KT Corporation (KT) Q2 2015 Earnings Report, Transcript and Summary

[Korean] [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 2015 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 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] [Interpreted] Good morning. I am Youngwoo Kim, KT's, IRO. We will now begin second quarter 2015 earnings presentation. Our call is being webcasted via the company’s website and please refer to the presentation slide as we present this quarters business results. [Korean] [Interpreted] And please note that since the first quarter of 2011, KT has been presenting consolidated numbers under the IFRS accounting standards. With that, let me invite CFO, Gwang-Seok Shin for his opening remarks and presentation on Q2, 2015 business results.

[Korean] [Interpreted] Good afternoon. I am Gwang-Seok Shin, KT's CFO. KT posted sound top line in operating profit reported by corporate restructuring and efforts to strengthen telecom's competitiveness and by reorganizing group's company portfolio we were able further enhance financial soundness. [Korean] [Interpreted] For the wireless business, we continue to expand benefits to the consumers by launching market leading services, like the LTE data choice and continue to grow subscribers underpinned by stronger channel competitiveness. [Korean] [Interpreted] For the fixed line business underpinned by GIGA Internet, we have strengthened our GIGA platform and the network keeping to our leadership and the broadband internet market. IPTV continues to grow with its subscriber base surpassing the 6.2 million mark. [Korean] [Interpreted] KT will focus its corporate wide efforts on gaining on upper hand and 5G generation and disposing its GIGA infrastructure, eventually by maximizing core business competitive, growing new businesses and differentiating technology and services we will strive towards becoming global number one. Let me now run through Q2, 2015 performance results. [Korean] [Interpreted] But before I do so, let me first brief you on financial statement changes related to KT Capital sales. With the signing of KT Capital sales agreement in the second quarter, KT Capital's P&O is presented as P&O from discontinue operations applied retroactively from 2014. [Korean] [Interpreted] Also for your information, asset and liability of KT Capital has been reclassified as asset and liability hold for sale under other current assets and other current liability. [Korean] [Interpreted] Q2, 2015 operating revenue was down 3.6% year-on-year to KRW 5,431.3 trillion and declines in fixed line and merchandise revenue. Service revenue was up 1.0% year-on-year and good top line performances from all businesses, except for the fixed line business. [Korean] [Interpreted] Operating profit came in at KRW 368.8 billion turning flat, driven by stronger competitiveness in our core businesses and efficient spending. Net income posted KRW 321.8 billion with EBITDA reporting KRW 1,205.6 trillion. Next is on the statement of financial position. [Korean] [Interpreted] Q2, debt-to-equity ratio is 153.6%, down 33.9 percentage points Q-o-Q. Net debt ratio, excluding KT Capitals net debt is 55.5%. Next is on CapEx. [Korean] [Interpreted] 2015 first half cumulative CapEx stand at KRW 8,33.5 billion with a remainder of 2.7 trillion guidance trend to be spent over the remainder of the year. Next is on the business results from each line of businesses. [Korean] [Interpreted] Wireless revenue on LTE subscriber growth which led to service revenue growth is up 1.7% year-on-year to KRW 1,829.2 trillion. In line with the cutting edge marketing strategies KT launched LTE data choice, My Time Plan and GIGA LTE and driven by its strong trend of competitiveness recorded 240,000 net additions in the second quarter. [Korean] [Interpreted] LTE subscribers now account for 67% of the total base with Q2 ARPU recording KRW 34,879 of 1.4% Q-o-Q. Next is on the fixed line business. [Korean] [Interpreted] Fixed line revenue on PSTN revenue decline is down 7.5% year-on-year to KRW 1,302.7 trillion. [Korean] [Interpreted] We are seeing sustained growth in broadband subscribers with a good take up of GIGA internet and GIGA Wi-Fi home products which we believe will help improve fixed line revenues going forward. Next is on media and contents business. [Korean] [Interpreted] Media and contents revenue is up 7.3% year-on-year to KRW 409.2 billion. We continue to hold leadership position in the pay TV market, driven by sustained IPTV subscriber growth and through efforts to acquire high quality subscribers. Next is on financial and other services. [Korean] [Interpreted] Financial revenue on solid revenue from BC card is up 1.8% year-on-year to KRW 800.9 billion. Other services revenue is up 20.9% year-on-year to KRW 484.4 billion driven by higher IT and solutions revenue. That brings me to the end of our Q2, 2015 earnings presentation. [Korean] [Interpreted] For more details, please refer to the materials we provided. We will now take questions.

