Youngwoo Kim - Vice President In Hoe Kim - Former Chief Financial Officer and Executive Vice President of Financial Management Office - Corporate Planning Group.

Hoe Jae Kim - Daishin Securities Co. Ltd., Research Division Jong In Yang - Korea Investment & Securities Co., Ltd., Research Division Hongseek Kim Josh J.

Bae - UBS Investment Bank, Research Division In Young Chung - Goldman Sachs Group Inc., Research Division Sean Oh - BofA Merrill Lynch, Research Division Jiana Seo - Morgan Stanley, Research Division Dan Kong - Deutsche Bank AG, Research Division.

[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 2014 third quarter preliminary earnings results by KT. We would like to have welcoming remarks from Youngwoo Kim, KT IRO, and then Mr.

In Hoe Kim, the CFO, will present earnings results and entertain your questions. [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 Q3 2014 Earnings Conference Call. Our call is being webcast via the company's website, and you can refer to the slides as we make the presentation. [Korean] Please note that since Q1 of 2011, KT has been presenting consolidated numbers under the IFRS accounting standards.

And let me introduce our CFO, In Hoe Kim, to begin the presentation on Q3 business results..

[Korean] Good afternoon, I am In Hoe Kim, CFO of KT. Since the beginning of the year, KT has been strengthening competitiveness in its core telecom business, improved cost structure, realigned group's company portfolio, implementing strong corporate enhancement efforts.

As a result, since Q3, we are seeing visible recovery in both growth potential and profitability. [Korean] First, in the Wireless segment, subscriber growth continued, underpinned by KT's brand value and competitiveness in the distribution channel. ARPU growth also expended, solidifying the basis for turnaround in performance.

[Korean] Broadband Internet subscriber growth also strengthened with IPTV net addition coming in at 270,000 subscribers, its growth trajectory continuing. Also major subsidiaries, such as BC Card, kt Rental, kt Skylife, are showing meaningful growth in scale as leading companies in their respective markets.

[Korean] On October 20, KT launched olleh GiGA Internet for the first time in the domestic market. olleh GiGA Internet provides 1 Gbps speed, which is at most 10 times faster than broadband Internet that supports 100 Mbps commercialized back in 2006.

This speed allows full gigabyte-sized full HD movie or 1,000 music titles to be downloaded in just 33 seconds. [Korean] Moreover, we adopted a technology that eliminates interference between electrical wires, commercializing olleh GiGA Wire, enabling up to 300 Mbps GiGA services.

So even users living in old apartments can benefit from GiGA services without the need to replace the network loop on the premise. [Korean] In the future, KT will bring forward a paradigm shift in telecoms through a different array of GiGA services, such as olleh GiGA Wi-Fi, olleh GiGA UHD, et cetera.

Along the way, we will create new growth engines, taking a step further than a mere network upgrade in order to facilitate development of the ICT industry. [Korean] The market recently is undergoing a transition into a new framework of competition since the implementation of the Handset Distribution Act.

Although initially there were some controversies, I believe that it was just the market getting used to the new paradigm of competition. And soon, we expect the market, consumers and operators will all find a new balance.

[Korean] KT is doing all it can to make sure the framework brought on by the Handset Distribution Act takes firm root in the market. We try to alleviate market jitters during the initial implementation phase and expand on practical benefits for customers.

Accordingly, we launched net pay plan, which provides lifelong tariff discounts without any attached penalties. Also Wideband Safe Unlimited reduces data usage charge and an unlimited data plan for youngsters was also launched.

[Korean] Also we are working together with manufacturers to reduce list price of handsets and expand on the membership point usage, implementing measures to improve on service quality.

[Korean] In the future, in the spirit of Handset Distribution Act, KT will refrain from value-destructive subsidy competition, improve customer service, strengthen network quality, launch diverse products to meet consumer needs in order to work towards a service-based competition.

[Korean] KT will further strengthen its corporate improvement initiative, and based on regained telecom competitiveness, solidify sound profit foundation and make necessary preparations to secure a leadership in the field of ICT convergence services.

Through such efforts, we wish to win back unwavering trust from shareholders, investors and customers and continue to enhance corporate value. With that, I will move on to business results for Q3 2014. [Korean] Q3 2014 operating revenue increased 3.9% year-on-year to KRW 5,955,600,000,000 driven by growth in Wireless and Media revenue.

Operating profit increased 8.9% year-on-year to KRW 335.1 billion on stabilized market and lower labor expenses. [Korean] Net income declined 45.7% year-on-year to KRW 74 billion with EBITDA recording 7.2% year-on-year growth, coming in at KRW 1,280,300,000,000. Looking on to the next page. We will look at highlights from subsidiary performances.

