KT Corp Executive Insights: Wireless ARPU, DPS

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On Monday, KT Corporation ADR (NYSE:KT) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Wireless ARPU

Kim Hong Seek – NH investment securities: There are two questions that I would like to ask you. If you look at your results, it seems that from your affiliates such as BC Card and Skylife that you have had very strong performance and now for rather than on a KT standalone basis, your consolidated performance is much better. On the non-telecommunication side, the expectations that we have actually are very large. Therefore the question that I would like to ask you is that if you look at this year and next year and maybe further down the road, to compare your consolidated performance and then your non-consolidated profit, what would be the gap between the two and what do you think this trend will be like going forward? That’s the first question that I would like to ask you. Then the second question, right now if you look at your wireless ARPU, it seems that the decline was smaller than we had expected. Was this mainly due to the impact that in case of the bundling discounts that you were providing that the wireless bundling was less than we had expected? Or are there other factors behind this? In addition to that, when do you believe that the wireless ARPU will start to recover and pick up?

Unidentified Company Speaker: Thank you for your question. To address your first question regarding, our subsidiary company or non-Telco core business. As you can see by the year-on-year growth, it’s been a significant growth from the perspective of how much is adding to our operating income. Overall, it’s difficult to mention how much it will impact your operating profit. Obviously, we’re looking at increasing more on a quarter-on-quarter basis and we’re watching this very closely. From a big picture standpoint, we have outlined and communicated with the market that overall non-core revenue should increase in additional KRW18 trillion by year 2015. So in line with that, I think we do see increasing operating profit, but for now, I think it’s actually contributing to about 10% of our operating profit ex-KT and how much it’s contributing to KT. We will continue to monitor and communicate clearly with the market how much are non-Telco business is going to impact our operating profit and that’s one of the biggest directives, one of the drives that we have, so we will keep a close watch. In terms of the comment in the ARPU, we have a big picture of ARPU in sort of the moderate case rebounding from the current levels in third quarter. In a better scenario, we expect the ARPU to increase in this quarter as well, albeit very slow. To address your question as to why our ARPU is falling slower – I mean we all understand there was tariff reduction of 1,001 SMS, (indiscernible) and so those are being offset by new subscribers in smartphones as well as LTE subscribers coming forward.

DPS

John Kim – Deutsche Securities: I also like to ask two questions. First is on your wireless, related to the previous question, as you know your wireless ARPU dropped 5% year-on-year or about KRW1,500 per despite your smartphone user base more than doubling from KRW3.8 million to KRW8.2 million over the same period. So, given that smartphone users were originally expected by the management to feature higher ARPU, I don’t think we can blame the ARPU decline entirely on tariff cut. So, what did KT and competitors miscalculate with respect to your ARPU outlook last year? How do you ensure the same outcome doesn’t repeat again with LTE? That’s my first question. Second is on your DPS, just so that everyone understands clearly, your minimum KRW2000 per share EPS and 50% of net profit payout are you going to base this on your consolidated or KT separate earnings. Also your second half earnings for 2011 was worse than 2010. So on a year-on-year basis, are you expecting your second half earnings for this year to remain flat or be on a declining trend?

Unidentified Company Speaker: First let me address the question regarding dividends, it is 2001 minimum and that’s based on KT standalone. Regards to your question regarding ARPU, yes, there was more than just the tariff reduction that has impacted the fall in tariff for the last year, I guess from the first quarter last year to the end of last year. In the beginning of the year, we anticipated X amount of ARPU reduction because of our revenue discount or smart sponsor. As we (go) on more and more subscribers, a lot more percentage of our subscribers were signing up for these programs. In the beginning of the year, it was 23%. By the end of the year, it came out to close to 50% or 48% to be exact. So that kind of addition made extra discount on our ARPU and that added to a certain amount. Therefore our earlier anticipated ARPU reduction in terms of not the external factors but our internal factors actually grew little bit bigger than we had anticipated, and you take into account of the tariff reduction towards the end of the year and it all totals up to a lot more than 5%. But in our view we made up a lot of the other extraneous forces due to up-selling of the tariff. So, in essence, I think that it could have been worse, but I think we stopped it off at minus 5%. Now looking forward, just to mention about LTE and the value accretion that we may look-forward to is one, we are signing up for much higher tariff plans. We are intensifying the sales force in a different manner so that they sell the higher tariff scheme, that’s one. Number two, we want to try to minimize or reduce some of this tariff or bundling savings to meet what the market demands. Third, there is no unlimited data plan in LTE. So all these lessons learned from 3G and the competitive environment we hope to use to our advantage so that going forward our ARPU goes up and we do see ARPU increasing from here on, because of these forces and as I mentioned earlier, as we hit 4 million LTE subs with these basic guidelines, we believe that we will increase ARPU.

John Kim – Deutsche Securities: Just a quick follow-up question. Your thoughts on second half earnings and just so that I understand correctly, expansions in non-telco business based on your comment is not going to help raise KT’s dividend then, am I correct?

Unidentified Company Speaker: My comment would be that we are doing everything to increase corporate value for KT. That includes our subsidiary company being brought up to our parent company level and is showing the increasing operating profit. Regardless in our view, you should think differently from where the profits are coming from for the dividends. Dividends are (2001) per share at this time or better but right now as we are saying that our subsidiary companies are adding to our value and I hope our shareholders can see that what’s going on. The answer to your last question regarding the outlook for second half, we have an annual target that our Company is trying to achieve. Our first quarter did pretty well, I mean, if you look at the numbers, our wireless, our market share didn’t move much, at the same time we acquired subs at a very reasonable price, not too expensive. So, therefore we have pretty good profits for the first quarter. Going forward there is a lot of changes that’s coming up, everyone is talking about our Company addressing the LTE market. So, it’s hard to say on a quarter-on-quarter, half year-half year, but for me overall comments that I can make is that we will try to achieve an outcome that’s much similar to last year, that will be the overall comment. But just to add a little bit I mean, as you recall there was an extra KRW180 billion one-off cost and shutting down 2G at the end of last year. So, I guess, you could assume that’s not going to happen again. So that will add value or add profits in the second half. We hope that all three players can acquire subs at a reasonable cost and we have bettering second half, I mean that will be out for comment.

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