KT (KT) Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: KT Corporation (KT)

KT (NYSE:KT)

Q2 2014 Earnings Call

July 29, 2014 3:00 am ET

Executives

Youngwoo Kim - Vice President

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

Analysts

Hoe Jae Kim - Daishin Securities Co. Ltd., Research Division

Hongseek Kim

Jong In Yang - Korea Investment & Securities Co., Ltd., Research Division

John H. Kim - Deutsche Bank AG, Research Division

Josh J. Bae - UBS Investment Bank, Research Division

Sam Min - Morgan Stanley, Research Division

Stanley Yang - JP Morgan Chase & Co, Research Division

Jee-Hyun Moon - KDB Daewoo Securities Co., Ltd., Research Division

Hyun-Jee Kim

Operator

[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 2014 Second Quarter Preliminary Earnings Results by KT. We would like to have welcoming remarks from Mr. Youngwoo Kim, KT IRO; and then Mr. In Hoe Kim, CFO, 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.

Youngwoo Kim

[Korean] Good afternoon. I am Youngwoo Kim, KT's IRO. We will now begin Q2 2014 earnings conference call. Our call is being webcasted via the company's website, so please refer to the slides as we make the presentation.

[Korean] Since Q1 2011, KT has been presenting consolidated numbers under the IFRS standards. Please note, Q2 2014 consolidated statement reflects both KT and its subsidiaries. With that, I will invite our CFO, In Hoe Kim, to begin the presentations on the second quarter results.

In Hoe Kim

[Korean] Good afternoon. I am In Hoe Kim, CFO of KT. Under the vision of Global No. 1 KT, KT is undertaking strong corporate enhancement initiatives, including strengthening of telecom competitiveness, improvement of cost structure and revisiting of the group's business portfolio.

[Korean] From the time KT resumed its sales operations in the second quarter during the KT-only operation period, subscriber performance has turned favorable with continuous ARPU growth, enabling a stronger visibility towards regaining of telecom competitiveness. Also, through the implementation of Early Retirement Program and review of cost items, we are promoting innovative cost structure improvement.[Korean] Also, underpinned by 4 core values of No. 1 KT, Single KT, Customers First and management by integrity and through endless corporate improvement efforts, we plan to maximize competitiveness of respective businesses and synergies amongst group of companies.

[Korean] Through such corporate enhancement efforts, we will bring forward growth potential and accelerate recovery of profitability in order to meet the expectations of shareholders, investors and customers.[Korean] For the past century, KT has led the history of the development of Korea's telecom industry right next to its people. Going forward, KT will pursue converged giga era and GiGatopia, providing the fastest and the most innovative telecom-based converged services to reinvent itself as global #1, who places customers ahead of anything else.

Now with that, let me move on to Q2 2014 business results. [Korean] Q2 2014 operating revenue increased 2.4% year-over-year to KRW 5,895,500,000,000, driven by wireless and merchandise revenue growth. For the operating profit, there was an operating loss of KRW 813 billion, turning in deficit due to massive early retirement-related expenses.[Korean] Decline in operating profit, among others, led to a net loss of KRW 757.2 billion. EBITDA declined 89% year-on-year, coming in at KRW 125.1 billion.

[Korean] This quarter, a net loss was recorded due to approximately KRW 1 trillion of early retirement expenses. But aside from the fixed line business, we are seeing a top line growth in all of the services. And with rationalization of our businesses and cost reduction from early retirement kicking in, we project KT's profit structure to improve gradually going forward.

On the next page, we will look at the subsidiary performances. [Korean] BC Card saw an increase in revenue by 3.2% year-on-year, driven by a growth in purchase volume of credit and check card with its operating profit posting a growth of 11.6% year-on-year.[Korean] Skylife, in line with the growth in total subscriber base, saw a growth in revenue of 5.3% year-on-year. However, its operating profit declined 70% -- 17% year-on-year on the back of increases in subscriber acquisition cost and fees and commissions. [Korean] For KT Rental, with more of an activated sales in the auto rental business and the inclusion of green cards in the top line, revenue recorded a growth of 20.7% year-on-year. Operating profit also posted a growth of 30% year-on-year, driven by savings in maintenance costs per vehicle and expansion of high-margin services. [Korean] By solidifying the efficiencies of the group's portfolio of companies, we at KT will achieve a Single KT thinking, and attain like a one single entity, creating an ICT-based convergence synergies towards enhancing the value of KT Group.

