KT Corp (KT) 2017 Q3 法說會逐字稿

(foreign language) 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 2017 third quarter preliminary earnings results by KT. We would like to have welcoming remarks from Mr. Youngwoo Kim, KT IRO and then Mr. Kwang-Suk 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.

(foreign language) Good afternoon. I am Youngwoo Kim, KT's IRO. Let us begin the third quarter 2017 earnings presentation. This earnings release call is being webcasted via our website and you can follow the slides and listen in on the call at the same time. Please note that KT is releasing its earnings figures based on consolidated financial statement under the IFRS standards. We will begin with our CFO Shin's opening remarks followed by Q3 2017 results.

(foreign language) Good afternoon. I am Kwang-Suk Shin, CFO of KT. In the third quarter KT has seen sustained growth from GiGA Internet and the media business and based on steady performance from its group subsidiaries, the company recorded operating profit of KRW 377.3 billion. By acquiring 3,610,000 GiGA Internet subscribers, we achieved annual target of 3.5 million earlier than expected. For IPTV also, there was more than 100,000 subscriber net additions for 3 consecutive quarters with the group's media revenue continuing to post 2-digit growth year-over-year. In the meantime we launched premium family bundled service last September, moving ahead in the so-called family marketing. By offering strong bundling benefits on the unlimited data product, we allowed families to enjoy premium services at a reasonable price point.

In growth business we launched GiGA Energy Manager, which is an energy efficiency product offered in the form of a service and GiGAeyes, which is an intelligent video security service. And GiGA Genie, which is an AI based set-top box, recently saw its subscribers break above 300,000 level displaying visible results. For GiGA Genie business, we plan to strengthen the portal for developers and use a more sophisticated voice recognition based conversational technologies to introduce a more convenient and closer to our daily live service.

With that, I now move on to Q3 2017 earnings results. Q3 operating revenue was up 5.4% year-over-year posting KRW 5,826.6 billion. On higher marketing expense and contributions to broadcasting communication development fund, operating profit was down 6.1% year-over-year to KRW 377.3 billion.

Net income was down 13.6% year-over-year to KRW 202.6 billion with EBITDA at KRW 1,215.1 billion. Next is on operating expense. Q3 operating expense was up 6.3% year-over-year with the base effect from cost of merchandise on the back of cancellation of premium handset sales. Driven by fixed and wireless subscriber growth and increase in sales volume and selling out the inventory for older handset models, marketing expense increased 2% year-over-year.

Next is on the financial position. Q3 debt to equity ratio was 121.1%, down 16.8 percentage points year-over-year. Net debt ratio was 35.2%, down 2.5 percentage points year-over-year. Next is on CapEx. Total CapEx execution up to Q3 was KRW 1,336.5 billion. There were investments relating to the new spectrum acquired last year and investment accompanying the GiGA Genie subscriber expansion.

And out of the CapEx guidance of KRW 2.4 trillion, running rate is at 55.7%.

Next is on individual business line. Wireless revenue was KRW 1,816.6 billion, down 3.6% year-over-year. Performance indicators were more or less sound. The decline rather is more from change in the accounting treatment. We are also seeing second device and IoT subscriber net addition trends continue and especially there was 30,000 subscriber increase for the handsets with total wireless subscribers increasing 274,000 Q-on-Q.

Wireless ARPU was KRW 34,608, an increase of 0.2% Q-on-Q driven by databased upselling and acquisition of high-end tariff subscribers for the premium handsets. Wireless service revenue declined 0.7% year-over-year, but excluding the change in the accounting treatment, it actually increased 1.7%.

Next is on the fixed line business.

Fixed line revenue declined 2.9% year-over-year to KRW 1,218 billion. PSTN revenue fell 10.5% year-over-year, which is within our original projection. Broadband revenue on the other hand increased 3.9% year-over-year continuing its topline growth trend since the second quarter of 2015 when GiGA Internet subscriber acquisition became full-fledged and is defending the PSTN topline erosion.

Next is on the media and content business. Media and content revenue was up 15.8% year-over-year to KRW 572.6 billion. We have recently seen GiGA Genie subscriber numbers surpass 300,000 level and with the growth of high quality IPTV subscribers as platform revenue, double-digit topline growth continued.

