KT Corp (KT) 2015 Q3 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 third 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 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 Q3 2015 earnings presentation. Our call is being webcasted via the Company's website, so please refer to the presentation slides as we present this quarter's business results.

Please note that since the first quarter of 2011 KT has been presenting consolidated numbers under the IFRS accounting standards. From this quarter, in line with the revised disclosure guidelines of MSIP on subscriber numbers, while the subscriber calculation was based on number of total line basis, which is inclusive of KT and MVNO subscribers and other lines, which are surveillance equipment, ex the lines for the hybrid product.

Also ARPU calculation now excludes other lines that were unbilled and subscribers for the hybrid product such change was retroactively applied to Q1 2014 data.

Now I will invite our CFO, Gwang-Seok Shin for his opening remarks and presentations on Q3 2015 earnings results.

Good afternoon, I am Gwang-Seok Shin, KT's CFO. KT was able to maintain steady bottom-line driven by enhanced competitiveness of our core businesses and our efforts to achieve structural cost efficiency. Our wireless business has seen sustained LTE subscriber growth, underpinned by customer-centric management and stronger channel competitiveness. Fixed line business saw GiGA Internet subscribers surpass 700,000 mark with IPTV subs acquisition of 6.4 million. As such, we are an unquestioned number one player in Internet and IPTV.

Through its world-class ICT technology and GiGA infrastructure that integrates fixed and wireless network, KT is able to provide the fastest and most innovative telecom and converged services.

Leveraging ICT based technologies, KT is seeking to bring about conversion across various industries like advanced command and control, cloud and big data; by building intelligent GiGA infrastructure, whose value goes beyond the boundary of current level of speed, capacity and connectedness. Based on such technologies we are focusing on five future industries of smart energy, healthcare, next generation media, integrated security and intelligent transportation control.

To facilitate market expansion of the converged business, KT is intent on developing not just a B2C model but also a B2B and B2G business models. Considering that the core of our future business is underpinned by the value of the platform dictated by the size of the subscriber base, we expected KT's future conversions business will start to become prominent starting 2016 based on different conversions business models being sought after at this moment.

Especially, in the energy sector, KT is the first in the world to have developed KT micro-energy grid, which is an integrated and efficient energy management system. At the energy control center at Mapo they predict energy demand for 280 sites around the world including hospitals, hotels and industrial facilities using big data. And the system allows for energy optimization through the conversions of production, consumption and trading of energy resources.

KT also developed world's first portable security platform called Wiz Stick that personalizes KT's network security capabilities as one of its key initiative of its five future growth businesses in the integrated security segment. Wiz Stick manages vulnerabilities at the network access level and not at the PC level thereby blocking, pharming and other deceptive fraud attacks at its root and by providing fingerprint identification and strong modes of authentication we expect it will play an important role in leading the security market for financial and e-commerce transactions as well as for data protection.

KT is a telco that represents 130 years of Korea's telecommunications history. To live up to this legacy, we will further reinforce growth potential and profitability of the telco business and focus on bringing tangible outcome in the future convergence business so as to lead the wave in the fourth industrial revolution and new ICT paradigm.

Now, let me present on Q3 2015 financial results. Q3 2015 operating revenue was down 2.9% year over year to KRW5,492.2 billion and declines in fixed line and merchandize revenue. Operating profit was up 17.8% YOY to KRW343.3 billion driven by stronger core competitiveness leading to activated sales from core businesses and Company-wide cost innovations. Net income came in at KRW126 billion with EBITDA recording KRW1,174.3 billion.

Next is statement on the financial position. Q3 debt to equity ratio was 154.4% up 0.8 percentage points QOQ. Net debt ratio was 46.7% down 8.8 percentage points Q-over-Q.

Next is on capital expenditure. Q3 2015 cumulative CapEx was KRW1,344.5 billion and by the end of the year we plan to implement what remains of the KRW2.7 trillion CapEx guidance.

I will now move on to each line of business. Wireless revenue came in at KRW1,844.1 billion down 3.6% year-over-year. This was due to lower interconnect revenue as a result of lowering of interconnection fees and with the removal of the signup fee there was a decline in signup revenue.

But wireless service revenue on LT subs growth continued an upper trend posting 2.4% year-over-year growth. LT subscribers expanded to account for 69.3% of total subs with Q3 ARPU recording KRW36,193 up 0.4% QOQ.

Next is on fixed line business. Fixed line revenue on PSTN revenue decline was down 6.4% year-over-year to KRW1,284.4 billion. PSTN revenue declined 11% year-over-year to KRW1,284.4 billion. PSTN revenue declined 11% year-over-year driven by declines in both subscribers and traffic volume. Despite growth in subscribers, broadband Internet revenue fell 1.2% year-over-year due to offering of more benefits to consumers.

