect improvements on future revenue stream as well. Next is on media and content business.

(Interpreted) Media and content revenue was up 3.8% year-on-year to KRW383.8 billion. KT's IPTV in Q1 saw 180,000 net additions, reaching 6.04 million subscribers, writing a new chapter in the history of Pay TV market. Next is on the financials and other services.

(Interpreted) Financial revenue was up 1.2% year-on-year to KRW829.4 billion, on higher revenues from BC Card. Other Services revenue was up 35.7% year-on-year to KRW410.7 billion, with the inclusion of KTIS and KTCS in the consolidated statements and increased revenue from IT and solutions. This brings me to the end of Q1 2015 earnings presentation.

(Interpreted) For more details, please refer to the materials we provided earlier. From now on we will entertain questions.

(Interpreted) (Operator Instructions) (Interpreted) The first question will be provided by Hoe Jae Kim from Daishin Securities. And the next question will be provided by Jong In Yang from Korea investment & Securities. Mr. Kim, please go ahead sir.

(Interpreted) I would like to ask two questions relating to your business strategy. First question has to do with your media business. In terms of the GIGA Internet and your UHD services, do you have a subscriber or a revenue target that you can share with us? It will be helpful if you could paint the overall roadmap in terms of the media business. And also would like to understand what your media strategy is going to be since you have merged back the media function from your subsidiary. And also Skylife will start to provide you UHD-related services. I would like to understand that in the era of UHD broadcasting, what role would Skylife play and would there be a higher level of cooperation and collaboration with KT.

Second question has to do with your wireless business. You have mentioned in your presentation that your vision is to lead the 5G trend. Admittedly you were quite late in the 4G implementation compared to your competitors and your peers and because of that you had to suffer some of the subscribers leaving you. So would like to understand what preparations you're making in order to lead the 5G trend?

(Interpreted) Now the merging back of media hub was conducted with a view to improve efficiencies in the IPTV business. It does not bring about any fundamental changes with regards to our media business strategy.

(Interpreted) Within the KT Group, our media strategy is that we want to strengthen our platform business. As you know, we have our IPTV, satellite and mobile platform and by making use of such variety media platforms and also by utilizing the accessibility that we have against our subscriber end user base, we wish to further enhance attraction or acquisition of subscribers and also bring about additional opportunities to generate additional value added revenue.

(Interpreted) Within our Group, we are currently providing value-added services such as T-commerce and mobile advertisement. And based on the platform competitiveness that KT has, we wish to continue to pursue growth in these media segments. Now having said that, if you look at the subscriber base on an IPTV standalone basis, we have 6 million and within the Group, we have total of 8 million subscribers. So going forward, we are going to focus on improving or enhancing the quality of our subscribers.

(Interpreted) In terms of the potential collaboration that we might have with Skylife, basically our basic principle in providing the OTV and OTS services, depending on the preference of the customers, stays the same. We are still holding to that principle. But we do admit that OTS sales -- the sale of OTS product has recently been quite slow and within the KT Group, we want to make a balance amongst different media platforms. And so, we do believe that there is need to recover the balance that exists between the two products.

(Interpreted) In line with our strategy to expand the subscribers who take up the high-end pricing plan and also we are strengthening various different promotions on the UHD product and UHD set-top is newly launched and I believe under this circumstances, we believe that there will be higher level of consumer preference on the channels that OTS products provide. And also, in terms of the sales, there will be further strengthening of collaboration between KT and Skylife. We will also strengthen our sales activities against the collective housing complexes, in line with the penetration or the provision of the GiGA Internet services. And with those initiatives, we believe that OTS sales will be further facilitated.