Next, I will walk you through the breakdown of operating revenue. [Korean] Operating revenue recorded an increase of 2.4% year-on-year, coming in at KRW 5,895,500,000,000. Decline in fixed line revenue continues, but with the growth in LTE subscribers, ARPU growth followed, driving up wireless revenue 2.7% year-on-year. Media and Contents and Finance/Rental revenue continues to show a robust trend of growth. [Korean] Merchandise revenues saw a growth of 10.8% year-on-year on higher handset sales driven by a growth in demand for LTE conversion. [Korean] KT will accelerate the recovery of our wireless business, maintain stable performance of broadband internet and strengthen the growth of Media business in order to continue to bring forward structural change in top line to offset the decline in fixed line telephony.

[Korean] Next is on the operating expenses. [Korean] Operating expense increased 24% year-on-year to KRW 6,708,500,000,000. Labor costs increased 115.1% year-on-year due to the large-scale early retirement related expenses. One-off ERP-related expense reflected on this quarter's labor cost is KRW 1,050,000,000,000. Cost of service provided declined 1.3% year-over-year on lower real estate development costs, and cost of merchandise increased 19.9% year-on-year, driven by a growth in handset sales.[Korean] SG&A increased 21.3% year-on-year, driven by a growth in new wireless subscribers, among others, which led to an increase in sales cost.

Next is on the highlight of the company's financial position. [Korean] As of end of Q2, debt-to-equity ratio is 188.3%, rising 16.1 percentage points Q-o-Q. Net debt stands at KRW 10,795,400,000,000, edging up 7.4% Q-o-Q. And net debt-to-equity ratio stands at 91.2%.

Next is on capital expenditure. [Korean] Q2 2014 CapEx declined 6.8% year-on-year to KRW 562.7 billion on declines in investments into wireless and IT infrastructure.[Korean] The breakdown is as follows: wireless, KRW 206.1 billion; fixed line, KRW 255.6 billion; and KRW 101 billion for others.[Korean] Cumulative CapEx for the first half of the year was KRW 919.9 billion with 34% implementation rate against the CapEx guidance of KRW 2.7 trillion.

Next is on the business results from each of our services. [Korean] With the growth in wireless subscribers and LTE subscriber share leading to a rise in ARPU, wireless revenue increased 2.7% year-on-year to KRW 1,798,800,000,000.

[Korean] With lowered list price and activated distribution networks during second quarter's KT-only operation period, wireless subscriber net addition recorded 300,000 subscribers. As of end of Q2, number of LTE subscribers reached 9.41 million with LTE share expanding to 56.1%. ARPU came in at KRW 33,619, recording a year-on-year rise of 6.3%. [Korean] Under a stabilizing market with a stronger competitiveness in distribution, service and networks, recovery of wireless competitiveness is becoming more visible. And by preemptively responding to changing competitive landscape with the enactment of handset distribution reform act, we plan to lay the basis for a turnaround in the wireless business.

[Korean] Next is on the fixed line business. [Korean] Fixed line revenue declined 6.6% year-on-year to KRW 1,408,000,000,000 on declines of telephony subscribers and traffic. We plan to make up for the fall in fixed line revenue through maximizing competitiveness of our bundled products while continuing to solidify broadband subscriber base.

Next is on the Media/Contents business. [Korean] Media/Contents revenue recorded a growth of 13.8% year-on-year to KRW 381.3 billion on sustained growth of subscribers. [Korean] Even under a fierce competition among paid TV service providers, KT IPTV acquired 210,000 net additions in Q2, securing a subscriber base of 5.37 million subscribers, continuously solidifying its leadership in this market. [Korean] IPTV business seeks to reach over 800,000 net additions this year. And based on value-add revenue growth from PPV and advertisement, will continue to enhance ARPU, which will enable a qualitative growth.

Next is on Finance/Rental and Other services revenue. [Korean] Finance/Rental revenue increased 5.5% year-on-year to KRW 1,017,900,000,000, driven by stable revenue coming from BC Card and an expansion of KT Rental's growth. Other services revenue increased 1% year-on-year to KRW 382 billion with better performance from IT/Solutions and other subsidiaries.

This brings me to the end of the presentation for Q2 2014. [Korean] For more details, please refer to the materials that we've circulated. From now on, we will take questions.

