KT Corporation (KT) Q2 2013 Earnings Report, Transcript and Summary

[Korean] 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 2013 Second Quarter Preliminary Earnings Results by KT. We would like to have welcoming remarks from Mr. Youngwoo Kim, KT IRO; and then Mr. Bum Joon Kim, CFO, who 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.

[Korean] Good afternoon. I am Youngwoo Kim, IRO of KT. We will now begin Q2 2013 earnings conference call. You can join the conference call via the website and can follow through the presentation slides as we make the presentation. [Korean] Since Q1 of 2011, KT has been presenting consolidated numbers based on the IFRS accounting standards. Q2 2013 consolidated statement includes performance of 60 companies, including KT, same as the previous quarter. With that, our CFO, Bum Joon Kim, will begin the presentation.

[Korean] Good afternoon. I am KT's CFO, Bum Joon Kim. KT has made bold pursuit in the non-telco market to lay down the basis for future growth and has built its capabilities in the virtual goods space and expanded it to All-IP subscriber base. And the second quarter was when such effort towards All-IP and making inroads into the non-telco market came to fruition. [Korean] Over the past year, LTE continued to record a fast growth. And in the fixed line market, IPTV continued its growth trajectory based on the broadband Internet. We now also start to see positive outcome of groupwide management with subsidiary companies, excluding KT, making KRW 155 billion of operating profit contributions, which is 180% higher compared to the previous year's figure of KRW 55.5 billion. [Korean] As such, we will live up to being a global leader in telecoms by enhancing corporate value with a focus on All-IP platform and be a respected company, a one that is socially responsible. Let me now walk you through our Q2 business results. [Korean] Q2 operating revenue, on the back of revenue growth from wireless, Media/Contents, financial and rental business recorded a growth of 0.8% year-on-year coming in at KRW 5,757,000,000,000. With wireless ARPU growth and contributions from group companies, operating profit increased 0.7% year-on-year to KRW 348.3 billion. EBITDA increased to 9.8% Y-o-Y to KRW 1,228,100,000,000. [Korean] Net income declined 43.3% year-on-year to KRW 133.4 billion, influenced by a fall in other operating revenue and a rise in nonoperating expense. Next page is on key subsidiaries business highlights. [Korean] kt Skylife and kt Rental generated steady performance in Q2 as well, especially kt Skylife saw 45.1% growth in operating profit year-on-year and kt Rental's OP increased by 2.9% year-on-year, continuing with their steady growth trend. [Korean] On top of key subsidiaries' operating profit growth, companies that were newly set up end of last year, such as KT Media Hub, KT Sat and KT Estate have been included in the consolidated figure, leading to a 180% increase in operating profit contribution from subsidiaries with the figure reading -- recording KRW 155 billion. Next is the breakdown of operating revenue. [Korean] Aside from the fixed line revenue, operating revenue recorded a year-on-year growth on all of the business lines. Wireless revenue on LTE subscriber growth, which led to ARPU increase, recorded a growth of 0.7% year-on-year. Media and contents revenue increased 35.3% year-on-year, sustaining its high growth rate. [Korean] Financial and rental revenue continued to grow at 14.3% year-on-year due to the inclusion of kt Rental and the consolidated statements into Q3 of last year. Merchandise revenue declined 15.8% year-on-year due to a fall in handset sales volume. Next is on operating expense. [Korean] Operating expense saw a rise of 0.9% year-on-year, coming