KT Corp (KT) 2016 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 2016 first 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. (Operator Instructions)

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

(interpreted) Good afternoon, I am Youngwoo Kim, KT's IRO. Thank you for joining our Q1 2016 earnings presentation. Our call is being webcasted via the Company's website, so please refer to the presentation slides as we present the business results. Please note that since the first quarter of 2011 KT has been presenting consolidated numbers under the IFRS accounting standards. Now, our CFO would deliver his remarks on Q1 2016 earnings results.

(interpreted) Good afternoon, I am Gwang-Seok Shin, CFO of KT. In Q1, based on stronger competitiveness in core telecom business we saw growth in revenue and subscribers from wireless, broadband, Internet and IPTV. And driven by structural cost saving efforts we enhanced overall efficiency thereby achieving quite steady quarterly results.

For the wireless business we introduced private LTE that is optimal for a company's business environment as well as Y24 which offers value added data service to subscribers below 24 years of age. We optimized services that befit the mobile use patterns of the data generation and so we're able to continue with net addition trends thanks to the leadership wielded in marketing.

For the fixed line business, by employing core competitiveness underpinned by GiGA infrastructure, we are solidifying market leadership in broadband and the IPTV market. In broadband, GiGA Internet, net addition recorded 300,000 in the quarter, surpassing 1.3 million mark.

We are also seeing continuous growth in high quality subscribers for the IPTV as well. In particular, GiGA Internet is not only contributing to overall Internet subscriber net addition trend but also making positive impact on facilitating fixed and wireless bundling.

On top of strengthening our core competitiveness, KT is committed to bringing tangible results from new business areas of future convergence, platforms and global business. We will first focus on energy and security under the convergence initiative and deploy platform business in five areas of IoT, Big Data, O2O, Fintech contents where we will focus on key values regarding customers' lifestyles, time spent and essential needs.

For global business, we will expand areas of cooperation and strengthen local sales channel to aggressively identify revenue opportunities.

In Q1 we commercialized for the first time in the world LTEN, which is the most optimal and standardized network for Internet of Small Things, establishing a robust basis for market expansion, we also launched [ShowDoc] Korea's first Big Data based commerce platform for consumer trend analysis.

Also, world's first VR live of KT [WhisPark] showed us a glimpse of a not-too-far-away future where our life and the industry is revolutionized via convergence between KT's intelligent network and other industries.

Also, world's first GiGA LTE and GiGA YO developed by KT were exported to overseas proving that Korea's leading network technologies and convergence model can actually expand into the global market.

This year KT will bring breakthrough improvements on customer perception on our products and services, accelerate growth of our key businesses and bring tangible results from growth businesses so as to further reinforce KT's GiGA leadership.

Now, I will present on Q1 2016 financial results. Q1 operating revenue driven by growth in all segments except for fixed line and merchandised revenue saw a growth of 2.2% year over year coming in at KRW5.515 trillion. Driven by top-line growth of major businesses and structural cost cutting efforts operating profit was up 22.8% YOY to KRW385.1 billion. Net income was KRW215.1 billion with EBITDA KRW1,215.7 billion.

I will present on operating expense on the next page. Q1 operating expense was KRW5,129.9 billion, up 0.9% year over year. For marketing expense with efficient spending for fixed and wireless sales expenses enabled by improved product competitiveness and also in light of the fact that market last year was temporarily overheated marketing expense declined 7.4% year over year to KRW655.5 billion.

Since last year KT has removed redundancies in distribution channels and improved business work flows by either integrating and directly managing similar work tasks and reducing outsourcing expenses. We are also engaged in improving process efficiencies through which we are building a sustained and stable profit base.

Next is on the statement of financial position. Q1 debt to equity ratio was 141.8% down 45.7 percentage points year over year. Net debt ratio was 49.6%, down 28.1 percentage points year over year.

Next is on CapEx. Q1 CapEx stands at KRW215.9 billion, we will implement efficient spending within KRW2.5 trillion this year.

