KT Corp (KT) 2015 Q2 法說會逐字稿

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 second-quarter preliminary earnings 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 the earnings results and entertain your questions.

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

Now we would like to turn the conference over to Mr. Youngwoo Kim, KT IRO.

Good afternoon. I am Youngwoo Kim, KT's IRO. We will now begin second-quarter 2015 earnings presentation. Our call is being webcasted via the Company's website and please refer to the presentation slides as we present this quarter's business results. And please note that since the first quarter of 2011 KT has been presenting consolidated numbers under the IFRS accounting standards.

With that let me invite CFO Gwang-Seok Shin for his opening remarks and presentation on Q2 2015 business results.

Good afternoon. I am Gwang-Seok Shin, KT's CFO. KT posted sound top line and operating profit supported by corporate restructuring and efforts to strengthen telecom's competitiveness, and by reorganizing Group's Company portfolio we were able to further enhance financial soundness.

For the wireless business, we continued to expand benefits to the consumers by launching market-leading services like the LTE Data Choice, and continued to grow subscribers underpinned by stronger channel competitiveness. For the fixed line business underpinned by GiGA internet, we have strengthened our GiGA platform and the network keeping to our leadership in the broadband internet market. IPTV continues to grow with its subscriber base surpassing the 6.2 million mark.

KT will focus its corporate-wide efforts on gaining an upper hand in 5G generation and dispersing its GiGA infrastructure. Eventually, by maximizing core business competitiveness, growing new businesses, and differentiating technology and services, we will strive towards becoming global number one.

Let me now run through Q2 2015 performance results. But before I do so, let me first brief you on financial statement changes related to KT Capital sales. With the signing of KT Capital sales agreement in the second quarter, KT Capital's P&L is presented as P&L from discontinued operations applied retroactively from 2014. Also for your information, asset and liability of KT Capital has been reclassified as asset and liability held for sale under other current asset and other current liabilities.

Q2 2015 operating revenue was down 3.6% year over year to KRW5,431.3 billion and declines in fixed line and merchandise revenue.

Service revenue was up 1.0% year on year on good top line performances from all businesses except for the fixed line business. Operating profit came in at KRW368.8 billion turning [black] driven by stronger competitiveness in our core businesses and efficient spending.

Net income posted KRW321.8 billion with EBITDA recording KRW1,205.6 billion.

Next is on the statement on financial position. Q2 debt to equity ratio is 153.6%, down 33.9 percentage points QoQ. Net debt ratio excluding KT Capital's net debt is 55.5%.

Next is on CapEx. 2015 first-half cumulative CapEx stand at KRW833.5 billion with the remainder of KRW2.7 trillion guidance planned to be spent over the remainder of the year.

Next is on the business results from each line of businesses. Wireless revenue on LTE subscriber growth, which led to service revenue growth, is up 1.7% year on year to KRW1,829.2 billion. In line with the cutting edge marketing strategies, KT launched LTE Data Choice, My Time Plan, and GiGA LTE, and driven by its strong channel competitiveness recorded 240,000 net additions in the second quarter.

LTE subscribers now account for 67% of the total base, with Q2 ARPU recording KRW34,879, up 1.4% QoQ.

Next is on the fixed line business. Fixed line revenue on PSTN revenue decline is down 7.5% year on year to KRW1,302.7 billion. We are seeing sustained growth in broadband subscribers with a good take-up of GiGA internet and GiGA wi-fi home products which we believe will help improve fixed line revenues going forward.

Next is on media and contents business. Media and content revenue is up 7.3% year on year to KRW409.2 billion. We continue to hold leadership position in the Pay TV market driven by sustained IPTV subscriber growth and through efforts to acquire high-quality subscribers.

Next is on financial and other services. Financial revenue on solid revenues from BC Card is up 1.8% year on year to KRW800.9 billion. Other services revenue is up 20.9% year on year to KRW484.4 billion, driven by higher IT and solutions revenue.

That brings me to the end of Q2 2015 earnings presentation.

For more details please refer to the materials we provided. We will now take your questions.

Now Q&A session will begin. (Operator Instructions) Hoe Jae Kim, Daishin Securities. And the next question will be provided by Jong In Yang from Korea Investment Securities.

I see that your earnings results for the second quarter was also quite favorable after the good performance in the first quarter. I would like to understand what your shareholder return policy is including your plans for dividend payout.

Second question has to do with the media business. SK Telecom is really solidifying its media capabilities by carving out the business unit from the SK Planet and merging with SK Broadband. I would like to understand what KT's media strategy is, including KT Skylife. Could you elaborate as to what your fixed line and wireless-based media strategy is going forward?

Last question is, since the launch of the GiGA internet product in the second half of the year, I would like to understand what the performance is like, for instance what is the number of subscribers? How much is this business contributing to your top line? What is the ARPU status? And what would be future prospects for the GiGA internet product?

Let me first respond to your question on the dividend. As you know, last year KT was not able to pay out dividend because of the weakened competitiveness in our core business of telecom business and also the high level of expense that was incurred due to the massive ERP program that -- which we implemented.