[All] subscribers for GiGA Internet and GiGA Wi-Fi Home continues to rise and we believe it will help improve fixed line revenues going forward.

Next is media and contents. Media and contents revenue was up 8.2% year-over-year to KRW428.8 billon. IPTV recorded more than 180,000 net additions in Q3 and as of Q3 end, there are 6.4 million subscribers. Other VAS, value added service revenue from media business including PPVs and ads are showing an uptrend as well.

By making use of variety of content platforms within the Group such as IPTV, satellite and mobile and utilizing our content distribution capabilities in music, mobile ads and commerce, KT will strive to maintain its leadership in the media and contents industry.

Next is on financial and other revenues. Financial revenue was up 2.0% year-over-year on higher domestic card usage volume recording KRW835.5 billion. Other services revenue was up 28.4% recording KRW503.1 billion on higher IT/solution revenue driven by bullish global ICT business.

Next is operating expenses. Q3 operating expense came in at KRW5,148.9 billion declining 4% year-over-year. With the inclusion of KTCS, KTIS and other new subsidiaries, labor cost rose 30% year-over-year recording KRW844.3 billion. But thanks to corporate-wide cost cutting efforts through improving systems and enhancing efficiencies of work processes, business expense fell 3.1% year-over-year to KRW2,438.1 billion.

KT will continue to find ways to structurally enhance cost efficiency thereby leading to bottom-line improvements.

This brings me to the end of Q3 2015 earnings presentation. Thank you.

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

(Operator Instructions) Hue Jae Kim, Daishin Securities.

I would like to pose two questions. First question has to do with your wireless business. Your ARPU did increase, but the speed of increase had slowed. I would like to understand whether this is due to the fact that because you launched data-centric rate plans, whether trading down of the tariff schemes by the subscribers. And would like also understand what your projection is in terms of the ARPU movement for next year.

Second question, your broadband ARPU has increased for the first time in seven quarters. Is this mainly driven by the fact that you've introduced GiGA Internet and that GiGA Internet subscriber base is currently at 700,000 or was it driven by some other reasons?

And also, can you provide us your target for subscribers as well as top line target for your broadband Internet?

Yes, I will first respond to your question on wireless ARPU. With the increase in the penetration of the LTE and also with higher percentage of high-end subscribers or high-value subscribers coming online and with increase in other value added services, ARPU growth did continue. However, the speed of that ARPU growth was somewhat muted because of the introduction of the data-centric rate plan and also because of more subscribers selecting the pricing discount.

Now the data select tariff plan, which we introduced has an impact of reducing the voice revenue that was generated, which in turn had a negative impact on the ARPU level, but this was what we expected even before the launch of this tariff plan, we believe that from a long-term perspective this will actually trigger more data needs by the subscribers and it will eventually also have some positive impact on ARPU.

Now in terms of the consumers' purchase pattern for the mobile phones, we are seeing that more subscribers are selecting the pricing discount over subsidies and that actually had slowed the growth of the ARPU level. However, with the subscribers becoming more high quality, we plan to continue the quarterly growth ARPU trend and eventually achieve our 3% year-end target.

Now, as we see more subscribers take out that pricing discount that capped at 20%, the overall burden on the side of the consumers is reducing, therefore I believe that that would limit the negative impact that the scheme will have and will help eventually trigger more usage of the data going forward. And also, in consideration of the higher LTE penetration and the fact that the subscribers will start to use more data going forward and since there is a heightened need for multimedia content, we believe that future ARPU growth trend is still feasible and valid.

Especially in this era of data generation we will utilize our GiGA LTE plant to provide differentiated services so that we can provide high value and attract and acquire more high-value customers. We've introduced My Time Plan as well as media pack which provides the multimedia services through such solutions we intend to increase the value of data usage going forward, and through such approaches we intend to achieve our ARPU target.

Now I would respond on the broadband ARPU trend. With the increase in the GiGA Internet subscribers and with the end of the first half of the year promotion, our ARPU on a QOQ basis has recorded a turnaround. So since the fourth quarter of 2013, so in seven quarters we have seen a turnaround.

So going forward with the increase in the number of subscribers for GiGA Internet we believe that the downwards trend for ARPU has stabilized and underpinned by the subscriber growth we do expect top line growth.

So in terms of the subscriber target for GiGA Internet considering the current trend it is faster than what we had originally expected but we do not have a specific subscriber target that we are seeking after. We will employ a very flexible approach in line with the overall environment that surrounds the GiGA Internet.