Next is on financial and other services. Financial revenue was up 0.9% year-over-year recording KRW 873.9 billion on increase in domestic acquiring volumes and marginal recovery from decline in the number of Chinese tourists. Other service revenue was up 4.9% year-over-year to KRW 566.2 billion on good performance from real estate and IDC business.

That ends the third quarter earnings performance and moving on to 2017 dividend plan. In light of the internal and external business environment, annual earnings outlook and capital allocation plans, we expect financial year 2017's EPS to be around KRW 1,000 level subject to final decision at the BoD meeting beginning of 2018. For more details, please refer to the distributed documents. We will now entertain your questions.

(foreign language) (Operator Instructions) (foreign language) The first question will be provided by Jong In Yang from Korea Investment & Securities and the next question will be provided by Hoi Jae Kim from Daishin Securities. Mr. Yang, please go ahead, sir.

(foreign language) My first question has to do with the increase in the discount rates up to 25% so regulations relating to the tariff and also government's move to actually alleviate the burden of the socially vulnerable class when it comes to telecom bills. I would think that these different factors would have a negative impact on your overall P&L. Do you hence have a way to actually improve on your cost structure to respond to such regulatory changes? And looking out into next year, do you think that it will be possible for you to grow your bottom line?

My second question, it seems the move to try to split the disclosure between the vendor subsidy and telco subsidy is being delayed. I believe that there are some multiple issues related to this. Do you know the reason as to why this attempt is being delayed and if you think that the split disclosure is actually adopted, what impact would it have?

(foreign language) Responding to your first question. As we see increase in the number of subscribers selecting the 25% tariff discount scheme, would that have any impact on our P&L was your question. As you've mentioned, with the increase in the number of people taking out the tariff discount scheme, it is true that it will have some of a pressure on our topline growth.

But having said that, compared to people who take out the handset subsidy, we see more people gearing towards a high-end tariff scheme and they seem to have higher retention rate and that also is accompanied by reduction in the marketing cost as we are able to save more on the handset subsidies. And so we are going to -- and we believe that the impact that it will have on our P&L will differ depending on the upselling initiatives that we have as well as the impact of retention and also the extent of marketing expense saving.

Going forward, we will continue to push for upselling, providing more benefit to the high-end tariff for premium handset users and also expand on the value-added services based on our data and really focus on further enhancing the quality of our customers and really strengthen our sales strategy that is focused on further enhancing cost efficiencies and hence try to minimize the impact that it will have on our bottom line.

In terms of potential impact on our profitability after 2018, at this point we are in the process of developing our business plan so it is too early to provide you with the concrete details. Having said that, the government's current policy approach to alleviate the telecom bills for the household is taking momentum. So we believe that with such movement, after 2018 it will have some pressure on our profitability. So, we do expect there to be some pressure.

Having said that, we believe that we will be able to -- we will really focus on trying to save or reduce the marketing expense, make our business process more efficient and really achieve a structural cost improvement -- a cost efficiency structure so that we could minimize any potential impact that could be felt through the regulatory changes.

Responding to your second question about split disclosure. This issue was also discussed during the period when people were talking about the handset subsidy act, but I understand that it was actually carved out from that discussion at that point in time. I believe that through making the handset subsidy structure of the vendors much more transparent and disclosing the relevant information, it could bring down the ex-factory, the shipment price of the handset device so eventually it could have a positive impact in alleviating the consumer's burden.

However, in order for the purpose of this initiative to be actually realized, I believe that there has to be a proportionate regulation between the handset subsidy as well as the channel incentives that are being provided. I believe those aspects would have to be well institutionalized in order for the basic purpose of this initiative to be realized.

(foreign language) Our next question will be presented by Hoi Jae Kim from Daishin Securities and the following question will be presented by Neale Anderson from HSBC.

(foreign language) We recently heard that for the PyeongChang Olympics, KT has completed the build-out of the 5G pilot network. I believe there is high expectation and hopes for the 5G technology, but however compared to 4G, there is greater level of investment that is required. So, can you provide some color as to what business model we can expect in the era of 5G technology and by providing the 5G service, will you be able to actually recoup the investment that you've made?

My second question has to do with your pay TV business. I understand that with a view to actually disperse the traffic that KT's position is to make active use of your subsidiary KT SkyLife, the satellite broadcast service provider. I would like to understand the division of roles and responsibility between KT and KT SkyLife.

