KT Corp (KT) 2016 Q2 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 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 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. Youngwoo Kim, KT IRO.

(interpreted) Good afternoon, I am Youngwoo Kim, KT's IRO. We would begin Q2 2016 earnings conference call. Our call is being webcasted via the Company's website and please refer to the presentation slides as we present the business results. Also please note that since the first quarter of 2011 KT has been presenting consolidated numbers under the IFRS accounting standards.

Now, our CFO Gwang-Seok Shin will deliver his remarks on Q2 2016 results.

(interpreted) Good afternoon, I am Gwang-Seok Shin, KT's CFO. In the second quarter through GiGA infrastructure and optimized services for the changing telecom environment we were able to grow subscribers and revenue from our core business. And after adjusting business portfolio of Group companies, subsidiary contribution to profit has improved significantly enabling KT to record quarterly operating profit at around KRW400 billion level for the first time in four years since the Q1 of 2012.

First, in the wireless business we expanded on consumer's choice by launching KT-only handsets at reasonable price. And our second device models such as Leon kids phones, LTE Egg+, smart watch successfully entered the wearable market helping to continue subscriber net addition trend.

In our fixed line business supported by broadest GiGA coverage in Korea, GiGA Internet subscriber growth continued. IPTV is also seeing sustained growth as it leads Korea's media market through creating an advanced UHD eco-system. GiGA Internet subscriber as end of Q2 was 1.73 million, accounting for more than 20% of our total Internet subscribers. IPTV also recorded subscriber net addition of 140,000 in Q2. In light of current expansion in GiGA Internet subscriber base and user preferences, we believe 2 million subscriber target by the year end will be achieved without any difficulties.

Equipped with LTE M network, world's first commercialized Internet of Small Things, KT will facilitate device and service development to expand the market for its future business and introduce specialized products that satisfy customer need such as private LTE.

This year KT is poised to solidify its competitiveness in converged open platforms so as to proliferate its future business ahead of others and to build a firm foundation for growth.

Now, let me move on to Q2 2016 financial results.

Second quarter operating revenue was up 4.5% year on year to KRW5,677.6 billion on growth and merchandize and service revenues. Driven by sound performance from core businesses and greater subsidiary contributions, which led to top line growth, as well as structural cost cutting efforts, operating profit was up 15.8% year over year recording KRW427 billion. Net income came in at KRW255.2 billion and EBITDA KRW1,257.2 billion.

Next is on operating expense. Q2 operating expense was KRW5,250.7 billion up 3.7% year on year. On higher handset sales and marketing for GiGA business marketing expense increased 2.6% year over year.

Next, is on the financial position. Q2 debt to equity ratio was 130.3% down 23.3 percentage points year over year. With net debt ratio at 41.7% down 13.8 percentage points year on year.

Next, is on capital expenditure. Total CapEx spent up to Q2 stands at KRW637.2 billion. As we secured new spectrum from the previous spectrum auction, we expect investment expenses to rise to a certain extent. But through continuous cost savings efforts and efficient implementation, we plan to stay within our annual guideline of KRW2.5 trillion.

Next, is on performance of each business line. Wireless revenue was up 2.8% year over year to KRW1,880.1 billion. Newly launched second devices and KT dedicated handsets appealed to the market supporting wireless subscriber net add of 200,000 in Q2.

Q2 LTE subscriber expanded to 74.1% of the total base with wireless ARPU at KRW36,527 up 1.3% year over year. 40% of our LTE subscribers used data select rate plan and with data usage trending up, we expect a natural ARPU increase.

Next, is on the fixed line business. Fixed line revenue declined 1.1% year over year, but on a Q-on-Q basis went up 0.6% rebounding consecutively for two quarters. With GiGA subscribers reaching over 1.73 million and higher share of premium products, as well as impact from new interconnect revenue, broadband Internet revenue posted a growth of 12% year over year mostly offsetting PSTN erosion.

Next, is on the media and content business. Media and content revenue was up 15.1% year on year to KRW470.9 billion. KT, with its biggest IPTV subscriber base, will strengthen profitability through enhancing quality of our subscribers and growing platform revenue underpinned by differentiated strategies such as GiGA Internet based bundling and world's first HDR service offerings.

Next, is on financial and other services. On growth and card usage, which led to solid BC Card's revenue, financial revenue was up 7.1% year on year, to KRW857.6 billion. Other service revenue was up 12.4% year on year, to KRW546.4 billion on winning orders for global ICT and solutions business.

Now that was on Q2 results. Let me elaborate on our 2016 dividend plan. We expect 2016 dividends to be around KRW800 per share in light of our annual performance outlook and capital management plan. Final confirmation will come after the BOD meeting in early 2017.