Question-and-Answer Session

Operator

[Korean] Now Q&A session will begin. [Operator Instructions] [Korean] The first question will be provided by Hoe Jae Kim from Daishin Securities. And the next question will be provided by Hongseek Kim from NH Investment & Securities.

Hoe Jae Kim - Daishin Securities Co. Ltd., Research Division

[Korean] I'm from Daishin Securities. I would like to pose 2 questions. I believe in the first half of this year there were many changes, significant changes, that is, that had been implemented in KT. A new chairman was inaugurated. You've implemented a quite large-scale restructuring of your headcount. And also, you've made decision to sell off one of -- 2 of your major subsidiaries. My first question is until when do you plan to implement such changes or such initiatives? And when will be the timing for the normalization of profit for KT? Second question is that you've recently declared the GiGatopia as the vision for KT, and there's a lot of interest in the market as to whether this could really translate into profit and gains for the company. There is a talk of adoption of usage-based tariff system as well as additional charging for your heavy data users and also blocking of traffic. So could you provide some color as to whether this GiGatopia initiatives could actually translate into a corporate profit?

In Hoe Kim

[Korean] Yes, I admit that there were many events that have taken place, but it will be helpful for you to understand that such events as a -- are our efforts to really lay the basis to regain corporate competitiveness from the temporary erosion that we have experienced in the past so that we could really focus our efforts in turning around our telecom business, which is our core business, and really focus our core competencies in really trying to make KT a leader in the IT industry. Towards that end, we have implemented downsizing of our headcount in order to enhance efficiencies, and we've also made decisions to sell off a number of our subsidiaries in order to really funnel our ICT competencies in our core business area and also to improve our financial standing. Now having said that, we do not have a fixed timeline based on which we are working under. But -- so if there's any other initiatives or plans that we plan to introduce, we will, of course, communicate that to the market in due time. At this point, no specific details relating to the subsidiary sell-off have been decided.

[Korean] And relating to your second question, based on our competitiveness that we have in -- at the fixed and wireless integrated networks, we plan to enter into in telecom-based conversions and giga services. [Korean] Now this area is not a totally unheterogeneous, or a totally different industry that we are planning to enter into. This is a converged space, whereby we plan to use and really maximize the ICT competencies that KT actually owns in order to truly open up and held in a GiGatopia era. [Korean] So these types of converged ICT services, and the commercialization of Giga Internet and the opening up of the GiGatopia era does not necessarily mean that there will be massive requirement in terms of the CapEx.

[Korean] So in terms of your question relating to the GiGatopia and the possibility of it really contributing to the generation of profit, at this point, for each of our business lines, we are in the stage of developing our business plans. And once those plans become more specific, we will communicate that to you.

Operator

[Korean] Your next question will be presented by Hongseek Kim from NH Investment & Securities, and the following question will be presented by Jong In Yang from Korea Investment & Securities.

Hongseek Kim

[Korean] I would like to pose 2 questions. We actually have high expectations for KT in the coming years. I believe that in the second half of the year, we could probably see some growth in terms of the revenue, and we expect declines in depreciation and labor-related costs. I don't know if you could actually provide specific figures, but if possible, can you provide some color with regards to these figures? Second question is, in order to enable LTE-A services and providing 300 mega bps speed, basically the 2.1 -- 2.1 gigahertz and the purpose for that spectrum has to be changed or adjusted. So I would like to understand what efforts KT is implementing in order to bring about that change in regards to 2.1-gigahertz spectrum.

In Hoe Kim

[Korean] Yes, as you've correctly pointed, out in terms of our top line, underpinned by recovery of our competitiveness in the telecom business, we do expect our wireless and Media revenues to increase going forward. And in terms of cost, yes, as you've also correctly pointed out, we expect declines in depreciation and in marketing expenses. [Korean] So instead of giving you specific numbers, I think I can share with you my conviction that by next year, we will be able to see a turnaround in terms of profitability.

[Korean] Regarding your second question, now I think you're talking about the 3 carrier aggregation -- 3 CA-related issue. In terms of the potential reallocation of the 2.1 gigahertz under -- for the purpose of the LTE, we have made the request. And currently, MSIP has created a policy review team and is currently undertaking a review of that request. [Korean] Also, considering the fact that ITU's IMT-2000 includes LTE in its specification, and since the global trend for spectrum is towards net neutrality -- expansion of net neutrality, we do hope that 2.1 gigahertz can be allocated for the use of LTE going forward.