in at KRW 5,408,800,000,000. Selling expense came in at a level similar to the previous year. Cost of service provided increased 17.0% year-on-year due to the impact from cost of real estate development and content sourcing. [Korean] Cost of merchandise fell 20.1% year-on-year due to a decline in handset sales volume and the ship-out price. Next is on highlights of the company's financial position. [Korean] Net debt declined 1.6% Q-o-Q to KRW 9,928,800,000, and net debt-to-equity ratio fell 2.1 percentage points Q-o-Q to 75.9%, recording an improvement in financial position. Next is on capital expenditure. [Korean] Q2 CapEx declined 39.5% year-on-year to KRW 603.7 billion, with the conclusion of most of the LTE coverage investments in 2012. To break the figure down, CapEx for wireless was KRW 182.2 billion; fixed line, KRW 228.1 billion; and others, KRW 193.4 billion. Implementation rate for the first half of 2013 was 31.10% against the annual guidance of KRW 3.5 trillion. [Korean] We expect an increase in the second half over the first half of the year, but CapEx since 2012 has started to trend down and will continue as such for the coming 3 years. Next is on business results from each service. [Korean] Wireless revenue on LTE subscriber growth, which drove up ARPU, increased 0.7% year-on-year to KRW 1,752,200,000,000, of which wireless ARPU trend continued, growing 1.6% Q-o-Q to KRW 31,615. This is a 7.4% growth on a year-on-year basis. [Korean] Q2 smartphone subscribers accounted 66.7% of total sub space at 10,970,000 subscribers. Of this, LTE subs stand at 6.06 million. In view of the current trend, we expect LTE to account for around 50% of the total subscriber base by the end of the year. [Korean] Based on KT's figures fixed and wireless telecom infrastructure in Korea, we will develop differentiated tariff plans and packaged products so as to move away from destructive subsidy competition and focus on offering of better services to customers. Next is fixed line business. [Korean] On the back of subscriber and traffic decline leading to lower revenue, fixed line revenue declined 6.4% year-on-year to KRW 1,507,700,000,000. Although fixed line telephony revenue fell KRW 91.9 billion on a year-on-year basis, it is a decline of 12.5% compared to Q1's reduction of KRW 105.1 billion, which confirms a slower pace of decline. [Korean] Broadband Internet posted a growth of 2.5% year-on-year. Based on such stable growth trend in broadband Internet, KT will continue to expand its IP-based subscriber volume to lay the basis for a turnaround in fixed line revenue towards growth. Next is on media and contents business. [Korean] With continued growth in subscribers, media and contents revenue increased 35.3% year-on-year to KRW 334.9 billion. kT Group is solidifying its position as the leading player in the 4 AC [ph] Broadcasting market through a proactive investment and effort in the media sector. [Korean] With KT Media Hub playing a pivotal role as a media and contents company, KT will find new growth opportunities and respond quickly and nimbly to market environment, thereby fostering Media/Contents as group's core growth engine. Last July, KT Media Hub launched olleh tv smart, the world's first Web-based IPTV using HTML 5, leading content innovation for TV service, where there is a mash-up of broadcast and information. Next is on financial and other service revenue. [Korean] Financial and rental revenue increased 14.3% year-on-year to KRW 965.2 billion due to the inclusion of kt Rental in the consolidated statement in Q3 of last year. Other service revenue on impact from real estate development revenue increased from 29.2% year-on-year to KRW 378.2 billion. This has been business highlights for Q2 2013.