(Interpreted) Now relating to your question about our 5G strategy, as of this point, the standardization on the technology has not yet been finalized and the market consensus is that 5G will start to be commercialized by around year 2020. Having said that, PyeongChang Olympics is going to be hosted in Korea in 2018 and KT will participate as an official sponsor from the telco industry and we will make use of the Olympics as an important opportunity for us to showcase KT's 5G and KT's other ICT systems. (Interpreted) Now 5G network is an integrated network that brings the access and the core aspect together, and because the connection is based off of the wireless access infrastructure investment, it requires wideband fixed line infrastructure. So in this regard, KT considering its network competitiveness and efficiencies and investment has a more advantageous position compared to our industry peers. And by making use of such competitive edge that KT has in the integrated network of fixed and wireless infrastructure, KT plans to lead the 5G generation, and in order to attain that we have plans to utilize our capabilities and competitive edge to its maximum.

(Interpreted) Now 5G is not a simple advancement in terms of technology, based on the network. Basically it's heralding a new era where all different things are connected via the network, the so-called the Internet of Things generation will come. And with the IoT era, basically it will fundamentally change our lifestyles and there will be an impetus that really opens up a new chapter. And by making use of the 5G technology, we would bring in totally new services, which was unimaginable in the past and we will lead that trend.

(Interpreted) The next question will be presented by Jong In Yang from Korea Investment & Securities and the following question was presented by Josh Bae from UBS. Mr. Yang, please go ahead sir.

(Interpreted) I would like to pose two questions. The first question is, on April 24, government actually increased the limit on the tariff discount that one can get instead of the subsidies up to 20% and obviously that will have impact on your ARPU. So you've shared with us your first quarter ARPU numbers. What will the impact be on your ARPU going forward and in year 2014, you found the ARPU growth was around 4%. I would like to understand what your ARPU growth target will be in 2015 under these new circumstances? And in the month of March, government implemented certain regulations to curb the rebate-related situation. I would like to understand did that drive down the SAC number, the acquisition cost per subscriber?

(Interpreted) Now in terms of that increase in the tariff discount limit, it's only been recently that this new change was implemented. So we would have to wait and see what the impact is going to be, we would have to look at what the subscriber trend is going to be. And of course, basically, we need more time to look at how it plays out. From a short-term perspective, it will have impact on the ARPU and the marketing cost aspect, but we do need to have a higher level view. We have to also take into consideration the churn rate trends, as well as the subscriber trends. We have to look at it from a more structural perspective. (Interpreted) Compared to the previous quarter, temporarily we've seen a slight decline in ARPU. If you look at the ARPU for first quarter, it recorded KRW34,389. Now this is attributable to the fact that the subscribers who came in before fourth quarter of 2014, there has been a downgrading in the pricing plan, in the tariff plan that they chose. And also there were increased subsidy on the second-hand or the used-handset at the beginning of the year. And also we've seen increases in the adoption of mid to low end rate plans, because of the proportionate subsidy scheme that was applied. So as a result, on a QoQ basis, there was a slight ARPU decline.

(Interpreted) So, in the first quarter, the ARPU growth was quite stagnant, but that was temporary. On an year-end basis, we believe that we will be able to achieve in excess of 4% ARPU growth. And also, as data usage expands under the wideband [TEA] era and also with more people taking up high end pricing or tariff plans, we believe that ARPU would continue to rise. And also because of our various activities to improve our customer services, we believe that the retention rate of the rate plans will improve and just after the second quarter, we believe wireless ARPU growth to normalize.

(Interpreted) So in terms of the wireless marketing-related costs, in the fourth quarter, basically the disclosed subsidy amount slightly increased and in the fourth quarter, one of the key reasons why there were increases in wireless selling related expenses was due to the compensation that was given to the used phones and also the rebate into the channels. But those aspects declined. And so under our initiatives to further strengthen our service competitiveness, we are going to stay away from using circumventive subsidies that only aggravates instability in the market. We will focus more on providing direct benefits to our consumers, which we think is going to contribute to setting up a virtuous cycle in a transparent distribution structure.