[Korean] For BC Card, with a growth in purchase volume on credit and check card, revenue increased 9.2% and operating profit 83% year-over-year. kt Skylife revenue increased 8.5% year-on-year on subscriber growth. But with one-off expenses, operating profits declined 67.4% year-on-year.

[Korean] kt Rental revenue increased 19.5% year-on-year on growth in auto rental business and operating profit recorded a growth of 19.2% respectively. Next is highlights on the company's financial position. [Korean] As of end of Q3, debt-to-equity ratio was 186.1%, falling 2.3 percentage points Q-o-Q.

Net debt came at KRW 10,887,400,000,000, rising 0.8% Q-o-Q. Net debt-to-equity ratio stands at 91.3%. Next is on capital expenditure. [Korean] CapEx for the quarter stands at KRW 584.9 billion with this year's cumulative figure coming in at KRW 1.5 trillion. By the year end, we will use the remainder within the CapEx guidance of KRW 2.7 trillion.

Next is on performance highlights from each business segment. [Korean] Wireless revenue edged up 11.6% year-on-year to KRW 1,912,700,000,000 on inflow of higher-quality subscribers, which led to ARPU increases. Q3 net addition was 410,000 subscribers with LTE subscriber figure at 10,250,000, expanding to 59.6% against the total base.

ARPU came in at KRW 34,829, growing 3.6% Q-o-Q and 11.2% year-on-year, respectively. Next is on the fixed line business. [Korean] Fixed line revenue fell 6.2% year-on-year, recording KRW 1,371,400,000,000. Fixed line erosion continued, but there is a sustained growth in broadband subscriber base. Next is Media/Contents business.

[Korean] Media/Contents revenue increased 12.8% year-on-year to KRW 396.1 billion. KT IPTV reached 5.63 million subscribers with 270,000 net additions in Q3, sustaining its robust leadership in the pay TV market. Next is on Finance/Rental and Other services revenue.

[Korean] Finance/Rental revenue increased 9.8% year-on-year to KRW 1,072,900,000,000, driven by higher growth from BC Card and kt Rental. Other services revenue fell 12.4% year-on-year to KRW 377.5 billion on lower revenues from IT solutions and real estate. Finally, I will talk about operating expenses.

[Korean] Operating expense increased 3.6% year-on-year, coming in at KRW 5,620,500,000,000. Labor cost declined 21.8% year-on-year, driven by the ERP effect. Depreciation increased 6.6% year-on-year on increases from depreciation cost on spectrum. Marketing expense fell 9.9% Q-o-Q, with stabilized competition in the market.

This brings me to the end of the earnings presentation for Q3 2014. Thank you..

[Korean] For more details, please refer to the materials that we circulated. From now on, we will take questions..

[Korean] [Operator Instructions] The first question will be presented by Mr. Hoe Jae Kim of Daishin Securities. And the following question will be presented by Mr. Jong In Yang from Korea Investment Securities..

[Korean] Last week, Chairman Hwang has mentioned that by the end of this year, that KT might announce potential reshuffling plans related to your subsidiaries.

Including kt Rental and KT Capital, specifically what are your preparations regarding your subsidiaries? Second question is with the launch of the GiGA Internet, I understand that just in 10 days, you were able to garner more than 10,000 subscribers. Your basic rate has been increased.

But in terms of adoption of pay-as-you-go tariff system or premium services that guarantees a certain level of quality of service.

Can you explain as to what your business model that you're envisioning with regards to your GiGA Internet business?.

[Korean] Yes. As you would know, we are currently in the process of the selloff for kt Rental and KT Capital. And if there are any items that require disclosure, when that time comes, we would communicate with the market. But all I can say at this point is that there's a selloff process that's currently ongoing.

With regards to KT's Sidus FNH, the selloff had already been complete. And as you know, many of our group of companies are undergoing certain reshuffling or readjustment in terms of the company portfolios as I've mentioned during my presentation. And also we have completed the merger between KT Cloudware and KTDS.

And as I've mentioned previously, in order to further strengthen our ICT competitiveness and capability, we will continue to make readjustments in the company portfolio. And once we have any specific matters that we believe once we have any specifics, we will make sure that we do communicate that with the market.

[Korean] Yes, relating to your second question about GiGA Internet, with the launch of the KT's GiGA Internet, we have simplified our broadband product lineup. And we have actually readjusted and made it more simpler. [Korean] Our plan is to have 100 mega plain-vanilla type of a product and also GiGA product, which is more of a premium product.