[Korean] For more details, please refer to the materials we've previously circulated. We will now take questions.

[Korean] Now Q&A session will begin. [Operator Instructions] [Korean] The first question will be provided by Mr. Yang Jong In from Korea Investment Securities. And the next question will be provided by Mr. Josh Bae from UBS.

[Korean] Yes, I would like to ask 2 questions. The first question is, in the second quarter, it seems like the contribution that came from your subsidiary companies has actually increased quite significantly. And originally, when you've communicated, you have expected that contribution to be around KRW 300 billion for the entire 2013, but it seems like you have already reached that level. So to what extent do you expect the subsidiary contribution to be for this year? Could you provide some guidelines? The second question has to do with your MVNO strategy. Could you explain as to the reason why KT has a bigger portion of MVNO subscribers compared to your competitors? And also, could you share with us what your MVNO strategy is, basically the split between your own subscribers and your MVNO subscribers?

Thank you for the question. Let me take the first one regarding our subsidiary companies. Yes, we did earlier communicate that we would have profits, operating profits coming from subsidiary companies at around KRW 300 billion this year. [Korean] But I think we need to communicate with the market, it's going to be a little bit higher than that, maybe close to KRW 400 billion, and that's due to some of the improving numbers at our subsidiary companies, including the newly made KT Sat, Media Hub and Estate as well. [Korean] With regarding your second question, I think I'm going to hand over the mic to our Chief Operating Officer of our TNC [ph] department. He's in charge of the entire strategy for our wireless side, so he will explain in detail. [Korean] I forgot to mention his name. His name is Mr. Amo Koo [ph]. He is the Executive Senior Vice President of TNC [ph]. [Korean]

[Korean] Yes, I am Amo Koo [ph]. In terms of the MVNO markets, this is a newly forming market, and the government has intention to further promote and facilitate the MVNO market going forward. As you know, this market is mostly for low-ARPU subscribers and it's a different segment altogether compared to our existing subscriber segment, so we do believe that it is helpful to be a leader in the MVNO segment. [Korean] According to our internal analysis, MVNO is a market where we do not actually pay SAC. So we do believe that this is a market that is -- that does have embedded profit characteristics. [Korean] So the important share is not KT's subscriber split between MVNO and MNO, but how much KT's MVNO service can attract subscribers who have originally used other operator services. So that percentage is more important as compared to our own internal split. And considering the trend, I think that this is showing a positive trend.

[Korean] The next question will be presented by Mr. Josh Bae from UBS, and the following question will be presented by Mr. Kim Hong Sik of NH investment securities. Mr. Josh Bae?

I have 2 questions. First is on your promotion to offer double the data for your LTE subscribers. I understand that this is a promotion from July to October, so it's been about a month. If you could share with us what kind of impact this has had. For example, has it helped your subscriber acquisitions and has it changed the data usage behavior of your subscribers? And also, if you're considering extending this program beyond October. Second is on your real estate sale and copper cable sale. I recall KT booked a sizable gain in the non-operating line last year from these, but I don't see anything booked in the first half of this year. Can we expect some gains to be booked in the second half? And if so, could you please share with us how much this is likely to be? [Korean]

Let me answer the second part first, and Mr. Koo [ph] will answer just briefly on your first question. In terms of below the operating line, potential revenues/cash flow, a couple of our sales were a little bit slow in the beginning of this year, and that's kind of obvious because of the fact that copper prices fell roughly about 12% to 15%. So we're sort of watching that trend. But things were not copper-speculate, as I think it's safe to say we will have some copper sales in the second half of this year. To the exact amount, I can't say, because, actually, physical, we have to remove it. So I think anywhere between probably KRW 30 billion to roughly KRW 70 billion. [Korean] In terms of real estate, I have to mention in consolidated form. So anywhere -- I mean, again, this is something that you can't set in stone, so I will kind of give a range of anywhere between KRW 150 billion to KRW 200 billion is a possibility in the second half of this year. [Korean] And that is including KT Corp., the parent company, as well as KT Estate put together. [Korean]

[Korean] In terms of the outcome of this promotion, we've actually conducted a customer survey, and we were able to find out that more than 70% of our customers were aware of this promotion, to be aware of this level with more than 70%. And also more than 60% of the customers have turned favorable to KT. [Korean] In terms of the data usage behavior, because we started this promotion on July 1, we do not yet have any data. So it will be difficult for me to say one way or the other. [Korean] In terms of whether we will extend the promotion, we have not yet made any decision towards one way or the other, but we are quite steadfast in the fact that we want to further strengthen benefit that goes back to the customers.

[Korean] The next question will be presented by Mr. Kim Hong Sik from NH Investment Securities. And the following question will be presented by Mr. Neale Anderson from HSBC.