Operator

[Korean] The next question will be presented by Jong In Yang from Korea Investment & Securities. And the following question will be presented by John Kim from Deutsche Bank.

Jong In Yang - Korea Investment & Securities Co., Ltd., Research Division

[Korean] I would like to ask 2 questions. The first has to do with your MVNO business. I understand that with regards to the MVNO business, one of your subsidiary's has introduced some advanced tariff plans, and I would think that your mid- to low-end rate plans would be more of the focus. So could you share with us what your strategy is for your MVNO business? My second question is that, in your last call, you also mentioned the 5 important areas of your long-term growth engine. I think it includes smart energy, security and smart intelligent -- intelligent transportation and health care, et cetera. So of these 5 areas, which business -- converged business are you going to focus on first? And is there any project that is undergoing at this point?

In Hoe Kim

[Korean] In terms of the strategy for our MVNO business, I would like to share with you our overall strategy, not a subsidiary-specific strategy. [Korean] Now, the MVNO market, as you know, focuses on the low-end subscribers, low-end users. And we believe that this is an effective tool that could really help us maximize the value that KT networks can provide. [Korean] To that end, in line with the government's MVNO policy direction, we will very flexibly respond to the market and not lose our leadership in this segment.

[Korean] Relating to your 5 -- your question about our 5 converged services for the future, we have selected these 5 areas, which includes next-generation media and IoT, Internet of Things business in consideration of the future potential growth as well as the competencies that KT owns and also in consideration of the potential synergies that could be generated. [Korean] So on these 5 areas, we are in the process of defining the priorities in light of the competencies that we have, also in light of the market trends as well as the size of the market. [Korean] Now having said that, these new areas are not yet a mature market. So at KT, we are thinking about these business areas from various different perspective and really thinking hard about the potential and viable business model. So once things become more specific and more detailed, we will communicate that to you.

Operator

[Korean] The next question will be presented by John Kim from Deutsche Bank. And the following question will be presented by Josh Bae from UBS.

John H. Kim - Deutsche Bank AG, Research Division

I have 2 questions. First pertain to your marketing efforts. Can you share what your handset retention volume was for last quarter and how this actually compares relative to first quarter? I'm trying to make sense of how your retail distribution strength has been recovered when considering your gross add for last quarter rose 19% year-on-year while your marketing cost actually increased 32%. And related to this, how does the management anticipate the handset reform bill implementation to affect the competitive dynamics of the industry? And how do you expect KT to be positioned once this has been implemented? Second question pertains to your ongoing restructuring efforts for your subsidiaries. I recognize there has been some disclosures about KT's intention to dispose some of your larger subsidiaries, and it might be difficult for you to discuss specifics of ongoing transaction. But can you share with us what is the management's strategy with respect to managing your broad universe of subsidiaries? And are you trying to streamline, expand or grow? And what is your principal strategy that you're trying to administer as you're trying -- as you're dealing with your restructuring efforts? [Korean]

In Hoe Kim

[Korean] Now for the second quarter 2014, if you look at the M&P market, we recorded a net addition of 106,000, and we have maintained over 30% of market share in the new addition market. [Korean] We believe that such growth and net addition in the M&P segment was possible because we were able to restore our distribution network capabilities and also enhance KT's mind share in the minds of our users. [Korean] So not just during the sales operation period, but even after the resumption of sales operations by the 3 operators, we are seeing favorable trends in terms of subscriber performance.

[Korean] In terms of the handset replacement growth, I think it will be fair to understand that in line with the growth in the amount, or the volume of the sales, there was also an increase in the handset replacement. [Korean] Now in terms of the increase in the selling costs, vis-à-vis the increase in the sales volume, during the KT operation period, due to the lowered list price, our handset sales were quite favorable and positive. And because of the rationalization of the businesses, the portion that fixed line took out of the distribution channel actually expanded leading to an increase in the selling price with regards to the fixed line services. [Korean] But such increase in expenses, usually they would be reflected, or will be inclusive in the labor cost but after the rationalization of our business practices, those figures have been reflected under the selling cost. That explains the difference.

[Korean] Now your second question relating to post-implementation of the handset subsidiary act. We also do expect market to further stabilize. [Korean] So once the market stabilizes, the subsidy-based market competition or defining of the market based on the subsidy is not going to be very easy. [Korean] And as you know already, the wireless market, the mobile market in Korea, the penetration is already in excess of 110%. So we do not foresee quantitative growth in this space.