For more details please refer to the materials which are circulated. We will now entertain questions.

Now, Q&A session will begin. (Operator Instructions). Hoe Jae Kim, Daishin Securities.

(interpreted) I would like to post two questions. My first question has to do with dividend. Last year, you paid out KRW500 per share, and I understand that that KRW500 is based on 30% of your standalone net profit excluding the one-off gains. I would like to understand as to how you came to KRW800 per share. What is the basis of that number? And also going forward, would you be continuously communicating your DPS numbers or would you be sharing with us your payout ratio, going forward?

Second question. With the failed attempt by SK Telecom to acquire CJ HelloVision, I would like to understand how you paint the outlook for the second half of the year in the Pay TV market. I would like to understand KT's strategy and also your strategy in the UHD segment.

(interpreted) Responding to your first question about the dividend, as to what the basis for the number that we have arrived at. Now, for the dividend for 2016, it is based on the standalone net profit excluding the one-off gains as well as the cash flow based on which we looked at the balance across different aspects. First being the improvement of financial structure, second being investment for gaining a future growth engine and also considering the shareholder return aspects as well. So we have considered all of those three aspects and have tried to strike a balance. And so this KRW800 per share, we believe is a level that will not undermine the Company's financial structure and at the same time does not undermine its future growth potential.

Responding to your question about -- of our future dividend policy from year [2017] onwards, we will continuously consider our business performance as well as capital management plan in determining the size of the dividend payout. We would place our foremost priority in improving the profitability and cash flow of the Company based on which we are managing our business and we believe that accordingly and quite naturally, we expect the shareholder return size could expand going forward.

Now responding to your second question about the failed attempt at acquiring CJ HelloVision, I have to first say they were quite cautious in making a prediction or outlook for the pay TV market going forward. But considering the fact that the M&A attempt has failed, one can expect that there could be more competition to expand one's subscriber base in light of the fact that different players would want to strengthen their competitiveness across different platforms.

However, having said that, in light of the fact that the regulatory authority is very much focused on making the marketing environment transparent in regards to the bundling product of the fixed line segment, we believe that there is low possibility that there would be a heightened or reckless competition in this segment.

From KT's perspective, we have a very strong foundation of GiGA network based on which a competitive content and services are being provided. And by making use of our broadband and IPTV competitive edge, we believe that regardless of the competitive backdrop, we will be able to continuously grow in terms of both volume and quality.

You also asked about our plans regarding the UHD business. We are currently expanding and focusing on launching different set-top boxes and by partnering up with different manufacturers, we are very much focused on enhancing and increasing the coverage for the service as well as devices. And recently, we have also introduced HDR level definition of a VOD service, continuously strengthening our competitiveness so that we can have a more solid ground when it comes to the UHD services.

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

(interpreted) I believe that the trend of ARPU increase in the second quarter is quite encouraging and despite the fact that there's more adoption of the tariff discounts plan, I would like to understand how you were able to increase your ARPU, and what is your outlook for the second half of the year?

Second question is, if you were to compare the tariff discount plan as well as the subscribers who are taking out unlimited data plans, first, what is the number of subscribers for each of those segments, and also of the new subscribers that you are acquiring, what's the percentage, the breakdown between people selecting the discount -- monthly discount plan as opposed to the unlimited data plan?

And going forward for the second half of the year, I would like to understand the extent of the impact that could be dealt through your monthly discount plan on your P&L, what's the impact of the monthly discount plan on your P&L?

(interpreted) Responding to your first question about the second-quarter ARPU, as said before, the ARPU is KRW36,527 and the main drivers behind this ARPU was that we first got rid of the seasonality factor on a Q-on-Q basis, which was seen in previous quarter. And also we see higher percentage of subscribers taking up a more high-end tariff plan. And the third aspect is that, we've seen a greater level of revenue and sales from value-added services such as data charge-ups, or data top-up.

Now, we are continuously going to explore differentiated services based on the data aspect, and we will continue to enhance the quality level of the subscribers so that we may be able to achieve that 2% per annum target.

Now however, we see that subscribers that are adopting the 20% discount plan, the inflow of such subscribers are higher than expected. And also, we are at a period where we see significant changes in terms of the Internet of Small Things as well as the second device which will open up a new type of a subscriber market. So, we are very closely monitoring and looking at the ARPU trend.

Now, after the implementation of the handset subsidy and the percentage of subscribers taking out unlimited plans have actually fallen to the early 10% level. And with the increased needs by the subscribers and the benefits that we are providing to subscribers through products like VIP pack we have now seen recovery to about 30% to 40% level before the implementation of the handset subsidy act.