[Korean] I would like to ask 2 questions. First question is that compared to the size of your subscriber base and the size of your revenue on your telco side, your profit is comparatively quite low, especially if you look at LG U+, compare yourself to LG U+, that is more pronounced. What is the reason behind KT's lack of ability to generate profit? And how are you going to improve this going forward? Second question, the KT has been a company that created quite some noise in the market related to the 900 megahertz issue, as well as 2G shutdown initiative. So investors view KT as having political risk. What are your plans to mitigate the investors' concern on this?

Thank you for the question. First of all, just a quick identification of where we stand in terms of how our profit [indiscernible] and revenue trend is going. KT is uniquely positioned where a lot of our profits are coming from our fixed line rather than our wireless right now. And wireless, as you know, it's very competitive. So with the following revenue, and it's safe to say that there's a lot of built-in profit to the fixed line revenue, it is forcing and squeezing our profit margins. And then that is a fact, and we know this trend. Secondly, in terms of the LTE service, we started late, so it has become somewhat of a burden to us in the last year, 1.5 years. [Korean] So on the wireless side, the late starting of LTE, 1.5 years ago, has made it difficult for us to catch up. But as I said in the first quarter earnings call as well as last year's end conference call, we are working in order to turn that around, and it is becoming more -- we're gaining more traction, and we should see more of that benefits from what we're working on in the next quarter or 2. [Korean] So to be a little bit more specific on what we're doing and to give you a little bit of a tracking point for the next couple of quarters, is that we have 4 major points. One is that we are going to work on what we call TOM, top of mind, and raises, because it has fallen since we were a latecomer to LTE. So we would be working on consumer's viewpoint of KT in terms of raising TOM, top of mind. [Korean] Second is our distribution network, and we have identified some of the issues, which I can't go in details here, but we are working to strengthen our distribution channels so that we will be as strong as we were before. [Korean] Third is our network quality, which is still -- we're a very, very good network, but we will continue to work on better and better network and increase the quality of our network. [Korean] And lastly, introduce some new products to the market that is uniquely KT, using our strong fixed line and our IPTV and our wireless network and offer something that only KT can offer. [Korean]

[Korean]

Hold on, we did not finish that first or the second question of the last gentleman.

[Korean] In terms of the 9 megahertz and 1.8 gigahertz issue, we do not believe that this is a political issue that's creating a noise in the market. We think that these are initiatives and efforts that we are exerting in order to reduce business and operational-related risk on our part. [Korean]

[Korean] The next question will be presented by Mr. Neale Anderson from HSBC. And the following question will be presented by Ms. Moon Ji Hyun [ph] from KTB Day Securities [ph].

I've got a couple questions on the churn rate. I'd love to get your opinion. It's falling steadily at all 3 telcos, which is great. My first question is what do you think is the primary driver of this decline in churn? Is it lower customer interest in new handsets, or is it the stricter exit penalties for contracts? Secondly, is it realistic to expect that this lower churn rate would result in a structurally lower level of marketing expenditure in the future, or do you think this will be likely offset by further competition? [Korean]

[Korean] Yes, the reason why we believe that the churn rate has been trending down constantly is mainly due to 2 reasons. First reason is that with the introduction of more bundling products, and as bundled products accounts for a bigger portion of the entire part -- increased its portion against the product base, that has driven down the churn rate. Second is the adoption of smartphone. And the smartphone prices are much higher, so customers have to use this smartphone for much longer than they used to, for instance, a feature phone.

I think one of the focus or the points to look at is the improvement in broadband churn rates as our IPTV offering becomes stronger and stronger, and that's a supporting document to what Mr. Koo [ph] just mentioned, that this bundling is helping out in terms of the churn rates. [Korean]

[Korean] And also, a decreasing churn rate will have a positive impact on our marketing expenditure reduction. However, having said that, marketing expenditures are comprised of many different factors. So whether lowering churn rate will actually lead to marketing cost reduction, we would have to wait and see.

[Korean] The next question will be presented by Ms. Moon Ji Hyun [ph] from KTB Day Securities [ph].