So since last year, we've been exerting our efforts and further enhancing our competitive edge, have been restructuring the Company, and has also enhanced the Group's Company portfolio, and so we are continuing to focus on improving the profitability of the Company, and as a result this year we have decided to payout and resume the payout of the dividend.

Based on the first-half earnings results and also the profitability forecast that we have for the entire year, and our plan to make use of the funds we believe that it will be around KRW500 per share, but the final figure will be decided in the BOD meeting which will be held early 2016.

Let me also share with you what our dividend policy is going to be for the future, going forward. As you know, the Company was able to successfully do away with the weakening of the competitiveness, the whole issue of the competitiveness weakening, and we were able to achieve turnaround in terms of our profitability.

And also we need to continuously grow, we need to further identify and discover our future growth engines. And considering these factors in terms of our dividend position or dividend stands, we're going to be very prudent and flexible at the same time.

Also rather than having a fixated dividend policy every year, we would look at what the financial outcome is excluding the one-off factors, and from there on calculate and decide on our dividend payout. Basically the position of the Company is that we will continue to improve the earnings performance of the Company so that we can expand on the dividend payout and also further enhance shareholder return policy.

Now let me respond to your question about our media strategy. Basically KT's media strategy is underpinned or based on strengthening of our platform. As you know, KT has multiple array of platforms that it earns including IPTV, satellite, as well as mobile. And also by making use of the access that we have to our subscriber-base, we wish, based on the extensive platform that we own, to further attract large amounts of subscribers so that we may incur additional sources of revenue.

Recently we have launched UHD set-top for OTS and have expanded on the number of UHD channels to three. Based on such initiatives, we would continue to further upgrade quality of our subscribers. And based on those high-quality subscribers, I expect that the value of KT's media platform will further improve.

Within the Group we are providing variety of value-added services including T-Commerce and mobile advertisement and based on KT's platform competitive edge we will continue to grow the relevant segments and areas. From this perspective, we are going to continuously collaborate with our affiliated subsidiary companies including Skylife, KTH, KT Music and [Noise] Media, so that we may maximize synergy.

Yes, let me now respond to your question about the GiGA internet. As of end of June, the number of subscribers stand at 450,000. Now, in terms of the specific subscriber target, we do not have a specific number that we're shooting for. However, in line with the dispersion of the GiGA internet environment we are going to maintain a flexible stand.

Basically when people use the GiGA internet they can really feel the difference in the speed when they're downloading a huge file, and also if you're using a smartphone it allows for wi-fi access that supports the giga speed, so we see that the consumer's preference is quite high. So once the UHD market takes root, we expect that people's preference for GiGA internet is going to further improve.

The actual ARPU improvement effect is going to be different depending on the percentage of bundling that -- the amount of bundling that each product is reflecting, but basically after bundling compared to the existing 100 meg product, 500 meg is designed to have an increase of about KRW5000 whereas one gig product is about KRW10,000 higher.

So at this point in time, GiGA internet is not really uplifting the ARPU level, but we believe that once the percentage of GiGA internet users increase out of the total subscriber base, very naturally we will have -- we will see a positive impact on the ARPU and the revenue trend.

Jong In Yang, Korean Investment Securities. And the following question will be given by Sean Oh from Bank of America, Merrill Lynch.

I would like to ask you two questions. Recently there was a press release that KT is going to participate in one of the auctions that's going to take place. So would you take -- would you participate in that regardless of what the regulatory criteria is? We'd like to understand what KT's position is.

Second question is recently MSIP has announced or disclosed an information that said that when it comes to the subscribers who take up rate plan that is above KRW60,000, before the [Handset Subsidy Act], the percentage was 35%. Now, this is the total three telcos aggregate number, but as of June it [developed] around 10%. So that means that your high ARPU subscribers are declining and that will have an impact on your ARPU trend going forward. So could you elaborate on this point?

Yes, the question was about whether KT had plans to enter into the fintech or the Internet-based specialized bank, and KT's position is that regarding the fintech industry we are reviewing possibility of participating in an Internet-based bank consortium, but no specific decision has been made at this point. Once we make a decision then we will communicate with the market.

Now, you asked also about the mid-to-long term prospect for ARPU growth. Up to 2016 we believe ARPU will continue to grow because of the LTE migration. And based on our differentiated and competitive products such as the GiGA Wi-Fi and GiGA LTE product, we're going to further strengthen our sales capability. And once the data usage expands across the market, we believe that that will also drive ARPU growth based on the data usage.

My Time Plan is a plan where it enables the subscribers to use data unlimited, without a limit and at any time they wish. And as you can see we're providing such data-related value to our subscribers. And by providing differentiated services, we can lessen the burden that the subscribers feel and we are launching various different products towards that end.

Especially KT has the biggest amount of media subscribers, as well as contents. And we want to migrate those capabilities and apply that to the wireless aspect so that it could really kick-start the growth of the data usage. We also have KT Music, KTH and [M-House]. Basically companies are affiliated companies who have the capabilities in mobile content. And they will also play a very important role in really facilitating the data-based services for us going forward and we do expect a high level of synergy.