(foreign language) Responding to your first question about the business model for 5G. Currently it is too premature for you -- for us to actually provide a specific or a detailed picture in terms of the business model. Having said that, in light of the characteristics of the 5G technology which is ultra speed and ultra-low latency and ultra connectivity, we believe that we can actually provide not only to the existing subscriber base but we expect there to be new business opportunity in the areas of autonomous driving, live VR and precision measurement. So on various B2B based arenas, we believe that there are to be additional business opportunities.

In terms of the PyeongChang Olympics and the 5G that we are providing, there are 4 main services that will be offered. It's namely Omni Point View, Sync View and Interactive Time Slice and 360 degree VR Live. These are the services we will be providing at PyeongChang Olympics.

In terms of the size of the 5G investment, it is hard to predict at this point in time. But in light of the fact that 5G network will be well linked or connected to 4G and also we will focus on hotspot based network configuration and also continuing the gradual build-out of the coverage, the total investment that will be required is expected to be lower or could be lower than 4G technology. And in terms of the 5G service offerings to the actual users, it had not yet being determined. We will closely look at the market demand as we expand the infrastructure.

Responding to your second question on the potential collaboration with SkyLife. This will happen based on our group's media strategy. KT's corporate-wide media strategy is that based on GiGA infrastructure, IPTV and satellite platform, we will maintain our incumbent #1 position. And on top of that, we will lead in the new business areas such as AI, Artificial Intelligence TV.

In terms of how we could actually expand the UHD subscriber base in time for the terrestrial UHD services, IPTV business will do so through our GiGA Internet and SkyLife will use its new satellite to further expand on its UHD services.

(foreign language) The next question will be presented by Neale Anderson from HSBC and the following question will be presented by Stanley Yang from JP Morgan.

The first one is on real estate and I see you're ahead of target with the GiGA broadband subscribers. Does that have any impact on the way you can monetize some of the local exchange buildings and other real estate you've had and do you feel that you're still on track to hit the KRW 750 billion revenue target for 2020 or maybe even ahead of that? That's my first question.

The second one is on the IT services in the data center area. That's a product here that a lot of telcos are looking at at the moment. The business seems fairly flat at KT. Do you think this can grow meaningfully? Are there any substantial investment requirements relating to that? Thank you. (foreign language)

(foreign language) Responding to your first question about the relationship between the GiGA broadband Internet subscriber expansion and our real estate development related revenues, I cannot say that they are closely interlinked with one another.

Having said that, in terms of mid to long-term perspective based on our optimization strategy for each of the sites, basically there is no change in our previous plan that by 2020 we will grow our real estate related revenue to mid KRW 700 billion.

Now if you look at the real estate revenue for 2017, as we are seeing many development projects actually generating some revenue, compared to 2016 there was a significant growth and we expect that the real estate revenue figure to be above KRW 400 billion and this figure is well in line with once again our mid to long-term plan.

Responding to your question about our IDC business on IT service in data centers, you are correct that we see the market demand actually increase. We've opened the new IDC center and we believe that this will have an upward impact on our IDC service revenue. But this revenue figure can -- is subject to certain -- I guess certain changes because you also have to account for revenues that are generated based on the orders that we win.

And also since we have opened a new IDC center already, we do not expect a significant amount of investment to be required in the foreseeable future. After opening up Mok-dong, the second IDC center, we have already acquired 80% of the customers for the occupancy of the IDC center and we believe that -- and at this point, we are reviewing a possibility of an additional I guess IDC center.

(foreign language) The next question will be presented by Stanley Yang from JP Morgan.

(foreign language) I would like to ask 2 questions, they're actually on dividend. The first, you've mentioned that you plan to do KRW 1,000 dividend per share. Can you explain as to the process that took you to that conclusion? Did you consider this or make this decision based on the payout ratio or have you set for yourselves a certain target in terms of the absolute amount of a dividend that's paid out -- distributed out to the investors?

I would think that -- I mean -- or did you just reflect the business performance of this year or did you also reflect the outlook for next year and your -- because outlook for next year is quite uncertain given the regulatory environment. But despite that, you have actually increased -- you've increased your -- I guess your level of dividend compared to the past. So, does this really reflect your commitment to actually bring about cost cutting and cost saving next year?