[Korean] I'd like to ask 2 questions. First is that in the fixed line, especially in the broadcasting sector, we see a very fierce competition. KT Media actually has the biggest number of sales compared to other 3 operators, but your net addition trend has recently slowed. So could you share with us what your subscriber strategy is going to be like for your media services like OTS? And could you also share with us the corporate strategy of your company Media Hub? And out of your key subsidiaries, it seems like the financial and rental company is posting good performance. Now from a short-term perspective, do you have certain plans to focus on one certain subsidiary over the other? I would like to understand what your plans are regarding your subsidiaries, especially because I hear that you have plans to spin off one of your subsidiaries called KT Capital. And also, in terms of governance, could you also share with us basically what your direction is for your subsidiaries going forward?

Thank you for your question. The numbers are -- well, the growth in the media side has not, I wouldn't say slowed down, but it's not as rapid as last year. But it's still a very -- we look at it as a very growing business [Korean]. I think we did close to KRW 450 billion in revenue last year, and this year we're slated to do about KRW 660 billion. So it's still a pretty solid growth. [Korean] So from, I would say, reaching this level, we, as KT, went as far as we could. And so our management decided to spin off the management side of that business and called it Media Hub. [Korean] So if you can imagine just sort of the strategic brains of our IPTV and Media business to be at the Media Hub level, the first offering that they came out with since being spin off, is what I mentioned in my opening speech, is the Web-based new set-top box. [Korean] And this, the offering of the set-top box is not just a technological advancement, but also the management's style as well. We went through many iterations of the set-top box as well as doing a lot of prove-outs, so that we lower consumer complaints after we launch the product. So it's a new way of launching this product, and we feel -- I mean, of course, we'll continue to improve on it, but I think we have gone to a certain level where the Media Hub is becoming a very solid entity [indiscernible] [Korean] So to wrap up in the media side, Media Hub will be sort of the conduit between KT, IPTV as well as Skylife and have the biggest strategy, because media is a serious cornerstone of our growth engine for the future. [Korean] And to address your second question regarding some of the ownership structure or corporate governance with KT and some of the subsidiary companies, there's not a major shift that's going on. Again, from my perspective, we have, I think, invested close to KRW 1.3 trillion in buying and improving or cleaning up the ownership of some of these companies in the last 3, 4 years. And it's time for KT to sort of get back some of the investments. [Korean] By the way, let me -- I'm not saying I'm covering everything, but it is time to look at how the kt Group will function financially. And so this, beginning of this year, I think a lot of you know that we had some dividend payout to KT from subsidiary companies, not a large amount, but it's enough to signal that KT is sort of circulating our investments between us and our subsidiary companies. [Korean] And to be specific on the question you asked about KT Capital, we are looking at many ways of how KT Capital's ownership with KT will increase value as well as synergy. And so these kinds of things are looked at quite often. It's not something unique and it's something dramatic, but we look at these things because KT Capital is partly owned by KT as well as KTH. So we see how we can benefit our shareholders in terms of if we change structure. But it's currently at the sort of the initial feasibility study stage and nothing has been said yet. [Korean] I need to clarify it, it's not at the initial stages. It's sort of we are looking at it right now. Thank you. [Korean]

[Korean] Currently, there are no participants with questions. [Korean] The following question will be presented by Mr. (sic) Kim Hoe Jae from Daishin Securities.

[Korean] So I would like to ask 2 questions. In order for you to utilize the 9 megahertz band, what issues do you need to overcome? And when would that time be? And in turn, could you also share with us what your year-end wireless ARPU would look like?

Thank you for the question. On the 900 megahertz, it's hard for me to go into details. Rest assured, to our shareholders, that we are in discussions with the right people at the right places, so that we can get this thing resolved. It's about all I can say. [Korean] In terms of our ARPU growth for this year, I think it still stays, and what we communicated earlier, which is on a year-on-year basis about on an 8% growth in ARPU over last year. [Korean]

[Korean]