[Korean] So we will continue to move away from a destructive market share-based competition. We will actually want to enhance the qualitative growth based on providing a differentiated services. Meaning underpinned by ARPU growth, we wish to increase our position. [Korean] And during the KT only operation period, we did see improvement in our wireless competitive edge. So based on a stabilized market share position and also underpinned by ARPU growth, we do expect that wireless business will be restored.

[Korean] Now in terms of your question relating to the subsidiary strategy that the company will employ, I think from a timing perspective, it would not be all that adequate for me to say whether we will either increase the number of sales or decrease the number of subsidiaries. [Korean] Now having said that, I would appreciate if you could understand our approach as a way for us to solidify our competency in becoming an -- towards becoming an ICT leader.

[Korean] So I guess in conclusion, I can say that our strategic direction is such that we would want to move towards strengthening our ICT competencies and to that end, we will continue to readjust the portfolio of businesses that we have.

Operator

[Korean] The next question will be presented by Josh Bae from UBS. And the following question will be presented by Sam Min from Morgan Stanley.

Josh J. Bae - UBS Investment Bank, Research Division

I have 2 questions. First is on your wireless ARPU trend. It's good to see solid quarter-over-quarter ARPU increase again in the second quarter. If you could share with us your thoughts on the outlook for the coming quarters. Can we expect solid sequential ARPU increase to continue or even accelerate on the back of high-end LTE tariff plan takeup or should we expect a bit of a slowdown as subscriber acquisition competition stabilizes in the second half of the year? My second question is on the fixed line voice revenue. At the beginning of the year, I remember you had guided for about KRW 350 billion decline in fixed line voice revenue for the year. Is this expectation still intact and how do the new tariff plans for fixed line voice that were launched last month impact this guidance? [Korean]

In Hoe Kim

[Korean] Last time we communicated to you, we said that in terms of ARPU growth, we expect about 5% to around 6% growth on a per annum basis for this year. But considering the current trend, we think on a Y-on-Y basis, the improvement will actually be in excess of 6%. [Korean] Especially because our LTE subscriber ratio is increasing and also in terms of our unlimited data rate plans which we've introduced, we are putting in a lot of effort to attract more of the high ARPU rate plans or users.

[Korean] Now having said that, in the second half of the year and continuing on to next year, the impact of the Handset Subsidy Reform Act will have an impact of stabilizing the market. So there would be a limited upside in ARPU growth that could be incurred from the new sales. [Korean] But there are also positive factors that could work towards our ARPU growth because, as we can eradicate or eliminate overheating of the market, we could reduce the number of imaginary subscribers and also we could prevent against massive cuts in the rates.

[Korean] In terms of our fixed line voice revenue, yes, we do still expect around mid-KRW 300 billion of erosion or reduction. [Korean] The most recently introduced tariff plan, or the unlimited fixed-rate voice plan basically, was introduced in order to strengthen the retention of the subscribers. [Korean] And we expect such new rate schemes to really contribute in our retention program for our users, especially the self-employed as well as heavy users. [Korean] So also going forward, we would continue to exert effort to really strengthen retention, especially around such corporate customers and self-employed users who are usually high ARPU customers. We will develop specialized services to meet their demand so that we can minimize the fall in the revenue.

Operator

[Korean] The next question will be presented by Sam Min from Morgan Stanley. And the following question will be presented by Stanley Yang from JPMorgan.

Sam Min - Morgan Stanley, Research Division

I have 2 questions. First, is on your dividend policy. Can you clarify what your dividend policy is this year in regards to -- given the significant one-off that you're incurring due to ERP, et cetera? And also, give us some idea as to where your core current profit is likely to come in this year, so that shareholders have can have just some expectations as to what your dividends could be. Secondly, and sort of continuing on with the KRW 350 billion PSTN erosion, so can we expect that type of erosion to continue into next year? And if that is the case, and how much revenue will you have to essentially increase in order to offset that PSTN erosion given, obviously, the higher profitability of that PSTN revenue. In particular, do you expect to be fairly aggressive in selling noncore assets or monetize those assets like real estate or copper next year? [Korean]