Jong In Yang, Korea Investment Securities.

I'd like to pose two questions. The first question has to do with your net debt ratio, as of the third quarter it had actually declined 47% a significant decline and it posted KRW5.8 trillion, what would be your year-end net debt ratio and what do you think is going to be the mid- to long-term target for this indicator.

And second question is, next year there is going to be a new spectrum allocation. I would like to understand the basic position that KT is taking. Out of the five spectrums, is there a certain spectrum that KT is interested in? And if you were to be allocated a new spectrum, what impact would that have on your CapEx, going forward?

So in terms of Q3 2015 we expect that if you look at the overall forecast going forward, the current level of Q3 that level is going to be probably maintained. Of course, the actual number might vary slightly depending on the amount of cash spending, but we expect current level to continue into the end of the year.

In terms of our mid- to long-term financial structure, of course, things would differ depending on the eventual bottom line but based on the current level of profitability, if we were to premise it on that level, net debt to EBITDA our mid-term target, we believe we can control it below 2 times to 2.0X.

Now on a KT standalone basis our debt level has significantly risen due to the special retirement, the ERP program, so it will not be easy to reduce this level in the short-term. However, based on improvements on our profitability and cash flow once again our target is to lower our net debt to EBITDA ratio below 1.5 commensurate to our global peers.

So in terms of the spectrum, MSIP next year is going to conclude in selecting the fourth TOKO player and so we will consider and also the current situation is that the wireless data demand is increasing and there the traffic is also continuously increasing. So it is a situation but where it is necessary for players to secure the right spectrum. So our Company is going to consider the mobile telecommunications technology trend as well as the global usage trend and as well as the competitive landscape, so in consideration of all of these factors, we will come up plans to secure the right spectrum.

Now having said that, before we make the 5G related investment current level of CapEx is going to continue and it will stabilize around the current level. In terms of wireless technology, we will continue to make, every year, data capacity related investment as well as investment to further strengthen quality. However, once again before 5G, there will not be any extensive or massive coverage related investment.

Neil Anderson, HSBC.

Two questions from me please. The first also on CapEx but on wireline CapEx, I just wanted to follow up related to the GiGA investment you've made is that mostly complete now, and which case do you see wireline CapEx stabilizing or declining over the next couple of years?

Then a second question was on the IT and solution services business, fairly good growth in the third quarter, I was wondering if you could give a commentary on how you see that market developing and particularly how seasonal you expect those revenues to be? Thank you.

In terms of the wireline CapEx, first of all, for PSTN we expect PSTN related CapEx to decline but if you look at broadband in terms of the lines itself and the IPTV, we believe that certain amount of investment is going to take place in order to generate revenue based of off the IT infrastructure and also to continuously secure future growth engines.

So for the GiGA Internet as well we believe that in order to secure our leadership in the conversions arena we expect certain amount of investments to carry on going forward.

Mr. Neil Anderson, I just want to double check your question was your question related to IT solutions business?

Yes, it was.

Yes, with regards to the IT solutions revenue we have seen a growth or increase in the amount of KRW45.9 billion and this is due to the fact that we are winning more global SI projects or orders and also driven by IDC and corporate messaging service as well as digital signage.

And we will do our best to maintain the current level of this top-line, of course, things will differ depending on how well we do in terms of winning additional global SI orders but we will do our best to maintain the current level. Thank you.

Sean Oh, Merrill Lynch.

I have two questions, the first if you look in your MNO subscriber number the LTE, the subs figure, if you look at those figure the penetration is already up 80%, so next year there is not much room to grow, would like to understand even under this circumstances would you be able to see continuous ARPU growth? Second question, in Q3 your effective tax rate seems to be quite high, is this is a temporary thing? Would like to also understand what you think your effective tax rate is going to be post 2015?

So LTE penetration is expected to continue to rise, if you look at the MNO basis, the LTE handsets or LTE sales actually account for more than 85%. So we expect LTE penetrations to continue to rise from 67% of year 2014 even up to 90%, going forward.

Now, let me talk about the ARPU growth forecast. Since we are seeing more number of subscribers selecting the pricing discount and with a change in the overall environment, it is true that the expectation for ARPU growth has been some muted, but we still believe that there are very strong drivers that still exist to increase the -- or bring about mid- to long-term ARPU growth considering the LTE subscriber and the increased data usage.

So up to year 2016, we believe that ARPU growth will continue driven by continuous LTE migration, also on top of that, we have GiGA Wi-Fi and GiGA LTE which differentiates us from our peers, we are going to further solidify our distribution or sales capability and considering the fact that the recent trend is based on mobile multimedia, we believe that data centric ARPU growth trend can continue into the future.