[Korean] [Interpreted] Now Q&A session will begin. [Operator Instructions] [Korean] [Interpreted] The first question will be provided by Peter Kim [ph] from Desjardins Securities. And the next question will be provided by Jong In Yang from Korea Investment Securities. Mr. Kim, please go ahead sir.

[Korean] [Interpreted] I see that your earnings results for the second quarter was also quite favorable after the good performance in the first quarter. I would like to understand what your shareholder return policy is, including your plans for dividend payout? Second question has to do with the media business, SK Telecom is really solidifying its media capabilities by carving out the business unit from the SK planet and merging with SK Broadband. I would like to understand what KTs media strategy is including KT Skylife? Could you elaborate as to what your fixed line and wireless based media strategy is going forward. Last question is since the launch of the GIGA internet product in the second half of the year, I would like to understand what performance is like, for instance what is number of the subscribers, how much is this business contributing to your top line, what is the ARPU status and what would be future prospects for the GIGA internet product?

[Korean] [Interpreted] Let me first refer to your question on the dividend, as you know last year KT was not able to pay out dividend because of the weakened competitiveness in our core business of telecom business and also the high level of expense that was incurred due to the massive ERP program that which we implemented. So since last year we've been exerting our efforts in further enhancing our competitive edge, have been restructuring the company and has also enhanced the groups company portfolio. And so we are continuing to focus on improving the profitability of the company and as a result this year we have decided to pay out and resume the pay out of the dividend.

[Korean] [Interpreted] So based on the first half earnings results and also the profitability forecast that we have for the entire year and our plan to make use of the funds we believe that it will be around 501 per share, but the final figure will be decided in the BoD meeting which will be held early 2016.

[Korean] [Interpreted] Let me also share with you what our dividend policy is going to be for the future going forward. As you know the company was able to successfully do away with the weakening of the competitiveness, the whole issue of the competitive weak – this weakening and we were able to achieve turnaround in terms of our profitability. And also we need to continue to – continuously grow. We need to further identify and discover our future growth engine. And considering these factors in terms of our dividend position or dividend spends, we are going to be very prudent and flexible at the same time.

[Korean] [Interpreted] Also rather then having a fix stated dividend policy every year we would look at what the financial outcome is, excluding the one-off factors and from there on we calculate and decide on our dividend payout. Basically the position of the company is that we will continue to improve the earnings performance of the company, so that we can expand on the dividend payout and also further shareholder return policy.

[Korean] [Interpreted] Now let me respond to your question about our media strategy, basically KTs media strategy is underpinned or based on strengthening of our platform. As you know KT has multiple array of platforms that it owns, including IPTV satellite, as well as mobile. And also by making use of the access that we have to our subscriber base, we wish based on the extensive platform that we own to further attract large amounts of subscribers, so that we may incur additional sources of revenue.

[Korean] [Interpreted] Recently we have launched UHD set-top for OTS and have expanded on the number of UHD channels to three. Based on such initiatives we will continue to further upgrade our quality of our subscribers and based on those high quality subscribers I expect that the value of KTs media platform will further improve.

[Korean] [Interpreted] So within the group we are providing variety of value added services, including T-commerce and mobile advertisement and based on KTs platform competitive edge we will continue to growth the relevant segments and areas. From this perspective, we are going to continuously collaborate with our affiliated subsidiary companies, including Skylife, KTH, KT Music and Nasmedia, so that we may maximize synergy.

[Korean] [Interpreted] Yes, let me now respond to your question about the GIGA internet, as of end of June the number of subscribers stand at 450,000.

[Korean] [Interpreted] Now in terms of the specific subscriber target we do not have a specific number that we're shooting for. However, in line with dispersion of the GIGA internet environment we are going to maintain a flexible stand.

[Korean] [Interpreted] Basically when people use the GIGA internet they can really feel the difference in the speed when they are downloading a huge file and also if you are using a smartphone it allows for Wi-Fi access that supports the GIGA speed. So we see that the consumer’s preference is quite high. So once the UHD market takes root, we expect that people's preference for GIGA internet is going to further improve.