In Hoe Kim

[Korean] Now your question on dividend. As you know, there was a large-scale ERP expense that was incurred, and as such, our financial position came under some pressure. So in consideration of those aspects, I think for 2014, dividend is going to be difficult -- dividend payout is going to be difficult. [Korean] However, any final decision on the dividend payout is going to be decided next year during the BOD session for account closing of 2014 financial year. [Korean] On PSTN, as I've mentioned before, yes, there is a continuous erosion of revenue on our PSTN business. For this year, it will be around KRW mid-300 billion. [Korean] And in order to try to improve on the profitability of our PSTN business, this year, we have implemented the large-scale ERP program and also rationalization efforts on our businesses. [Korean] Of course, these activities were not implemented solely for the purpose of making up for the PSTN erosion but one -- I would have to say that it did provide some contributions. [Korean] But a fundamental way for us to really make up for the PSTN revenue erosion is to enable the turnaround of our wireless business, and when our media businesses start to make a robust growth, I think we will be able to more than cover or more than make up for that erosion. [Korean] Now in terms of potential real estate asset sales and the sale of the copper lines as relating to these idle assets, currently, it is under review but there has not been any specific decisions made.

Operator

[Korean] The next question will be presented by Stanley Yang from JPMorgan. And the following question will be presented by Jee-Hyun Moon from KDB Daewoo Securities.

Stanley Yang - JP Morgan Chase & Co, Research Division

[Korean] I would like to ask 2 question. The first in regards to the downsizing of your head count. The ERP costs, I don't think that the entirety of the ERP cost is booked in the second quarter numbers. So could you provide some color on that? And if you were to exclude the impact of this one-off expense, what would be your operating profit on a stand-alone parent basis and as well as on a consolidated basis? And once the labor cost is normalized going forward in a quarterly basis, what would be a normalized level of labor cost that we can expect going forward? Second question, you've mentioned that the key to your strategy is to really seek a turnaround in your wireless business. In the second quarter, yes, there were some positive aspects such as net additions of your MNO subscribers and also your subscriber acquisition volume had increased. But also from the qualitative perspective, meaning on the cost side, were there any positive signals that could hint turnaround in your wireless business? For instance, was your SAC -- subscriber acquisition cost -- better, for instance, compared to your peers?

In Hoe Kim

[Korean] In terms of the ERP-related expenses, if you look at the total number of people who had retired, it's 8,356 people who had made the early retirement and the total ERP-related cost was KRW 1,235,700,000,000. [Korean] And as I mentioned previously, the amount that was booked for this quarter, the second quarter that is, with this one-off expense was KRW 1,052,700,000,000. [Korean] And the differential that you see between the 2 figures were -- is actually attributable to the usage of the allowance that we had provisioned for this severance payment. So it's correct for you to -- so in the second quarter, the entirety of the ERP-related expense has been booked because we used the provisioning for the severance retirement. [Korean] And so with that, I think that on an operating profit line item, there would be an improvement effect of KRW 470 billion. [Korean] So following the massive, or the large-scale ERP, there will, of course, be some natural increases in the outsourcing costs and consignment costs. So the actual impact or the actual expected positive impact on OP would be lower than the figure that I just shared with you. [Korean] In the second quarter, during KT-only operation period, through very effective marketing activities such as lowered list price and the introduction of sponge programs and strengthening of our bundled product and also by facilitating and activating our distribution channels, we do believe that we had successfully attained turnaround in terms of subscriber performance. [Korean] And our SAC was not higher than our competitors. [Korean] And also, especially during KT-only operation period, in terms of our channel strategy, we have really made thorough preparations while we were under a sales ban or a suspension of sales operation period, and we really targeted large-scale retailers and we do believe that, that effort was quite successful. [Korean] So once the Handset Subsidy Reform Act is implemented and even after the market is stabilized, since we have strengthened and solidified our channel capabilities by introducing variety of products, we will continue to focus on achieving turnaround in our wireless business.

Operator

[Korean] The next question will be presented by Jee-Hyun Moon from KDB Daewoo Securities. And the following question will be presented by Hyun-Jee Kim from UBS Hana Management.

Jee-Hyun Moon - KDB Daewoo Securities Co., Ltd., Research Division

[Korean] I would like to ask 2 questions. The first has to do with your Media and Contents business. We've seen some significant increase in growth in your subscriber base, and so can we also then expect improvement in your profitability going forward? And what will be your long-term business strategy and direction for the Media and the Content business? And second question is that we've now seen new heads of ministries at MSIP, as well as we have a new head at the Ministry of Finance and Strategy. So what do you think would be a opportunity for KT Group under this new government leadership?