[Korean] Basically for our GiGA Internet products, we will be targeting subscribers who would use big-sized contents like the UHD content and people who require big-sized content real-time transmission. So we will be tapping against that subscriber segment.

[Korean] Through such efforts, we believe that we could lay the foundation for a growth trend in the ARPU for the broadband business and also grow our total subscriber base as well as our top line.

[Korean] Also based on such GiGA infrastructure that KT has, we will make sure that we retain leadership in the ICT converged services market and be at the very forefront of this business..

[Korean] The next question will be presented by Mr. Jong In Yang of Korea Investment Securities. And the following question will be presented by Mr. Hongseek Kim of Hana Daetoo Securities..

[Korean] My first question has to do with your mobile ARPU. On a Q-o-Q basis, it recorded a growth of 3.6%. I think that this figure is one of your very highest Q-o-Q ARPU growth figure.

So could you provide the reason as to why there was such a significant increase? And also at the same time, can you give us a projection with regards to ARPU growth for this year as well as next year? Second question has to do with the iPhone launch.

What are your strategies to attract iPhone 6 subscribers? And what are your strategies to protect your existing iPhone subscribers?.

[Korean] The reason behind the increase in Q3 ARPU, simply put, is because we have seen a larger acquisition of new subscribers who are LTE-focused subscribers.

[Korean] And especially subscribers taking out LTE unlimited rate plans, the so-called high-quality subscribers, we've seen an increase on Q-o-Q basis, which had a positive impact on ARPU growth.

[Korean] For example, if you look at of the new subscribers, new LTE subscribers, the users who had taken out data unlimited plan in Q2 was 30% and in Q3, that increased to 40%. [Korean] Since the handset subsidy act in terms of its impact on the ARPU trend, we think that the rate of growth or the margin of growth of ARPU will slow.

However, it would still be in an upward trajectory. [Korean] We continue to expect LTE users' migration into LTE, but we believe that the sales volume itself is going to decline in line with a more stable market.

[Korean] So we believe that the rate of growth or the extent of growth will depend on the percentage of people taking out high-end tariff plans and also the trend related to the strategic devices, strategic handsets like the iPhone and the Galaxy Note 4.

[Korean] So regarding your question about our strategies relating to iPhone 6, we have recently received preorders for iPhone 6. And as you know, it was received quite well by the potential users.

[Korean] Now KT has the biggest user base for iPhone and we have the experience of selling the iPhone for the longest and also the biggest in terms of volume. [Korean] And also the variety of retention programs that we have developed, we will retain existing iPhone subscribers and also provide differentiated services that only KT can provide.

[Korean] To cite a couple of examples, we have allowed the use of membership mileage points and use that point to pay the installment payment on the handset price.

[Korean] We've also launched an insurance product that not only covers against physical damage on the handset, but also even if there is a simple problem of a malfunctioning button, that will also be covered through this insurance.

[Korean] And not only that, we at KT, we are the one that has the most adequate and optimal networks that supports the iPhone through our wideband LTE network as well as our GiGA Wi-Fi support..

[Korean] The next question will be presented by Mr. Hongseek Kim of Hana Daetoo Securities and the following question by Ms. [indiscernible] of UBS..

[Korean] I have 2 questions relating to distribution strategy. First, since the adoption of the handset subsidy act, a lot of people are wondering where your distribution focus will lie. Will it be on your direct channel or large outlets or on online distribution channels? Could you provide some color on this aspect.

Second question, National Assemblyman of the ruling party, Mr. [indiscernible], is said to soon table a bill regarding the self-purchase of handsets by the users.

If that gets adopted and if it gets enacted, what affect will it have on KT? Will it be positive or negative? And depending on your answer, why would you think so?.

[Korean] In terms of the channel strategy that we will implement since the handset subsidy act implementation, our position is then to rather than selecting one channel over the other, we will be agile in responding to the market as we observe and see how the market reacts.

[Korean] So currently, our approach is that after the announcement of the handset subsidy act, we will respond very proactively to the changes that we identify in the market.

We will expand on our core direct channel and our dealer channel and also increase the amount of handling from our sales outlets and also focus on massive scale or large-scale sales distribution points in core commercial zones.

[Korean] On the online channel side, we have recently conducted a total renewal on our olleh shop, our online shopping mall, in order to provide better service to our customer as well as the distributor. [Korean] For instance, we are allowing price comparisons of different dealer shops.

And also there is a customer management system in place or you could also look at the bundled price simulation. So we are providing a very differentiated services in order to gain trust from our users through this online shop.

[Korean] Now once this self-purchase system is allowed, I believe that it will accompany many different issues and many different changes -- it will accompany many different changes. Therefore, I believe that it is very important beforehand to engage in discussions and also to share different feedback and ideas and opinions.