(Interpreted) The next question will be presented by Josh Bae from UBS. And the following question will be presented by Hong-Sik Kim from Hana Daetoo Securities. Mr. Bae, please go ahead, sir.

I have two questions. First is on your wireless subscriber trend. Excluding the MVNO subscribers, KT recorded net loss of MNO subscribers since the introduction of the new handset subsidy legislation in October last year. But in March, KT returned to positive growth in MVNO subscribers. So, could you please walk us through why you think you were losing subscribers in the initial months, and also what has helped you turn to subscriber growth in March and also what trend we should expect in the future?

The second question is on your earnings outlook. If you could please share with us your expectation for the earnings outlook for the coming quarters? Looking at consensus forecast, the market is expecting about KRW1.1 trillion operating profit on a consolidated basis for this year. Looking at the first quarter results and considering fourth quarter is seasonally weaker, do you think that the consensus forecast is reasonable? Also looking beyond this year, what do you think will drive earnings increase from 2016? This year, the labor cost declined and the stable marketing costs are helping the earnings increase, so wondering what you view as drivers beyond this year? Thank you.

(Interpreted) Relating to your question on the subscribers, initially there were some overheating of competition in the competitive landscape. But we responded to that quite prudently. So admittedly, there were some declines in the subscriber acquisitions. But came February and after February we started to focus more on the service competitiveness aspect and therefore we were able to recover in terms of our subscriber trend. And even in the MNP market, our performance was quite weak up to that point in time, we were able to recover a steady net addition trend and I think that is the key testament to the fact that we are recovering our competitiveness.

(Interpreted) Currently the MNO subscriber market has already reached saturation, so it is not easy to increase the number of subscribers. Therefore, we're not going to implement a policy where we overly focus on short-term expansion of market share. We will keep to the current level of market share and continue to exert efforts to further upgrade or improve quality of our subscribers. And in the current situation, it is not just the mobile number portability, MNP market that's important, but also handset upgrade and replacement demand is quite important. So we're going to also focus on the retention of our long-term customers.

(Interpreted) We believe LTE penetration will continue to increase going forward and also currently, if you look at the MNO market, the LTE handset sales account for more than 85% of the total market. So if you were to consider that factor, we think that LTE penetration by end of 2014 was 67% and by end of 2015, it will move to 79% and eventually from mid to long-term perspective, it can go up to even 90%.

(Interpreted) You asked about our earnings outlook. Because the market is still quite uncertain and quite volatile, it's not easy to come up with an accurate earnings or the profitability -- earnings forecast for the future. But last year, we've implemented organizational restructuring and also focused on recovering our fundamental competitiveness. And this year, we therefore have seen some visible outcomes in terms of improvement in our earnings. So 1Q results are reflective of our past years' assets. We will continue to make our cost structure more efficient and also focus on the widest Internet aspects to further foster its growth and also to bring forward a stable stream of earnings.

(Interpreted) It is a bit too early to predict next year's outlook, but KT's management is committed to further strengthening its profitability and to identify new growth engines for the future. We will continue to focus on cost saving and also make efforts to grow our core business, our telecom business and also bring about a visible outcome in our new business initiatives. KT will also make utmost use of the assets that it has, for instance, like its real estate to further improve its profit base.

(Interpreted) The next question will be presented by Hong-Sik Kim from Hana Daetoo Securities. Mr. Kim, please go ahead, sir.

(Interpreted) You just mentioned that you will consider making use of your assets to generate profit. Does that mean that we can expect additional sales of the assets that KT owns? And secondly, on an [HQ] KT basis, your operating profit recorded was KRW210 billion, which is quite desirable and also your competitors are strengthening their shareholder return policies. So for KT is it still unclear whether you're going to pay out dividends this year, when would you be able to paint a more clearer picture in terms of the dividend payout?