[Korean] [Interpreted] The actual ARPU improvement effect is going to be different, depending on the percentage of bundling that - the amount of bundling that each product is reflecting, but basically after the bundling compared to the existing 100 meg [ph] product, 500 meg is designed to have an increase of about KRW 5000, where as one gig product is about 10,001 higher.

[Korean] [Interpreted] So at this point in time GIGA internet is not really uplifting the ARPU level but we believe that once the percentage of GIGA internet users increase out of the total subscriber base very naturally we will see a positive impact on the ARPU and the revenue trend.

[Korean] [Interpreted] Thank you.

[Korean] [Interpreted] The next question will be presented by Jong In Yang from Korea Investment Securities. And the following question will be given by Sean Oh from Bank of America Merrill Lynch. Mr. Yang, please go ahead, sir.

[Korean] [Interpreted] I would like to ask you two questions, recently there was a press release that KT is going to participate in one of the auctions that's going to take place. So would you take – would you participate in that, regardless of what the regulatory criteria is? I would like to understand what KTs position is. Second question is recently MSIP has announced or disclosed an information that said that, when it comes to the subscribers who take up rate plan that is above KRW 60,000 before the handset subsidy and the percentage was 35%, and now this is the total three Telco’s aggregate number, but as of June its around at 10%. So that means that your high ARPU subscribers are declining and that will have an impact on your ARPU trend going forward. So you could you elaborate on this point?

[Korean] [Interpreted] Yes, the question was about whether KT had plans to enter into the Wintech [ph] or the internet based specialized bank and KTs position is that regarding the Wintech industry we are reviewing possibility of participating in an internet based bank consortium, but no specific decision has been made at this point. Once we make a decision then we will communicate with the market.

[Korean] [Interpreted] Now you asked also about the mid to long-term prospect for ARPU growth, up to 2016 we believe ARPU will continue to growth because of the LTE migration. And based on our differentiated and competitive products, such as the GIGA Wi-Fi and GIGA LTE product we are going to further strengthen our sales capabilities. And once the data usage expands across the market we believe that that will also drive ARPU growth based on the data usage.

[Korean] [Interpreted] My Time Plan is a plan where it enables the subscribers to use data unlimitedly without a limit and in any time they wise and as you can see we are providing such data related value to our subscribers and by providing differentiated services we can lessen the burden that the subscribers feel and we are launching various different product towards that end.

[Korean] [Interpreted] Especially KT has the biggest amounts of media subscribers, as well as contents and we want to migrate those capabilities and apply that to the wireless aspect, so that it could really kick start the growth of the data usage. We also have KT Music, KTH and Mhouse, basically companies are affiliated companies who have the capabilities and mobile content and they will also play in a very important role in really facilitating the data based services for us going forward and we do expect high level of synergy.

[Korean] [Interpreted] The next question will be presented by Sean Oh from Bank of America Merrill Lynch. Mr. Oh, please go ahead, sir.

[Korean] [Interpreted] I would like to pose three questions. First question is that you've introduced the new tariff plan, will that change your ARPU guidance. Second question has to do with your fixed line business, I think the results were better than what the market – where we were expecting, could you explain us to the reason behind that. Third question, were there any one-off items, either on the non-operating income side or on the expense side?

[Korean] [Interpreted] Your question relating to our wireless ARPU, sine the enactment of the handset subsidy at, we have seen consumers selecting reasonable tariff plans and also in terms of purchasing the devices there is a pattern whereby people are purchasing – their purchasing behavior has become more reasonable. And also we are seeing the number of subscribers who are taking the tariff discount, 20% tariff discount, so it is expanding and so we have applied that to our ARPU growth projections. So we would like to adjust our ARPU guidance from the original 4% down to 3% per annum.

[Korean] [Interpreted] No, but having said that, because KTs LTE penetration is still low and since we are seeing sustained increase in the data usage, we still believe that ARPU growth is possible.

[Korean] [Interpreted] Especially we are providing a differentiated services that really be fit to the generation of data usage, such as GIGA LTE and VIP pack [ph] thereby expanding on subscribers who take up the higher test plans, meaning above 59.9k tariff plans. And also we have introduced a data value added product, the unlimited data product called My Time Plan and we've also upgraded our existing IATA type [ph] product to adjusted plus product and we believe that we will continue to provide value on data usage, thereby achieving our ARPU growth target.

