KT Corporation (KT) Q1 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'll begin the conference of the 2013 First 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, will present earnings results and entertain your questions. This conference will start with the 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 Q1 2013 earnings conference call. [Korean] You can join the conference call via the website and can look through the presentation slides as we make the presentation. Since Q1 '11, KT has been presenting consolidated numbers based on the IFRS accounting standards. We'd like to note that from Q1 2013, kt Tech is no longer reflected in the consolidated figure, and so business result of total of 61 companies, including KT, is represented in the statement. [Korean] With that, our CFO, Bum Joon Kim, will begin the presentation.

[Korean] Good afternoon. I am Bum Joon Kim, CFO of KT. In the first quarter, we expected market to stabilize with operation suspensions of 3 operators, but we admit that different from what we'd expected, markets concern and overheated marketing competition persisted. [Korean] In Q1, KT did its best not to take part in overheating marketing competition but rather, based on its core product competitiveness, such as in its networks, differentiated content, customized pricing plans, focused on securing a basis for future growth to growing its wireline and wireless All-IP customer base. First off, with LTE subscribers surpassing 5 million, we regained our wireless market. And in the wireline business, broadband Internet and IPTV subs are showing sustained pattern of growth. Our new IT devices such as Smart Home Phone HD successfully launched into the market. [Korean] And in February, for the first time as a Korean CEO, KT's CEO, Suk-Chae Lee, gave a keynote speech at the Mobile World Congress. In his speech, he presented that KT has made an entrance into the virtual goods market, transforming itself from a traditional telecom company to one that's of an ICT convergence. [Korean] KT has the biggest scale of all IP-based subscribers and strong platforms of IPTV, olleh tv now and olleh market. Our efforts will come under full swing as we start to introduce the most optimized services and pricing plans for the All-IP environment as we lead the virtual goods market. With that, I would now like to move onto Q1 business results. [Korean] On the back of revenue growth from wireless and media services and the impact from kt Rental's inclusion into the consolidated numbers, operating revenue increased 7.0% year-on-year to KRW 6,104.5 billion. Operating profit, however, declined 36.7% year-on-year to KRW 367.3 billion due to the impact from marketing spend growth. Net income declined 47.5% year-on-year to KRW 212.6 billion due to the decline in operating profit. EBITDA fell at 7.2% year-on-year to KRW 1,246 billion. Next is highlights of major subsidiary companies. [Korean] BC Card, kt Skylife and kt Rental all posted impressive results in Q1 as well. Especially Skylife's operating profit recorded a growth of more than 100% year-on-year, and BC Card and kt Rental all posted operating profit growth of more than 19% and 13%, respectively, showing a stellar performance. With subsidiaries posting higher operating profit, newly established company such as KT Sat and KT Estate, were included in the consolidated statements, bringing the subsidiary contribution off by more than 120% year-on-year to KRW 131.4 billion. Next is breakdown of the operating revenue. [Korean] In terms of operating revenue, aside from the wireline business, all businesses showed a year-on-year growth. Wireless revenue increased 2.4% year-on-year due to the ARPU growth which was driven by LTE subscriber growth. Media/Content revenue increased 36.2% year-on-year, continuing its strong growth trajectory. Financial/Rental revenue increased 9.6% year-on-year due to the inclusion of kt Rental in the consolidated statements in the third quarter. Next is on operating expenses. [Korean] Operating expense increased 11.9% year-on-year to KRW 5,737.2 billion. Selling expense increased 47.8% year-on-year because of strong LTE marketing, which began in full swing from Q2 of 2012. Cost of service provided increased to 24.8% year-on-year because of real estate development costs and costs for content sourcing. Cost of merchandise rose 15% year-on-year due to active LTE marketing. Next is highlights of financial position. [Korean] Q1 assets, liability, equity all declined 1.2%, 0.8% and 1.7%, respectively, on a quarter-on-quarter basis. Net debt slightly inched up compared to previous quarter due to the decline in cash and cash equivalents as deferred handset payment from 2012 was made. But we expect the figure to improve after it's second quarter. Next is on capital expenditure. [Korean] Q1 CapEx declined 41.9% year-on-year to KRW 521.1 billion. As in Q1 of 2012, there was a focused investment into LTE. To break this figure down, CapEx for wireless is KRW 247.1 billion; wireline, KRW 138 billion; and others, KRW 136 billion, recording 15% of implementation rate against the annual guidance of KRW 3.5 trillion. Now moving onto the business results for each of the services. [Korean] With the growth in ARPU, thanks to LTE subscriber growth, wireless revenue increased 2.3% quarter-on-quarter to KRW 1,756.5 billion. Wireless ARPU continued to grow, moving up 1.4% quarter-on-quarter to KRW 31,116. It's a 8.3% growth year-on-year, surpassing the KRW 31,000 mark in just 9 quarters since Q4 of 2010. [Korean] Smartphone subscribers at end of Q1 account for 65% of total subscribers at 10.6 million. The number of LTE subscribers is 5.07 million, surpassing the 5 million mark in just 1 year and 2 months. KT recently launched an on- and off-net unlimited pricing plan for fixed and wireless, optimized for All-IP environment. Through differentiated pricing plans and variety of virtual goods, including olleh tv now and Genie, we plan to expand our competitiveness in the wireless market. Next is on the fixed line business. [Korean] Due to the decline in fixed line subscribers and traffic leading to lower revenue and greater impact from bundling discounts on broadband services, fixed line revenue declined 8.5% year-on-year to KRW 1,521.9 billion. [Korean] Although fixed line telephone revenue declined KRW 105.1 billion year-on-year compared to Q4's KRW 135.4 billion, it is a 22% decline which shows a mitigated pace of decline. [Korean] Broadband Internet, especially, is a service that is crucial to expanding All-IP subscriber base of IPTV, VoIP and Smart Home, and so we plan to strengthen current market leadership so as to expand the base of users. Next is on Media/Contents business. [Korean] Media/Contents revenue increased 36.2% year-on-year to KRW 314.1 billion, thanks to continued subscriber growth. Despite heightened competition in Q1, kt Group Media subscriber, which includes IPTV and Skylife, grew by over 200,000, solidifying its position in the for-fee broadcasting market. [Korean] KT Media Hub was established in Q4 last year to maximize the synergy between Media/Contents business within the group. With KT Media Hub at the center, we plan to explore new growth opportunities and respond to market changes with agility and speed, fostering Media/Contents at the group's core growth businesses. Next is on financial and other service revenue. [Korean] Financial and Rental revenue increased 9.6% year-on-year to KRW 916.9 billion due to the inclusion of kt Rental in the consolidated statements in Q3. Other service revenue increased 65.1% year-on-year to KRW 431.8 billion, reflecting the impact from real estate development. This wraps up the presentation and business highlights for Q1 2013. [Korean] For more details, please refer to the materials we circulated. We will now take questions.