Now on each business line. Q1 wireless business continued subscriber net addition trends driven by tariff plans such as Y24, a tailored product befitting a specific point in the lifetime of the users and private LTE that best meet customer needs. And with KT's differentiated product offering of GiGA WiFi and GiGA LTE we successfully appealed to the customers, leading to 3% year over year growth for wireless service revenue.

Q1 LTE subscriber share increased 272.7% against the total base. Q1 ARPU was KRW36,128, up 1.9%. But on a QOQ basis due to the base effect from Q4 iPhone launch and Q1 seasonality ARPU declined 1% Q-over-Q.

Next is on the fixed line business. Fixed line revenue declined 2% year over year to KRW1,278.7 billion on PSTN revenue erosion. Despite PSTN erosion with growing GiGA subscribers and ARPU growth as well as the impact from interconnect revenue newly reflected from Q1 broadband revenue posted a growth of 10.5% year over year largely offsetting PSTN decline.

With growing consumer needs for GiGA products we expect broadband revenue to sustain its growth contributing to top line improvements for the fixed line business.

Next is on media and content business. Media and content revenue was up 15.3% year over year to KRW442.3 billion. Based on differentiated network content competitiveness, subscriber net addition trend continued. Also, since last year we focused on expanding high quality subscribers and on bringing platform revenue growth based on which we are seeing qualitative growth.

Next is on financial and other services. Financial revenue was up 4% year over year to KRW822.6 billion on higher card usage and strong BC Card revenue. Other service revenue was up 22.8% year over year to KRW504.7 billion and wining orders for Global ICT and Solutions business.

That brings me to the end of Q1 earnings presentation.

(interpreted) For more details please refer to the earnings document that we have circulated. We will now begin the Q&A session.

(interpreted) (Operator Instructions) Jong-in Yang, Korea Investment & Securities.

(interpreted) Thank you for the opportunity to ask questions. I have two questions. The first question has to do with ARPU. You communicated in the beginning of the year that you expect ARPU growth rate for this year to be around 2%. I would like to understand if you have made any changes to this projection for this year and I think that this level of ARPU growth is relatively higher compared to what is projected by your competitors.

I would like to understand what you think is the driver behind the ARPU growth is it -- does it have to do with the LTE penetration or the expansion of the second device or with -- or because of different types of handsets.

Second question, I see that your broadband revenue had increased quite significantly and you mentioned that it is due to the reflection of the interconnect revenue. So, in the first quarter number what is the actual amount of revenue that is attributable to interconnect?

(interpreted) So, let me first respond to the question about ARPU. Q1 ARPU stands at KRW36,128. We've seen that there's been a continuous increase in the share of subscribers who are taking out the high end tariff plan but in the first quarter there were some other variables that came into play; the first being that we had seen lower level of handset sales, which actually impacted on the slower growth of the LTE penetration.

And the second aspect is that we, with the start of the new semester, we saw higher share of adolescents or young people in terms of our -- coming in to our subscriber base, and also on a QOQ basis because there is a base effect coming from the fact that last quarter there was an iPhone launch on a QOQ basis there was a slight dip in the ARPU.

Now, for the full year ARPU on a QOQ basis I mention that there was a slight decline in ARPU and I say that that is because of some seasonality factors therefore it is a temporary impact. We believe that we're continuously going to see increases in LTE subscribers as well as subscribers taking out high end tariff plans. And also we see increase in the data usage as well as other value added services for multimedia services.

So, we believe that as we go into the second quarter the ARPU level will start to normalize and we will exert our utmost efforts to make sure that we do attain the 2% growth per annum basis for the ARPU growth.

Now, going forward in order to achieve our ARPU target we will continue to provide a differentiated services underpinned by data and also we will focus more on improving the quality of subscribers rather than just purely competing on number of subscribers.

Now, having said that we are at an era, where we now see a new generation open with respect to the Internet of Small Things as well as second devices. We see a potential for opening up of new subscribers. Therefore, we will very closely monitor different factors that may impact our ARPU.

And to elaborate a little further, it is true that with the higher level of LTE penetration at this point the future prospects or people's expectations, when it comes to ARPU growth, has reduced. However, KT compared to its peers still has room to continue on with our LTE growth penetration.