And so this whole process of adoption should be prudent. [Korean] So at this point, it will be difficult to say one way or the other regarding KT's position since this bill has not yet been tabled. But even if this bill does get tabled, I believe that it will be quite necessary to engage in discussions, extensive discussions..

[Korean] The next question will be presented by Ms. [indiscernible] of UBS and the following question by Mr. In Young Chung of Goldman Sachs..

This is Josh Bae from UBS. I have 2 questions. First, on the dividends. I think you mentioned on the last call that it may be difficult to pay a 2014 year-end dividend. Looking into 2015, I think the sale of kt Rental and KT Capital should help your balance sheet. So I'm wondering how this would help your dividend outlook for 2015.

Second is on the fourth quarter earnings outlook. In the past, the fourth quarter earnings have been difficult to forecast with some seasonally higher cost at the year-end.

Just looking at fourth quarter this year, considering the seasonality and also the fact that the handset subsidy legislation has been introduced from fourth quarter this year, if you could share with us your thoughts on the earnings outlook for this quarter, that would be helpful. [Korean].

[Korean] Now responding to your first question about dividend, once kt Rental and Capital sales process is complete, we do expect that the financial position of the company will become quite sound.

[Korean] Now looking out on to year 2015 and beyond and for our dividend policy, we will consider a mid- to long-term business plan and also make some forecasts on our financial position going forward and consult with the members of our BoD to come to a final decision.

[Korean] And so once we decide on the specifics, we will communicate with the market. [Korean] Relating to your question about Q4 earnings, yes, in Q4, we need to consider some seasonal factors. And so we believe compared to Q3, profitability will be slightly lower..

Just to follow up on the first question, is there a mid- to long-term balance sheet target or a gearing target that you could share with us? [Korean].

[Korean] So if we sell off our assets, yes, our financial position and balance sheet would see a significant improvement.

However, if you look at KT on a standalone basis, because there is a significant level of borrowing or leverage that we had incurred because of the high level of ERP we've implemented, it will be quite difficult to lower that leverage level in a very short period of time.

[Korean] I believe the key for us is to what extent we can control net debt-to-EBITDA ratio based on our efforts, our aggressive efforts in improving our financial structure as well as improvement of profitability and cash flow. [Korean] So I think it's a bit too early for us to say and fix the official target.

But my personal view is this, it would be nice for us to be at the level that is commensurate to other global telco peers. [Korean] Continuing on -- with answering your second question, we are exerting efforts to try to mitigate the seasonal impact.

But admittedly, there are certain commission payouts as well as operational expenses that does occur in the last quarter of the year.

[Korean] But in terms of how the handset subsidy legislation is going to impact our cost, as you know, because the breadth of change that we are witnessing in the market environment is just too significant, so it's not easy for us to make a clear forecast going forward.

[Korean] But if we continue to see the decline in the handset sales volume, we believe that Q4 marketing expenses will be lower compared to the past..

[Korean] The next question will be presented by Mr. In Young Chung of Goldman Sachs and the following by Mr. Sean Oh of Merrill Lynch..

[Korean] I have 2 questions. First has to do with your GiGA Internet. What do you see as a potential percentage of your broadband subscribers who could immediately take out this GiGA Internet product? So I would like to understand what your calculation is.

And also within next year's CapEx guidance, how much percentage would GiGA Internet account for? Second question is your PSTN business. On a year-on-year basis, your ARPU decline in the past was in the extent of about 9% to 12%. But in Q3, according to my calculation, it was only 7%.

Now is this a temporary phenomenon? Or is it due to, for instance, an introduction of your unlimited rate plans? Did it help to mitigate that speed of decline?.

[Korean] So in terms of the GiGA Internet, because it basically is a basic telecom service, meaning infrastructure-based service, it's difficult to provide an all-at-once nationwide service.

[Korean] But fortunately for KT, about 48% of our customers basically can enjoy -- 48% of our customers can enjoy the FTTH/R facilities and infrastructure through which GiGA Internet can be provided immediately. So with the growth in those types of subscribers, we will continue to expand on the coverage.

[Korean] Especially, we will focus first on apartment complexes, where we see high density of demand. So that will be our priority. And in terms of other regular housing areas, we will conduct maintenance-type of typical of nominal investment and continue on with the replacement of the low-speed facility.

[Korean] So basically, we will be using CapEx that usually is needed for the Internet loop upgrade, and at the same time, additionally expand on our spend on the GiGA Internet-related capital expenditures. [Korean] But for KT, investments into FTTH/R has already progressed quite significantly, so we do not foresee significant level of investment.