In Hoe Kim

[Korean] Now the Media and the Content business is one of a very critical growth engines, next-generation growth engine for KT Group. [Korean] Now based on the diverse media platform that KT has, in -- for instance in IPTV satellite and mobile, as well as its competitive edge in terms of the access to the subscribers and users, we will continue to maintain the strong #1 position that we have enjoyed in a pay TV broadcasting market. [Korean] Within KT Group, we have a Media and Contents consultative committee or a body. [Korean] What this consultative entity or the group actually does is to identify synergies amongst the group of companies and also based on our ICT convergence direction, they are trying to develop the strength and edge of each of these respective businesses. [Korean] And through continuous development of differentiating services and technology, as the #1 player in this market, we have a firm commitment to maintain that #1 position. [Korean] As you know, the Media and Contents business, in combination -- or in combination and bundled with our broadband services and mobile wireless services, is playing a very important role in acquiring new subscribers and also retaining those subscribers. [Korean] Now if you look at KT IPTV on a stand-alone basis, its revenue is continuously growing, but because of a relatively higher level of content-sourcing costs, we have yet to post a profit. [Korean] Now however, having said that, if you look at our content sourcing cost as against our total revenue, that trend is continuously declining. So we will continue to exert efforts to improve our cost structure so that we can generate profit. [Korean] Now regarding your second question, the government seeks to really facilitate and promote the market by generating results in terms of a creative economy based on ICT and science and technology, and also through deregulation. [Korean] And of recent, government has also announced a policy that places a great focus on the importance of software. [Korean] And so accordingly, KT is making preparations in the 5 areas of convergence which we've mentioned previously. [Korean] And also in terms of the software industry, currently, we're providing a lot of support to small and medium enterprises who are within the industrial complexes under the initiative of the government. [Korean] And so these are small medium enterprises, SMEs, in this industrial complex. We provide them support so that they could save on the shared services costs and also providing legal services and safety-related support as well as SME support. [Korean] And also for SME, so in the industrial complex at Hungnam city, we are trying to provide them software-related support by launching our bizmeka software. [Korean] So as we align ourselves with the government strategy, I believe that we at KT could also make contributions in creating a creative economy and also supporting the SMEs of the nation.

Operator

[Korean] The next question will be presented by Hyun-Jee Kim from UBS Hana Management.

Hyun-Jee Kim

[Korean] I would like to pose 2 questions. You've made decision to sell off your subsidiary, KT Capital and KT Rental. What are you going to do with the sales proceeds? Where will that money be used? Second, in terms of your pay TV services, you currently have 2 products, OTD and OTS, which is provided via your subsidiary. Do you continue to -- do you plan to continue to have both of these products or, through restructuring of your media business, do you somehow plan to combine those 2?

In Hoe Kim

[Korean] Now the cash proceeds that we will gain from the sales and disposition of KT Rental and Capital is going to be firstly used to improve our financial structure. [Korean] Relating to your second question on OTD and OTS, now OTS, you should understand this product as a product that only KT can provide. This is a hybrid product. [Korean] Now OTS brings the strength of the satellite and the IPTV services. This is a high-quality service. It's a customized service for our user base and the churn rate is also very low. [Korean] Especially in consideration of the launch of the UHD service, since we can effectively make use of the satellite services, OTS will contribute greatly in leading KT into a upper hand or a favorable position in the UHD era. [Korean] So OTV and OTS are nonredundant or overlapping products. They have their own idiosyncratic characteristics. They are differentiated products. [Korean] Now in terms of KT's Media business within the group, as I mentioned before, we have a consultative body, a committee, that was set up for the Media and Content business. [Korean] And that team is trying to identify the most efficient synergy between OTV and OTS. [Korean] And studying into possibilities of how to better leverage the strength of these 2 products towards the ICT convergence service. [Korean] So in this regard, we are currently looking at various different aspects to come up with the most optimal solution in our efforts to provide the most optimal services by really enjoying the synergy between these 2 products, or between the 2 companies. [Korean] So you could understand our approach as being exerting effort to find the best synergy between the 2 companies or the 2 products that could better contribute to the further growth of our Media business and media industry.

Operator

[Korean]

In Hoe Kim

[Korean] As there are no further questions, we will close the Q&A session. Thank you very much for joining us today. This will be the end of Q2 2014 earnings conference call. Thank you.

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