We will continuously expand the data use and we think that with regards to that element there is still quite a bit of potential for ARPU growth going forward. However, in order to bring about and facilitate the ARPU growth going forward we need not focus -- we must not focused on a competing based on the number of subscribers, we need a paradigm shift in the way we see this competition aspect. We will focus more on enhancing the quality of our existing customers, or existing subscribers.

You asked about the interconnect related line item with the improvement in the system of accounting for interconnect revenues by applying a aggregate based approach rather than the net based, meaning we would be reflecting both the revenue as well as the expense side.

For Q1, we accounted for KRW31.5 billion as interconnect revenue.

(interpreted) Hoe Jae Kim, Daishin Securities.

(interpreted) I would like to pose two questions. I would like to first understand what your strategy is for your real estate business and what do you foresee as your financial performance from this business. I heard that you are getting involved in the rental housing business as well as hotel development. So could you provide some color with regards to this topic?

And second, I see that your GiGA Internet subscriber is growing quite quickly. Hence I would like to understand what your investment plan is for the coming three to four years in terms of your network coverage?

(interpreted) Responding to your first question about our real estate business. Our basic business strategy is that we will consider the specific characteristics of the assets that we have based on which we will decide whether we will embark in the renting business or in the real estate development business. All of these efforts are to make sure that we can maximize the asset value.

In the case of the rental business we have recently announced that we will expand on the corporate type of a rental housing business and also we will focus on hotel, real estate development, which can work as a very stable revenue source. We will also look at remodeling of the existing assets and existing property asset. And also most efficiently make use of the existing space that we have.

And also for development and for the development project we will consider the characteristics of the each site and also we will be in line with the trend of the real estate market, will identify the most optimal development related products in order to eventually maximize the value of such property assets.

Now, if you look at the property assets that KT owns. We have currently 450 sites and KT Estate owns 90 sites out of those. So excluding the assets that we need for our telecom business as well as for the support of our business management, we can categorize 170 property assets as ones that could actually generate profit. And of those we have identified 50 assets that could actually increase in its value after going through some development project.

If you look at the current real estate site that are under development or under planning, there are about 20 sites. And also, if you consider the projects that we are undertaking for the sales and the rental of these projects we believe that by 2017 we will be able to see the outcome come to fruition.

And because of that we believe that if you look at the current real estate related revenue it stands at about KRW250 billion as of 2015. But come 2020 we expect that figure to rise to around mid KRW700 billion.

Moving on to your second question. Under the current broadband network, the GiGA coverage stands around 70%. So there is not significant burden for us in terms of additional investments required. Going forward, in year 2016 we will expand on the coverage, especially focusing on the apartments, where we see high density of demands. And also for the regular residential areas, we will focus more on replacing the low-speed equipment -- or low-speed network and this -- the investment will take place as a recurring investment.

And so by the end of 2016 we expect, we will have 100% coverage when it comes to apartment complexes and that will bring our GiGA coverage to 80%. And all of these aspects are already reflected in our CapEx plan.

So our efforts to expand coverage from year 2016. We will employ a very flexible approach as we consider the market demand as well as the competitive landscape.

(interpreted) Jee-hyun Moon, New Asset Daweoo Securities.

(interpreted) I would like to post two questions. First has to do with your expenditures. In Q1 on a standalone basis we think that the expense had dipped. Whereas, on a consolidated basis there was a slight increase. So going forward, is your position still that you wish to rigorously control the expense and cost.

I would like to ask you to provide some color in light of the fact of maybe potential new investment into spectrum as well as your new business initiatives.

Second question has to do with dividend, currently KT's dividend yield stands at around 2% to mid 3% going forward with the higher level of profit could we maybe expect a higher level of dividend yield?

(interpreted) Now first, regarding your question about our cost reduction; this quarter we saw decline in our marketing expense due to the lower level of fixed line selling expenses and also with the elimination of a one off seasonal element of the previous quarter that also had an impact. So on a QOQ basis our expense did decline.

Going forward, in light of the fact that we will see paradigm changes based on a service-based competitiveness and with more of a market stabilization trend we believe that a stable level of marketing expense or market control will continue.