[Operator Instructions] [Korean] The first question would be provided by Mr. Yang Jong In from Investment Securities and the next question would be provided by Mr. Josh Bae from UBS.

[Korean] I would like to ask 2 questions. First has to do with the recent launch of the on- and off-net unlimited rate plan that's been introduced into the market. What is its impact on your profit and revenue, especially respective impact on your wireless and wireline? Second question, the government is currently planning to reallocate the frequency in the month of August. I would like to understand what KT's strategy is with regards to the broadband LTE and LTE advanced?

Regarding your first question, yes, we did issue the on-net pricing scheme. It is based on, looking at our average ARPU of KRW 31,000, obviously we are offering this on-net at a much higher price, which is to the market is KRW 62,000. But actually, with this, it kind of comes up to about KRW 51,000. And in our view, it is still value-accretive, ARPU-accretive. We have been getting very positive response from the market. Our sales, our number of sales have just gone up significantly from our sales of that pricing scheme before this. [Korean] Just a quick correction, I meant KRW 67,000 tariff rate with the saving after discount of KRW 51,000. So having said that, again, the big question that you raised is it accretive to us, our network? Yes, it is at this time. We will monitor this very closely because it is a very heavy usage-based tariff scheme, so we will monitor it and see how it goes. [Korean] And lastly, the impact on this tariff scheme as to our fixed line revenue or our ARPU, yes, we assumed there'll be some. I mean, as you can see, our fixed line revenue continues to fall. Will it accelerate this? It could, but in our view, it's minor. It will have a very positive impact in terms of holding onto our subscribers to one of the best networks in Korea or the best network in Korea. And we hope that it will facilitate and mitigate people leaving, so they will stay on our network longer with a very good pricing scheme. [Korean]

[Korean] I am Jang Soo Lee [ph] from KT from External Corporation division. With regards to considering the speed at which LTE is penetrating into the market, there is currently, I guess, a limited utilization of the frequency spectrum. So in order to improve the efficiency of the utilization of the frequency, KT -- we wish to be allocated the adjacent frequency next to 1.88 gigahertz. And with regards to multicarrier and carrier aggregation, we believe that in the third quarter commercialization is possible. And in terms of the LTE event, it's not a fresh investment, but it would be an upgrade to the existing framework. And in 2013, the investment amount related to LTE Advanced is going to be quite minor and that figure is already reflected in the CapEx number.