So in terms of the corporate tax rate, you can combine the effective tax rates for -- on a quarterly basis post to the adjustment for the consolidated subsidiary, so if you look at Q3 number, the consolidate number on a cumulative basis it's 27.6% and for a per annum basis, the statutory effective tax rate stands at 24.2%.

Thank you.

Dan Kong, Deutsche Bank.

I would like to pose two questions. First question, I would like to understand whether KT has plans to sell off its other subsidiaries or and what your headcount or human resources restructuring plan is like. Basically I would like to understand your overall corporate improvement strategy. The reason why I ask is because I heard that in May, KT has made an investment into a non-telco related business called [KT Bravo Golf], would like to understand how this investment fits your overall corporate wide strategy.

Second question has to do with your dividend payout for this year. I believe that it is around KRW500 per share, like to just confirm whether that is the level of dividend payout you're considering and what is your dividend policy from a long-term perspective?

Now, first of all with regards to this non-telco related investment, please let us check and we will come back to you on this point, thank you for understanding.

So now let me talk about the restructuring plans that we have for our subsidiaries. As you know in order to further enhance our group of Company portfolio and revamp the group of companies, we have focused on -- we have focused on enhancing our ICT capabilities in improving financial structure. As you know we have successfully sold of KT Rental and KT Capital, and also other non-core businesses have been sold off or liquidated, so most of these processes have come to somewhat of a closure.

And on top of that we are continuing to seek turnaround in our telco business and also to make our cost structure more efficient. And as you know we had implemented an extensive headcount related restructuring, but even after that, we do understand that our headcount is much larger or bigger compared to our peers in the industry. Having said that, however we do not have any additional plans to cut headcount at this point rather than engaging in artificial or arbitrary approaches, we believe that it's more important to enhance the productivity of the existing pool of human resources.

Now on dividend, of course, we cannot completely exclude a possibility or probability of a potential change in the final decision on the dividend amount, but as I stand today it will not depart from KRW500 per share.

Now for our long-term or future dividend policy. As the Company's business results improve and our financial structure improves and as we make efficient use of our capital expenditure and as we realign and revamp the group of company portfolios, we've been indulging in a lot of efforts to minimize the wastage in terms of the cash flow. We believe that underpinned by such continuous efforts and improvement in bottom line and profitability we hope that we will be able to expand on dividend payout going forward. We will once again exert our utmost effort to make sure that our good performance continues so that eventually we could expand our shareholder return as well.

Thank you.

Chung In Young, Goldman Sachs.

I have one single question. And you have said that you will keep to the CapEx guidance that you communicated previously. And if you were to assume that that is the case, that means then in the fourth quarter you would need to spend about KRW1 trillion worth of capital expenditure. If you were to invest that amount I would like to understand, first, where you are going to focus your investment, would it be on the wireless side or on the wireline side?

And also then compared to the fourth quarter of 2014, Q4 2015 CapEx is going to be significantly higher, what is the rationale behind that or why would you be doing that?

Yes, it is true that our fourth quarter is going to see some very concentrated CapEx expenditure. Basically, we expect that on a per annum basis we would be spending that guidance of KRW2.7 trillion. The split is KRW0.8 trillion for wireless and KRW1.4 trillion for wireline. It's not easy to disclose specifically or clearly where exactly it's going to be spent but we are going to do our best to implement the CapEx within the guidance. But there is a slight possibility that it may be slightly lower than the total guidance.

Thank you.

Operator Sean Oh, Merrill Lynch.

My recollection, I remember that there were a lot of one offs in the Q4 of previous year. What are some of the one off items for you this year?

Now KT, as you know, in the fourth quarter of the year we had traditionally some seasonality factor. We tend to have a number of -- a couple of one-offs that's concentrated in the Q4, but we've indulged in a lot of efforts to bring about that stability in the quarterly performance and we think that starting this year you will be able to see that tangible outcome.

Now, having said that there are expenses that are linked to CapEx and also expenses that are linked to some outside payments to the outside entities. So it's very difficult to bring about 100% even distribution over different quarters. And also there is negotiation going on, wage negotiation going on, so there could be some impact coming from there.

Hence it will be difficult to provide you with the specific extent or specific number, but concerning the fact that the operating profit up to the third quarter on a cumulative basis has been KRW1 trillion we believe that on a per annum basis at the end of the year we would be able to meet the market expectation in terms of operating profit.

Thank you.

So with no further questions, we will now close the Q&A session. Once again, thank you very much for joining us today. That brings us to the end of the Q3 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.