We will continuously introduce differentiated services underpinned by data so that we can expand on the subscribers who take out and who adopt the high-end tariff plan.

Responding to your second question, if you look at the subscribers who have adopted the monthly discount plan of 20% it is for Q2 470,000. On a QoQ basis, as against the total sales, there was about an increase about 6.1% and as such out of the total base, the percentage of these people account for 32%. And on a Q2 basis and in a accumulative basis it is 11% as against the cumulative subscribers and the number of these people on a cumulative basis is 2.05 million.

You also asked about the trend for the 20% discount subscribers. We believe that this is an aspect that will be impacted by the size of the subsidy as well as the handset launching schedules. However, at this point the inflow of such subscribers is higher than what was originally expected at the beginning of the year but we expect that percentage to somehow stabilize in the upper 20% level.

With the increase in the subscribers who take out this monthly discount plan, this could have some pressure on the ARPU but there is also an impact of reducing the marketing cost as well as helping to increase subscribers that take out the high-end tariff plan. So, we believe that from a short-term perspective its impact on profit and loss is not going to be all that significant.

Sam Min, Morgan Stanley.

Thank you for this opportunity to ask questions. I wanted to congratulate you on a sound beat this quarter. And I was wondering if you can give us [certain] outlook for profitability in the second half, particularly since your second quarter [deep] consensus quite considerably and heading into, I guess, second half -- particularly in the fourth quarter there was some seasonal impact as well. So -- and considering the increase in operating leverage, profitability will most likely continue to go up.

My second question is on your PSTN or telephony revenue. Do you think by second half of this year we'll see a meaningful slow down in the telephony revenues -- deceleration of the telephony revenue so that we can see even more increases in profitability. That would be my second question.

(interpreted) Now, on your question about the second half outlook because there are many drivers that will impact on the performance I would first have to preface by saying that I am a bit cautious to paint a definitive picture. Having said that we have been able to bring about a growth in service revenue and also structurally make our costs more efficient and also improve on our financial position.

Through such efforts we have been very steadily been able to grow our profit on a quarterly basis and we are exerting our utmost efforts to sustain this trend. So, if we are able to achieve the business targets that we have set for ourselves and if we continuously make our cost structure more efficient I believe that also in the second half of the year as we did in the first half we will be able to achieve quite steady performance.

And also, we are working very hard to eliminate the seasonality as well as one-off factors that usually happen in the fourth quarter. So, for this year compared to the previous years I believe that the variability across -- between the performances of the 4Q and the previous quarters would be more mitigated.

Responding to your second question, if you look at our PSTN numbers on the first half on a cumulative basis, if you look at our revenue from an year-over-year basis there was about KRW129.6 billion decline recording PSTN revenue at KRW1,065.3 billion. So, if you were to compare that to our annual target reduction target of around KRW200 billion, we are well within the target.

Once again in terms of the structural revenue decline and the relevant speed with respect to that it's -- I am very cautious to give you a definitive number on that.

(interpreted) Jee-hyun Moon, New Asset Daewoo.

(interpreted) I have two questions. First has to do with spectrum. With the new spectrum that you have acquired I would like to understand what your investment plans are and the relevant costs. Because in the first half your CapEx was relatively quite small. So, do we have to expect a significant spending to come in the third quarter?

Second question has to do with the overall regulatory environment. The news that we're getting from the government authority, different commissions and National Assembly is very different. So, the market is currently quite confused with respect to the regulatory direction going forward. I would like to understand what KT's management's understanding is, when it comes to the regulations for the telco industry as well as for pay TV market.

(interpreted) Responding to your first question on the new spectrum, the actual investment size has not yet been completely determined. Having said that because we have won the spectrum; which is a narrow band, which has relatively low level of obligation for network build out. We expect that we would be able to efficiently control the CapEx and also for the existing spectrums through efficient investments and also improvement in the CapEx investment process we are going to work hard to make sure that the CapEx is stabilized downwards.

Responding to your question about the government's regulatory environment, the regulatory authorities' position basically is that rather than arbitrarily cutting the price they will focus more on facilitating and activating service competition so that the general public's telecommunication related expense burden could be lessened and that philosophy or principle is still very valid.

And most recently MSIP has announced a telecom market competition related plan and in that plan also they focus more on improving the -- basically the framework for -- a framework focused on the wholesale regulation rather than cutting the tariff in the market based on which they seek to expand voluntary price competition amongst different players so that at the end of the day it will enhance the benefit and the welfare that goes back to the consumers.

KT will also implement its business in line with this government policy by developing variety of services and content so that we will enhance the benefit that goes back to the consumers.

(interpreted) Stanley Young, JP Morgan.