[Korean] The next questions will be presented by Mr. Josh Bae from UBS and the following questions will be presented by Mr. Kim Hong Sik from NH Securities. [Korean] We will move onto our next question. The next question will be presented by Mr. Kim Hong Sik from NHS Investment Securities and the following question will be presented by Mr. Don Kim from Deustche Securities Korea.

[Korean] Compared to your competitors, KT's share price is relatively low. I'm wondering whether as one of your KPIs for the management is -- share price is one of the indicators based on what you assess the performance of the management? If not, do you plan to add that as a KPI going forward? And I would like to understand what KT's management effort is in order to try to beef up the share price in the market? Second question is that the new government has announced that it's going to try to facilitate the giga Internet. If that is the case, what would be the impact that KT will feel in terms of the ARPU from its broadband business?

To answer the, I guess, stock price corporate value aligning with the CEO, yes, our CEO does have in his KPI as what we call total shareholder return. And this is based on the Telco Index, as what will the cost be, and it's based on how much we can outperform that. So it is included in there. Plus, I mean, if you look at the disclosures, our CEO has purchased a lot of stocks with his own bonuses from the company so there's quite a bit vested interest from the CEO. [Korean] To make comments on other executive of the company, including myself, my KPI specifically states certain percentage as being TSR as well, including all the staff members of our team. [Korean]

[Korean] Allow me to respond to the giga Internet question. Ministry of Science and Future Creation has an important model of making Korea into a ICT powerhouse, and they have designated network upgrade as one of the key tasks to be performed. And the government has said that by 2017, they are encouraging the operators to expand nationwide coverage up to 90%. [Korean] And I believe that investment into giga Internet will take place when -- once and when there is a differentiated tariff and pricing plan that exists compared to the broadband service. [Korean] As of this point, there is no commercialization time, concrete commercialization time, but we are closely reviewing potential business models. In terms of the impact on ARPU, it's too early to say. We will have to wait and see how the competitive landscape and the trend plays out.

[Korean] The next questions will be presented by Mr. John Kim from Deutsche Securities Korea, and the following question will be presented by Mr. Sean Oh from Merrill Lynch.

First one is regarding your CapEx. Considering KT's fixed line revenues look like it's on pace to decline another 8% to 9% this year again and this pace may continue for a couple of more years, how should the market think about your fixed line CapEx? I'm asking since your fixed line CapEx budget was KRW 1.3 trillion in 2011. Last year was KRW 1.1 trillion, and this year, your guidance for this year is about KRW 1.2 trillion. So how should the market think about your fixed line CapEx budget considering the decline in the business? Second is with respect to your business subsidiaries. During your conference call, you just mentioned that the P&L reflects 61 kt Group subsidiaries. Can you share how the number of kt Group subsidiaries have evolved over the course of last 3 to 4 years? Do you see further additions of new businesses to KT's portfolio? [Korean]

Well, thanks for the question. Regarding CapEx, just the big numbers first, we had a little bit of a decrease in CapEx from last year. We're at KRW 3.5 trillion this year, and we'd like to see that trend falling going forward. That's one. [Korean] Now when you ask the question regarding fixed line, I want to be specific. You mentioned revenue falling year-on-year 8%. I assume you're talking about PSTN. So with regards to PSTN, our annual CapEx for PSTN is relatively small, very minor. I would say, at most, maybe KRW 50 billion. [Korean] However, in terms of the overall fixed line business, we are seeing a little slight increase from that of last year, a KRW 1.1 trillion roughly to this year, KRW 1.2 trillion, because of our initiative of going All-IP and making our network much more efficient, which will in turn, turn to lower OpEx from the years coming ahead. [Korean] So again, we are quite aware of your question. I mean, this is a falling revenue, and why are we putting all this money in? But if you specifically look at it, it's not that picture at all. In fact, there are some investments going on in the fixed line side where we truly find we will save money on OpEx in the years ahead. Without that, we will continue to -- we won't have much chance to lower OpEx in the fixed line, so this is the reason why we have taken this choice. [Korean] With your second question, I just have some rough numbers right now. I can't go into every detail, but at the end of 2011, we had about 52 subsidiary companies, including KT. And again, the first quarter of this year, we ended up 61 subsidiaries right now, including KT. [Korean] So to -- again, going back to a little bit bigger picture, back in 2011, we look at a strategy where we have to continue to be strong in our telco side but also nurture a non-telco business. [Korean] So during that time, we acquired a lot of companies, made new companies like KT Sat and whatnot. But overall, the strategy is that we will continue a sort of 2 tiered where we have telco, non-telco. [Korean] Now going forward, there's really no number that's important to us. In fact, if you look at last quarter, we actually omitted 3 companies and acquired 2 more -- not acquired but became sister companies. And if you look at the details of it, we actually shot down one company because we felt it was noncompetitive, which was kt Tech. [Korean] And we merged together a company called KT Innotz, a software company that we felt will be better run more efficiently if we merge it together with KT Cloudware. [Korean] And then lastly, we got rid of a company -- we actually liquidated, sold to another company called U Payment, which is a subsidiary company of BC Card, which was a bus credit card service, which felt -- we felt was no longer within our strategy. [Korean] So our subsidiary companies and these companies will continue to evolve. I mean, we'll continue to find more efficient ways of running it. We obviously, in these 3 cases, we found it's more efficient to get rid of it. In the same time, we acquired a couple of companies in the last quarter. That's why we had a net minus of one company. But again, as I said, it's not important how many we have. It's how efficient we're going to be with the given strategy of telco and non-telco. And to answer your question, it's really the number isn't important to us. [Korean] But overall, I'd like -- the final comment is that the subsidiary companies' and our strategy is churn and to gain traction in that they are adding significant amount of operating profits to our parent companies. So in our view, we will continue to look at these very carefully and manage them very carefully with synergies that we will continue to extract among KT and these subsidiary companies. [Korean]