[Korean] [Interpreted] In terms of the decline in our fixed line business revenue, in the second quarter the PSTN declined the speed, it had slowed that is true, but we believe that its attributable to the seasonality factor, therefore we still have to wait and see whether this is a stop to our trend.

[Korean] [Interpreted] So if you look at the cumulative figure for the first half of the year, the decline was KRW 150 billion, so it actually is within the scope that we had expected or we had projected which is about 300 billion on an annual basis.

[Korean] [Interpreted] Now for the non-operating items, in the second quarter on a Q-o-Q basis KT Rentals gain from the sale was included in the non-operating income line item in the first quarter. In the second quarter however it was included in the operating P&L from discontinued operations. And also there was sales and liquidations of certain related company that incurred loss in the amount of KRW 66 billion.

[Korean] [Interpreted] Now as of the end of the second quarter most of the restructuring and reshuffling that we have been applying to the group portfolio companies have – it has come to a certain end, so believe that losses related to such effort would start to decline going forward.

[Korean] [Interpreted] Currently, there are no participants with questions. [Korean] [Interpreted] The following question will be presented by Dan Kong from Deutsche Bank. Mr.Kong, please go ahead, sir.

[Korean] [Interpreted] I would like to pose three questions. The first you mentioned that the speed of decline of PSTN revenue, you would have to wait and see whether it’s a structured tender or not, but then what about on the expense side, are there any aspects that you can improve on in order to control or lower the cost items, since you have finished restructuring your subsidiary companies, I am wondering what at the KT bench level could be done? Second question has to do with regulation, especially starting August the authorities are going to receive applications for the fourth mobile Telco business license, if the license is approved or is given out and if a player is selected then what impact will this have on either KT or the industry as a whole? My third question is quite simple question, now there seems to be some diversions between the data that MSIP announces and the data that KT announces in regards to your LTE subscriber number and your 3G smartphone user number. Can you explain as to – is to the reason behind that?

[Korean] [Interpreted] Let me first respond to your first question on the cost and expense side, in order to improve the fundamentals of KT, we need to do away with unnecessary activities and focus our efforts on what we do well. So we must regain our competitive strength and regain our ability to generate cash from our operation. That’s why as you know we have conducted massive headcount restructuring and this year we have also conducted expensive restructuring on our subsidiary companies and have sold of KT Rental and KT Capital.

[Korean] [Interpreted] Now we are continuing to improve on our cost structure and basically what we are doing is we're changing the way we work and also fundamentally changing the system based on which we work in order to further make or achieve a cost efficient organization. So it’s not just cost saving that is important, but this is inevitable in order for us to further strengthen our fundamental competitiveness and to a certain extent we are seeing some visible results.

[Korean] [Interpreted] Responding to your question about the fourth operator, basically their player would have to be qualified according to the MSIP framework plan, they would have to have the qualification of the technology, and will have need to have the ample finances. And if they apply for the license then there would be possibility for certain entities that satisfy the qualifications to be selected, but it is quite inappropriate for us to actually say what that possibility is.

[Korean] [Interpreted] But even if the fourth player enters into the industry were going to further improve on our telecom quality and provide a differentiated tariff plans and services, so that we can further acquire subscribers and enhance on our qualitative services. Thank you.

[Korean] [Interpreted] Yes. And your final question about the difference in the subscriber statistics, that’s announced by MSIP and us. Basically the main reason behind the difference is that, within the wireless subscribers there are Viber subscribers and LTE hybrid subscribers and those subscribers number is not included in MSIPs numbers, so basically that is the main reason.

[Korean] [Interpreted] Now so the a follow up question, then we knew – calculate ARPU to you include those subscribers of do you not the subscribers, because we've said – we are seeing this discrepancy from the first quarter on and I think that the gap between the two numbers are quite large and that will have a quite a meaningful impact and for instance the penetration number, so you could you elaborate?

[Korean] [Interpreted] Yes, when we calculate our ARPU, the hybrid sub-number is included.

[Korean] [Interpreted] Currently, there are no participants with questions.

[Korean] [Interpreted] With no further questions, we will close the Q&A session. Thank you for all your questions and interest. And also thank you for joining us today. This brings us to the end of the second quarter 2015 earnings conference call for KT. Thank you very much.