(interpreted) My question is on dividend. KT's management, thanks to their efforts in cost control and turning around its business, have been doing very good performance. In the second quarter KT is now up to around 70%, has caught up with SK Telecom's net profit level like it is up about 70%. But in terms of the dividend that you're paying out, for SK Telecom they are distributing about KRW700 billion while at KT, based on the number you've given us, will be distributing around KRW200 billion, so that's about one third of SK Telecom's dividend.

So, when can we expect for KT to actually catch up to SKT's level at least of above -- [by about] 50%. I know that back in 2010 and 2012, your payout ratios were about 42% to 69% as against that basis. This year, the dividend is slightly up but from a mid- to long-term perspective, when would you be able to catch up to about 50% of what SK Telecom is paying out. When would you become quite comparable to SKT?

(interpreted) You asked about our dividend going forward. This year, we expect that on an year-over-year basis that our profitability will improve. But we have to also understand that the Company's ability to generate profit has not yet fully normalized.

So from a mid- to long-term perspective it is of utmost priority for us to actually solidify the foundation for us to be able to create and improve on profitability. So we've made a very prudent decision in light of these facts.

So once our cash generating capabilities become much more stable and we make our financial position much more sounder, then very naturally we expect that will lead to higher payout ratio. Having said that, the Company does not have a dividend payout ratio target going forward, based on improvement and profitability we will do our best to expand on shareholder return.

(interpreted) Dan Kong, Deutsche Bank.

(interpreted) You've mentioned that the Company is focused on structural cost-cutting efforts. Can you specify and be a little more detailed in what efforts you're actually putting in? Because I think some people in the market are quite doubtful as to the sustainability of such cost-cutting efforts.

I say this, because if you look back to five to six years ago and read the conference call notes that one has taken at that time, the management has said the same things about structural cost cutting. But in the wake of that there still were increases in costs.

So I would like to understand how the current cost-cutting efforts are different from what you've engaged in, in the past?

Second question has to do with your PSTN. If it is hard for you to paint a clear picture on the trend of the slowdown, can you at least provide us with some color as to what the end game will look like? I mean what level of ARPU or what level of subscriber are you projecting? Because after the decline in ARPU I believe that one, you could still experience decline in number of subscribers. So what is the eventual, I guess, figures for PSTN business?

(interpreted) Responding to your first question. KT currently, actually has a separate team that is specifically dedicated to finding opportunities in structurally cutting costs. So we're focused on improving structural efficiency and not just on eliminating one-off cost items, so that we can bring about a sustainable outcome in this aspect.

So basically the -- there's been an extensive analysis on the cost structures since 2015. And we were able to achieve good improvement on the cost savings side. And for this year as well this effort will continue.

So to talk about some of the detailed efforts for 2016, we will focus on improving the business flow, the business work process, and making the processes more efficient and saving costs with respect to a very rigid expenditure or rigid cost items. Through such efforts we would discover improvement opportunities.

And on top of that, we will not just tackle each of the cost issues, but we will take an overall TCO perspective so that through CapEx advance investment we could also achieve savings on the OpEx -- operating expenditure side as well.

It will be difficult for me to share with you a specific savings target or plan, but we believe that through such cost improvement efforts it was thought to play into the performance of 2016 as well as to results for the future.

Responding to your second question. From 2016 onwards, we expect the revenue decline to be in the range of 11% to 12%. But in the absolute terms the absolute figure is declining, so it is going to pressure the top line and bottom line less as we go forward. And also considering the 40% of these fixed lines and now for businesses, the B2B lines, we think that the percentage of decline will slow, going forward.

It's hard to project on the exact subscriber number or the ARPU level, with the fixed to mobile replacement, the ARPU and subscriber revenue will fall. However, through providing bundling products and also fixed rate tariff plans, we will limit that decline.

(interpreted) Just a follow-up question on cost savings. Compared to five to six years ago, how is your current effort different?

(interpreted) The biggest difference is that in the past when we embarked on cost savings, we did not have any separate organization or division who was dedicated to that mission. In the past, a simple target was given to different divisions and teams and had them achieve those target numbers.

But what's different now is that we have taken a fundamentally different approach. We now have a separate dedicated organization whose sole responsibility is look at the structural opportunities. Meaning, how shall we change the way we work, how should we change the work process, so that we can bring about a sustainable cost savings framework.

So that's what the biggest steps where the biggest difference lies. In the past, it was just a mere target number, but these days now, it is more of -- more essential as to how we work and it's much more substantial.

(interpreted) If there are no further questions, we will close the Q&A session. Thank you very much for joining us despite your very busy schedules. This brings us to the end of the Q2 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.