[Korean] The next questions will be presented by Mr. Sean Oh from Merrill Lynch, and the following question will be presented by Mr. Sam Min from Morgan Stanley.

Three quick questions. Number one, just a little bit perplexed here with regards to the subscriber loss given that all 3 players went through the marketing suspension or new subscriber addition suspension period, yet it was only KT that it seemed to have lost the net subscribers. So I'm trying to figure out with high brand equity that KT has, what went wrong, in your view, during the first quarter? And what is the outlook going forward for the rest of the year? Your competitor or your smaller competitor has mentioned that it's planning to add at least about maybe 400,000 to 500,000 subscribers in net additions, and I just wanted to see where KT was. Number two, what is the fair market value of all your royalty holdings? And if you were to recognize it, what would the impact to -- impact be to your shareholders' equity and your deferred tax liability? And finally, if you can just reiterate what your CapEx guidance is for this year? [Korean]

Thanks for the question. This is a expected question. After the first quarter, there was some losses in our subscribers. In order for me to address this question, we have to step back and give me a chance to explain our view of what happened in the first quarter. [Korean] I said this in the last conference call as well. I mean, last year was a very tough year for us, starting LTE late and losing the brand. It was a tough year for us, and we spent a lot of CapEx in catching up to our competitors. And we were ready in terms of pricing scheme, the handsets and the network when the year end came. [Korean] Now -- and this year came around, and the staggering cease of operation could be seen as an opportunity or risk. We saw it as an opportunity, and we were last to be stopped from operating. And in essence, there was a lot of acquisition we made during that time, and then being the last, I guess, became sort of a tough call because we had our hands tied. Our competitors had their last say, and so we had a net loss. [Korean] So going forward for us, we always have to keep an eye out on not only on subscriber numbers but also our profitability levels. We try to maintain a fine balance between subscriber growth and what -- how much net profit and operating profit that we extract. So it's not to say we can go full out. We do not want to use money or subsidy as a marketing tool, and that will be the last remaining resort. I mean, we want to use our fundamental benefits of KT, which is having the most amount of PSTN subscribers, a very good network from going forward, and we want to use a fundamental competitiveness so that people do not leave. And we will focus a lot from here going forward on retention of subscribers. [Korean] So in last comment, I'm confident going forward that KT, with its best fixed line network, the most amount of PSTN subscribers, IPTV, Skylife, all these put together, I am confident that we will retain and have the best -- better retention rate going forward and even offering tariff rate on that savings, and we should come back and regain competitive edge. [Korean] About the second question, I'm afraid to ask. Can you repeat the question because I didn't really get what you were asking? [Korean]

Yes, sure. If you were to step up your fixed assets, PP&E, including your real estate held for investments, how would that impact your -- what would the fixed -- what would the fair market value be for your net PP&E? And how would that be balancing on the liability side, such as shareholders' equity and deferred tax liability? [Korean]

Let me ask you -- let me answer your number 3 question. The CapEx guidance for this year is KRW 3.5 trillion. [Korean] Regarding number 2, I think I will have my IR team answer you directly, and if anybody wants, please send us an email, we'll send you the answer. [Korean]

[Korean] The next questions will be presented by Mr. Sam Min from Morgan Stanley.