Second question is also on dividend from a mid to long-term perspective. Now would you -- do you consider all these different indicators and like for instance free cash flow, debt to equity ratio and payout ratio when you make a decision on a certain amount of dividend? I mean I guess I'm asking this question because as an investor, is there a specific indicator that we should pay more attention to in wanting to understand your dividend position?

(foreign language) You've asked 2 questions on dividend and I believe that those 2 questions are interrelated. So if you look at dividend of 2017, once again based on our annual performance outlook as well as capital allocation planned, we expect it to be around KRW 1,000 per share. But of course eventually it would have to be decided by the BoD meeting slated for the early -- slated for early 2018.

After 2017 through continuous improvement in profitability and efficient allocation of the capital, basically our position is to increase the size of shareholder return and also increase payout ratio. At this point because our financial numbers have not yet been closed, it will be difficult for me to provide you with the payout ratio per se. Having said that, in light of the cumulative earnings up to the third quarter and in light of the performance outlook that we have on a normalized basis, we think that the dividend payout ratio itself will be higher compared to last year's 30%.

(foreign language) The next question will be presented by Dan Kong from Deutsche Bank.

(foreign language) I have a follow-on question on the 5G question. Chairman Hwang recently appeared in some -- in front of the National Assembly Audit Inspection and talked about the 5G technology. And when the topic of sharing of infrastructure -- infrastructure sharing came up, he spoke with a quite negative tone on this possibility as he mentioned the long-term perspective.

But if you look back to the past when 3G was developed, there was talk of WiFi sharing between the other telcos, SKT and LG; and KT was of a position that it will not do so. As a result, there was a significant competition on 3G technology and it actually ended up undermining the earnings performance of 3 companies. So if we were to look at 5G, I mean except for Korea, globally it seems to be the consensus that people expect there to be higher expense and investment that will be required for 5G. So, is this concept of infrastructure sharing a complete impossibility? I would like to ask this question and learn about KT's position because I mean effectively KT really holds the key to this issue.

Second question is on universal fee, I don't think this question was asked previously. I would like to understand what you forecast in terms of this regulation. How will this actually play out as we go forward? We would have to go through some legislative process as well. Do you have any -- I guess any sense as to how this whole process will actually play out when it comes to the universal tariff system. Third part of the question is that there was a saying beginning of the year that there will be about 75,000 shares of MasterCard shares will be sold. Will this actually happen this year?

(foreign language) Responding to your first question, the government has selected the so-called efficient utilization for essential facilities to advance the build-out of the 5G and this plan or improvement proposal was actually made in July. And at this point, the Ministry of Science and ICT is reviewing possibility of further bettering this system.

When it comes to the expansion and provision of the infrastructure facilities, actually this could have a negative impact on putting a cap on the investment that is required. So, we need to have a balanced approach to bring about a balanced growth of fixed and wireless as well as to make sure that the nation's infrastructure continues to become more upgraded. And also in light of more efficient build-out of the 5G network, we as a company continuously discuss and cooperate with the government as well as other operators in order to further enhance investment efficiency.

Responding to your question about the universal fee system. On August 23, Ministry of Science and ICT had basically proposed a revision to the Electricity and Telecommunications Business Act that actually includes the introduction of the universal fee system and it has received feedback by October 2 and at this point, the Regulatory Reform Committee is currently undertaking a review process.

But if you look at the whole concept of universal fee system, basically what it seeks to do is to have the law itself regulate the market tariff. And this is a concept that does not exist in any other country overseas. And if there is an introduction of a universal fee system, it will have an impact not only on the MNOs, but also on the MVNOs as well.

Therefore we believe that also from the perspective that the company should have a discretionary power to set the pricing on its own and for itself, I believe that there could be potential issues with respect to the legislative process. So, we are of the position that the legislation for universal fee system is not necessary.

Responding to your third question. In the first half of the year, the amount of shares of MasterCard that we actually sold off is 0.02%, which equates to 300,000 shares and we currently have 0.15% of MasterCard shareholding. And at this point in time, we do not have any plans to make additional sales of shares.

(foreign language) Currently there are no participants with questions. We will wait for a second until there is another question.

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(foreign language) As there are no further questions, we would like to now close the Q&A session. Thank you very much for your questions and your interest. And once again, thank you for joining us despite your very busy schedules. This brings us to the end of our earnings release for third quarter 2017. Thank you very much.

Portions of this transcript that are marked (foreign language) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.