(Interpreted) Now, when I say, we plan to make use of the assets that we own, I did not mean that it was -- it would be a simple selling of the assets, like we did in the past. When we sold some of the real estate assets, there were certain unexpected side effects that we had to deal with. So in terms of the use of the real estate assets that we own, we are going to focus on either leasing them or making -- or engaging in property development. And when we develop these lots of land, basically, we will also try to apply future conversions technologies and cutting-edge ICT technologies in terms of the security, energy efficiency and various different building solutions, which will help to further enhance the valuation of the real estate asset. And we could also make use of those projects as a reference point for our future conversions projects.

(Interpreted) Now investors who invest into a telecom share, I understand is interested in stable cash flow and also the dividend payout. So that aspect must be considered when we make dividend related policies. It is true that in the Q1, we were able to bring about an earning in line with the market expectations, but it's too early to say that the volatility in the market has been fully eliminated and that we have once again regained a stable position in generating earnings. So we will look at what our first half earnings and performance is and then communicate with the market in regards to the dividend payout policy. And in terms of the long-term aspect, we're going to also refer to a mid to long-term business plan and also we will communicate with you as to our deliberations and discussions made by our BOD.

(Interpreted) Sam Min, Morgan Stanley.

I like to ask you again about your core OP on a KT separate basis. It appears that you recorded OP of roughly KRW213 billion, but we'd seen on a sequential basis that marketing has fallen close to KRW100 billion. So trying to understand why the separate OP, current OP did not increase sequentially. Thank you. (Interpreted)

(Interpreted) My apologies, but Sam, would you be able to rephrase that question once again, because we could not understand your question?

Sorry I apologize. (Interpreted) So, basically every quarter your core OP is about KWR200 billion, that's on a quarterly basis. In the first quarter, your operating profit was KWR200 billion. And if you were to compare Q1 with last year's Q4 there was a decline in marketing cost of about KWR100 billion. So I was just wondering, on a parity basis why is your operating profit for the first quarter not KWR300 billion, but KWR200 billion? I'm sorry -- not up by KWR100 billion -- so not up to KWR300 billion, I apologize.

(Interpreted) As we communicated before, on a quarterly basis our core OP on a standalone KT basis is about KRW200 billion per quarter and that is about the normal level. And if you look at the marketing costs, there is no big difference in terms of the size of the marketing cost, if you were to compare that to Q1. So Q3 of last year and Q1 of this year, if you make the comparison, marketing expenditure is about the same and the operating profit of KRW200 billion is quite normal.

I'm sorry to interject again. Your marketing costs in the fourth quarter was KRW813 billion and in the first quarter, it was KRW708 billion. So that's close to KRW100 billion decline. Versus year ago first quarter, it's close to KRW70 billion decline?

(Interpreted) Sam, if you could please contact us separately, because I think your understanding of the numbers are a bit different from what we have. So we will make this clear offline.

(Interpreted) Josh Bae, UBS.

Just a couple more questions. First of all is on your subsidiary stake sales. If you could please walk us through your decision not to sell your stake in KT Capital. There are some press reports suggesting that there were multiple bidders that offered to pay more than book value for the stake, so wondering what drove the decision to cancel the stake sale plans. Also regarding the KT rental sale, some press were suggesting that there could be some cost that KT would have to spend related to the KT rental labor union. So I'm just wondering if this is something that we should be prepared for? The second question is just one of the cost items, I'm looking at page 14 of your earnings presentation, your cost of service declined to KRW299 billion in the first quarter, so wondering what drove that decline and also what trend we should expect for this line item going forward? Thank you.

(Interpreted) For the KT Capital, our original intention was to sell the subsidiary in order for us to be able to concentrate on our ICT business capabilities. But the bidders for the KT Capital, the prices that they have proposed, we believed, did not accurately reflect the fair value of KT Capital. And therefore, we decided to cancel the process. But then going forward, we will come up with or we will review other potential opportunities as long as that is within the scope that allows us to maximize the corporate value, helping us to concentrate our ICT business capabilities. And so, for the time being KT Capital will focus on its main business, we will be faithful to its main business and if there are more developments we will communicate that with you.