Sean Oh, Bank of America Merrill Lynch.

I would like to post three questions. First question is that you've introduced a new tariff plan. Will that change your ARPU guidance? Second question has to do with your fixed line business. I think the results were better than what we were expecting. Could you explain as to the reason behind that? Third question, were there any one-off items either on the non-operating income side or on the expense side?

Your question relating to our wireless ARPU; since the enactment of the Handset Subsidy Act we have seen consumers selecting reasonable tariff plans. And also in terms of purchasing for the devices there is a pattern whereby people are purchasing �- their purchasing behavior has become more reasonable. And also we are seeing the number of subscribers who are taking the tariff discount, the 20% tariff discount. Choice is expanding and so we have applied that to our ARPU growth projections. So we would like to adjust our ARPU guidance from the original 4% down to 3% per annum.

Now, but having said that, because KT's LTE penetration is still low and since we are seeing sustained increase in the data usage, we still believe that ARPU growth is possible. Especially we are providing a differentiated services that really befits the generation of data usage such as GiGA LTE and VIP pack, thereby expanding on subscribers who take up the higher tariff plans, meaning above KRW59,900 tariff plans.

And also we have introduced a data value-added product, the unlimited data product called My Time Plan, and we've also upgraded our existing [ultrapack] product to a [ultrapack plus] product. And we believe that we will continue to provide value on data usage thereby achieving our ARPU growth target.

In terms of the decline in our fixed line business revenue, in the second quarter, the PSTN decline, the speed had slowed, that is true, but we believe that it's attributable to the seasonality factor. Therefore, we still have to wait and see whether this is a structural trend. So if you look at the cumulative figure for the first half of the year, the decline was KRW150 billion. So it actually is within the scope that we had expected -- we had projected, which was about KRW300 billion on an annual basis.

Now, for the non-operating items in the second quarter, on a QoQ basis, KT Rentals gains from the sale was included in the non-operating income line item in the first quarter. In the second quarter however, it was included in the operating P&L from discontinued operations. And also there were sales and liquidations of certain related companies that incurred loss in the amount of KRW66 billion.

Now, as of the end of the second quarter, most of the restructuring and reshuffling that we have been applying to the Group portfolio Companies have come to a certain end. So we believe that losses related to such efforts would start to decline going forward.

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

I would like to pose three questions. The first, you mentioned that the speed of decline of PSTN revenue, you will have to wait and see whether it's a structural trend or not. But then what about on the expense side, were there any aspects that you can improve on in order to control or lower the cost items? Since you have finished restructuring your subsidiary companies, I'm wondering what at the KT parent level could be done.

Second question has to do with regulation. Especially starting August, the authorities are going to receive applications for the fourth mobile telco business license. If the license is approved or is given out and if a player is selected, then what impact will this have on either KT or the industry as a whole?

My third question is a quite simple question. Now, there seems to be some diversions between the data that MSIP announces and the data that KT announces in regards to your LTE subscriber number and your 3G smartphone user number. Can you explain as to the reason behind that?

Let me first respond to your first question on the cost and expense side. In order to improve the fundamentals of KT, we need to do away with unnecessary activities and focus our effort on what we do well. So we must regain our competitive strength and regain our ability to generate cash from our operations. That's why, as you know, we have conducted massive headcount restructuring, and this year we have also conducted extensive restructuring on our subsidiary companies and have sold off KT Rental and KT Capital.

Now, we are continuing to improve on our cost structure and basically what we are doing is we're changing the way we work and also fundamentally changing the system based on which we work in order to further make or achieve a cost-efficient organization. So it's not just cost saving that is important, but this is inevitable in order for us to further strengthen our fundamental competitiveness, and to a certain extent we are seeing some visible results.

Responding to your question about the fourth operator, basically the player would have to be qualified according to the MSIP framework plan. They would have to have the qualification of the technology and will have -- need to have the ample finances. And if they apply for the license then there will be possibility for certain entities that satisfy the qualifications to be selected, but it is quite inappropriate for us to actually say what that possibility is.

But even if the fourth player enters into the industry, we're going to further improve on our telecom quality and provide differentiated tariff plans and services so that we can further acquire subscribers and enhance on our qualitative services.

Yes, and your final question about the difference in the subscriber statistics that's announced by MSIP and us, basically the main reason behind the difference is that within the wireless subscribers there are Viber subscribers and LTE hybrid subscribers, and those subscribe number is not included in MSIP numbers. So basically that is the main reason.

Now -- so then a follow-up question; then when you calculate ARPU, do you include those subscribers or do you not include those subscribers? Because we've -- we are seeing this discrepancy from the first quarter on and I think that the gap between the two numbers are quite large and that will have quite a meaningful impact on, for instance, the penetration numbers. So could you elaborate?

Yes, when we calculate our ARPU, the hybrid sub-number is included.

Currently there are no participants with questions.

With no further questions, we will close the Q&A session. Thank you for all your questions and interests and also thank you for joining us today. This brings us to the end of the second-quarter 2015 earnings conference call for KT. Thank you very much.

Editor: 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.