[Korean] So basically, what I'm trying to hit home is that we will be able to absorb the need for CapEx expenditures within the CapEx guidance and minimize our CapEx burden. [Korean] Now for PSTN revenue, on a Q3 cumulative basis, there was about KRW 260 billion decline on a year-on-year basis.

[Korean] So if you look at each of the quarter, in Q1, there was decline by KRW 99.6 billion; Q2, KRW 91.2 billion; Q3, KRW 72.7 billion. So you are seeing, yes, a mitigation in the extent of decline. [Korean] So this is an outcome that shows that the subscriber decline did slow.

But whether this is a secular trend or not, it's a little too early to make that determination. [Korean] So on a per annum basis, as according to our original guideline, it would be somewhere in the mid-KRW 300 billion..

[Korean] The next question will be presented by Mr. Sean Oh from Merrill Lynch and the following by Ms. Jiana Seo from Morgan Stanley..

[Korean] I have one question. You're in the process of selling off kt Rental and KT Capital. On a consolidated basis, what are their respective interest-bearing debt? If you could provide figures on that, that would be helpful.

And also once these subsidiaries are all sold off, what will be the impact on your balance sheet? And will it have any impact on your CapEx?.

[Korean] As of end of Q3, Rental and Capital's asset is KRW 2.6 trillion and KRW 2 trillion, respectively. [Korean] Debt is KRW 1.8 trillion and KRW 1.6 trillion, respectively.

[Korean] So if we were to sell off these 2 entities on a consolidated basis, it would have a downward effect, a reduction effect, on the asset size by KRW 4.6 trillion, and on debt, KRW 3.4 trillion. [Korean] Once again, we are in the sales process, we're currently -- the sales process is ongoing.

So as I said before, once we have any need for disclosures or communication, we will disclose it..

[Korean] The next question will be presented by Ms. Jiana Seo from Morgan Stanley and the following by Mr. Dan Kong from Deutsche Bank..

[Korean] I have 2 questions.

The first, for next year, what do you think is the extent of decline from PSTN? What are your forecast or guidance? And secondly, after the adoption of handset subsidy act, what was your SAC level in the month of October?.

[Korean] Once again, as I said before, the decline from the PSTN business has slowed. But in terms of specific figure and the amount, it's quite difficult to say at this point. [Korean] But we can provide a ballpark figure. We think that next year, there would be declines of about 11% to 12%.

[Korean] Now SAC, after the legislation, the SAC level is similar to other previous normal periods..

[Korean] The next question will be provided by Mr. Dan Kong from Deutsche Bank..

[Korean] Yes, in terms of your CapEx, up to now, you have just spent KRW 1.5 trillion. So against your guidance, which is KRW 2.7 trillion, you still have KRW 1 trillion to spend in Q4.

So are you planning to do so? And if so, how? Another follow-up question relating to your increases in ARPU, it seems like when we entered into September, there seemed to be a very steep rise in number of subscribers. How was that possible? If you could elaborate on that point, that would be helpful.

And also can you explain as to the reason behind the declines in your nonoperating line item?.

[Korean] Yes, the CapEx, in Q3, we have spent KRW 585 billion, so the running rate is at 56%. [Korean] Usually in Q4, most of our executions are centered or focused in the fourth quarter. So as I said before, our year-end guidance, which is KRW 2.7 trillion, we will be spending the remainder of that guidance. So we will be within the KRW 2.7 trillion.

[Korean] So Q3, in September, there was a steep rise in the number of subscribers. And that is attributable to our regaining of competitiveness in our distribution channel based on our network quality. [Korean] So compared to the past, our efforts to improve on customer awareness has really improved both from a quality and quantitative perspective.

[Korean] And also in September, other operators were -- other operations were suspended. So that really -- that helped us on our MNP figures, acquiring of MNP subscribers. [Korean] Now yes, in the third quarter, our nonoperating expense was quite significant.

That is because of rise in FX rate, which led to FX translation, a smaller amount of FX translation gains. [Korean] And also there were one-off expenses, for instance, the disposition loss on certain assets and also penalties that were levied and also losses relating to the sale of AFS, available-for-sale securities.

So there were a couple of one-off items. [Korean] Some of the one-off items are losses from the disposition of assets and impairment losses. That's all in line with our efforts to make improvements on our corporate business portfolio as well as to make our assets more sound..

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

[Korean] So if there are no further questions, we will end the Q&A session. Thank you very much for joining us today and for your interest as well as for many of your questions. This brings us to the close of Q3 2014 earnings conference call. Thank you very much..