(Interpreted) With regards to the question on KT rental and the consolation payment that was given to the labor union and who paid for it, at this point, we are not able to consent. We will consent those facts and come back to you and communicate that to you. In terms of the reason why the service cost had declined so significantly on a standalone KT mother company basis, there was increase of KRW20 billion, but on the subsidiary level there was year-on-year decline of KRW120 billion attributable to subsidiaries, such as KTDS, KTENG Co. and KT M Hows.

(Interpreted) Most of these cost of services are sales linked costs or revenue linked costs. So, it does not have an impact on the profit.

(Interpreted) Don See, Janus Capital.

I just have a quick question and sorry if this has been addressed earlier. I just want to ask about your expectation of the fixed telephony line. And I'm not sure what the split between domestic revenue and also the national roaming revenue, what split in fact there, if you can kind of share your expectation on how this business is going to trend going forward, it will be very helpful, because I noticed that in the first quarter the drop in revenue has accelerated from last year average? Thank you.

(Interpreted) This Q1 2014 number, because we applied the interconnection rate that was set up in 2013. On a year-on-year basis, the revenue decline was quite large compared to the past. But if you look at the overall trend, basically we're looking at about KRW300 billion decline on a per annum basis. So, on a per annum basis, this figure is actually within the average trend.

Can I just follow up, in terms of CapEx for the fixed telephony business, what sort of ongoing CapEx should we be expecting?

(Interpreted) Basically, on the fixed telephony side, you can assume almost no CapEx expenditure. Investments will be focused on IP-based services, like the GIGA Internet, IPTV and GIGA WiFi home, because we believe that to be one of our future businesses. So investments will take place on these IP-based infrastructures.

(Interpreted) Sean Oh, Merrill Lynch.

(Interpreted) I would like to ask two questions. You mentioned that for this year you're looking at about 4% growth in ARPU. But if you look at the ARPU numbers and your revenue numbers it seems like the gap between the two is widening and I would think that's mainly because of your MVNO business. So for this year, what would be the growth rates of your top line is my first question? Second, with regards to the cost, labor cost compared to the previous quarters, did not decrease as much as we had expected, especially if you were to compare that to the third quarter there was even a slight increase. And if you look at the commissions, Q3 number was KRW352.4 billion and 1Q number is KRW234.8 billion. So there was a decline. So can we consider this as a signal to a fundamental change in your cost structure? Could you provide some more color as to the future direction relating to these cost items?

(Interpreted) So under the wireless revenues, it's comprised of the mobile call related revenue and interconnect revenue and for the interconnect revenue, depending on the change in the interconnect fees and charges that are defined, it may seem that there is a bit of a large fluctuation. But unless we see attrition of subscribers or subscribers leaving us, basically the wireless call, mobile call related revenue is going to be sustained on the same level.

(Interpreted) In terms of the labor cost for Q1 on a KT mother company standalone basis, due to the ERP last year on a year-on-year basis, there was a decline of KRW158.4 billion. But there was inclusion of KTIS and KTCS in the consolidated numbers. Basically that drove up the labor cost figure by KRW147 billion. So all in all, there was a effect of KRW9.9 billion decline.

(Interpreted) So on a per-year basis as a KT stand-alone basis, the labor cost is going to decline by around 4% to 5% as compared to 2014. But once again, with the inclusion of KTIS and CS there is going to be increase in labor cost by about 10%. Now having said that the KTIS and CS, if you look at the business that they're engaged in, most of their cost is labor costs. So, basically -- basically labor cost accounts for a big portion of their cost structure, but the fees and commissions that we pay to KTIS and CS will also proportionally decline. So it will decline around 20%.

(Interpreted) Thank you very much for your questions and your interest. We will now end the Q&A session. Thank you for joining us today. This brings us to the end of Q1 2015 earnings conference call for KT.

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.