Now for the depreciation cost, it may vary depending on the outcome of the spectrum auction but for the OpEx the operating expense we will continue to focus on enhancing structural efficiencies.

You asked about our dividend, just as we did for 2015, for 2016 as well, once we get some clear visibility on the year end performance, and once we were able to eliminate some of the uncertainties regarding the business operation environment, as well as the regulatory environment we will be able to communicate with you on the specifics of the dividend.

We continue to focus on -- focus our priorities on enhancing the profitability and improving the cash flow. And we will do our best that this will naturally flow through to shareholder return.

(interpreted) Sam Min, Morgan Stanley.

I have two questions. The first one is on your subsidiary OP contribution. It appears that in the first quarter it was close to about KRW100 billion. Could you detail which subsidiaries are contributing to this profitability? Can you also mention mass media as well as KTH their contributions as well?

And my second question is on the real estate, I'd like to follow up on the -- your target of KRW750 billion real estate revenue by year 2020. And I'm assuming that this will be sort of sustainable rental revenue that you're targeting. Could you also provide what you think would be the profit contribution from those revenue streams?

(interpreted) Responding to your first question about our subsidiaries' contribution to our operating profit. We continuously -- or thanks to the enhanced competitiveness of business -- enhanced business competitiveness, as well as cost innovation, in Q1 at the subsidiary side we had seen some very robust profitability impact.

On a quarterly basis depending on the business structure and the characteristics of that certain industry there could be some fluctuations on a quarterly basis but on a per annum yearly basis we believe that we can achieve that mid KRW300 billion target of contribution we are expecting from subsidiaries.

And just as we are doing at KT at our subsidiary level we are exerting our efforts to make sure that we have a very stable trend of performance and we expect that soon those efforts will come to fruition.

Yes, you also asked about the details of the operating profit contribution from our subsidiaries, the total contribution is KRW98 billion. And if you look at the breakdown BC Card is KRW60 billion, and Skylife is KRW25 billion, KT Estate is KRW2 billion KT Sat KRW9 billion, and Hightel KRW1 billion.

Responding to your second question about the OP contributions from our real estate business, it's at this point quite hard to provide you with a specific number for this specific business but I can say that the real estate contribution level is higher than the telco business.

(interpreted) In Young Chung, Goldman Sachs.

(interpreted) I would like to ask two questions. The first, after the spectrum auction do you have plan to realign or reshuffle your current wireless tariff plan or are you planning to just maintain the current level of tariff?

Second question, recently your competitor has very strongly voiced that it will pursue 5G. I would like to first understand what KT's competitive edge is in terms of 5G vis-a-vis your peers, and also when it comes to the 5G, what is the current level of your fixed line backbone capacity and also any potential upgrades?

(interpreted) You first asked about any potential changes to our overall tariff plan after the spectrum auction. Basically, our overarching framework is that we will continue on with a data centric tariff plan. But of course with the increase in the data use, we will continuously launch a variety of products.

Moving onto your second question, as at this point there has not been a final determination with regards to 5G standardization or the spectrum, it will be difficult for me to say, talk about the potential size of the -- or the size of the network and the capacity of that network.

Considering the fact that for the benefit of multiple devices and for data processing under the network, the network would be � would have to be a different network compared to that of LTE. So I would think that both approaches will have to go in parallel, meaning using making use of the existing network and a build out of a new network on a new spectrum.

Also from the CapEx side, in order to provide 5G services, there would need to be equipments and relevant investments that will support that specific spectrum.

But in order to alleviate the burden by the telco operators in -- with regards to the increase in CapEx, we will continue to focus on efficient investment. Especially, if you were to look at KT, KT already has a GiGA infrastructure nationwide when it comes to the fixed line network.

So going forward in the wireless, with the introduction of the 5G, we believe that we can reduce the CapEx on the fixed line infrastructure and hence, we will be able to implement CapEx investment in a more efficient manner compared to our peers.

(interpreted) Thank you. With no further questions, we will close the Q&A session. Thank you very much for your questions as well as your interest. Thank you for joining us. This brings us to the end of Q1 2016 earnings conference call. Thank you.

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.