I have 2 questions. First is on marketing. Given recent share price movement of Korean telcos, it seems fairly clear that the market is expecting competition and marketing expenses to fall going forward, particularly in the second quarter. My question is, CFO Kim, do you agree with this? And secondly, if you do agree, how much of this do you think is structural or over a longer period or temporary that's currently dictated by government oversight? My second question is on subsidiary profit. Of the KRW 130 billion operating profit contribution, could you tell us what portion of that was seasonal? And if you could provide, perhaps, annual guidance of the subsidiary OPs, I would appreciate that very much. [Korean]

Thank you for the question. Regarding your first question, I'm -- as a CFO of the company, which focus on profitability, I'm looking forward to a very calm marketing environment going forward. I know there's a government -- there's government oversight looking at this very strongly. And we, ourselves, as I said before in one of the answers, we are not looking to spend a lot of money for marketing at this time. And as you saw, we were trying to control our profitability in the first quarter, and I'm going to continue to look forward that way. My hope that other telco companies kind of do the same, which will be very, very helpful to the telco industry in general. [Korean] And again, our telco -- our company is not just based on wireless business. We have many other business that we always focus on as well. And as I said, if you put together all the other products that we do offer, including IPTV, Skylife and everything else, we hope that this becomes a fundamental basis for nonsubsidy-based, competitive environment. [Korean] And as you can see by our adds, our top of mind, what the industry people call TOM, we may be a little bit lower on the LTE side because we started late. However, the top of mind for All-IP right now is absolutely #1. And using that and leveraging off of that, we will be offering a lot of All-IP products, and hopefully that without subsidies, we can be competitive going forward. [Korean] To answer your second question regarding, is the first quarter's portion of subsidiary companies a one-off or however you want to put it, there's a little bit of that but not much. Actually, to be specific, BC Card had better profits than we expected. [Korean] And if you look at BC Card a little more closely, their revenues actually fell from last year because of the new commission rate that was imposed on. I think it went from average of 2.1 to about 1.8 percentage point -- or percent, sorry percent. [Korean] However, they had a pretty strong drive in cost reduction. So first quarter was pretty good, but in terms of the overall year, including BC Card and kt Rental, they will most likely -- it's a continuing business, but they'll most likely incur some costs in terms of marketing and whatnot. So we look at first quarter being pretty good quarter, and then for the full year, I think a simple guidance would be, all subsidiary put together, we look at around KRW 300 billion plus. [Korean]

If I can ask you a follow-up question, CFO Kim, do you think marketing in the second quarter is going to fall? [Korean]

I would say, yes. I would say, yes, and I would hope that it is yes. In my view, our company -- I can't speak for others. And if it gets heated up, I mean, obviously, we're a company that has to exist, and we can't watch our subscribers go away. But at this time, we are trying to abide everything to the T and use our competitive edge rather than money. [Korean]

[Korean] The next questions will be presented by Mr. Josh Bae from UBS.

My question is on your wireless business again. It appears the revenue decline in the wireless segment is continuing, down about 8% year-over-year. If you have any guidance on how much decline you're expecting for the full year, that'd be very helpful. [Korean]

I assume you mean wireline because our wireless went up slightly over -- on year-on-year. To answer your question.

Yes, yes.

We do see this line falling. I mean, our line losses really gotten a lot better than a few years ago. Losses per month has gotten -- now it's down to about maybe 35,000 to 50,000 lines per month. Whereas, a few years ago, it's as high as 150,000 lines per month. So that's gotten better, but unfortunately, with the prices on the wireless side coming down, we have seen more migration to wireless side, so our ARPU's falling. That's the issue right now. So with all that put together, even the wireline, the line itself being small, on that particularly, I think we're looking at possibly around KRW 300 billion loss in PSTN revenue this year. [Korean] Now I like to add a caveat to that answer that I gave you, which is this projection was based on prior to offering our on-net usage plan. So there could be slightly increase, but if this number changes, let's say, in our 2Q earnings call, I will update you on what our latest forecast would be at that time. [Korean]

And what about the broadband side? [Korean]

Broadband side, the subscriber number went up by, I think, about 10,000 this quarter. Right now -- hold on, one second. [Korean] We see a slight turnaround in the broadband revenue all due to the fact that we are obviously selling this bundle with IPTV, and IPTV is still a very good growth. So we see a slight turnaround. [Korean]

[Korean]

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There are no further questions. We will close the Q&A session. Thank you very much for your questions and interest. We will now close olleh KT 2013 Q1 Earnings Conference Call. Thank you all for joining.