KT expects earnings to jump in 2nd quarter

By Cho Mu-hyun

KT expects its profit to improve in the coming months, thanks to the strengths of non-telecommunications subsidiaries BC Card, Skylife and KT Rental. Too bad it continues to be mediocre in its main markets of mobile telephony and high-speed Internet, while its public switched telephone network (PSTN) decays as a business model.

Its subduing performance in the wireless market is particularly alarming as it continues to pay heavily for getting slow out of the gate in fourth-generation Long Term Evolution (LTE) services.

KT is also struggling to phase out its aging second-generation (2G) telephony services, leaving it stuck in between a deteriorating voice market and a cut-throat mobile data market.

``The first quarter was a time for us to address concerns over the stagnant fixed-line telephone services and the challenges we face in the mobile market,’’ said Kim Beom-jun, KT’s chief financial officer.

``We are quickly gaining ground in the LTE market and we believe our pace will accelerate when we release more LTE-compatible devices in the second quarter.’’

KT reported revenue of 5.75 trillion won (about $5 billion) in the first quarter and an operating profit of 575 billion won. Net profit declined 26.6 percent year-on-year for the three months through March.

The numbers are humbling for the company, which had made huge strides in the mobile market a few years back, being the first operator here to embrace the Apple iPhone and triggering a smartphone boom.

However, it seems that KT wasted its bright start by lagging behind rivals SK Telecom and LG Uplus in the transition to LTE.

``The market consensus was that KT’s net income for the first quarter will be around 300 billion won due to a decline in its telecommunications businesses. Operating profit exceeded our expectations of 449.1 billion won, so the numbers weren’t really that bad,’’ said Kim Hong-seek, an analyst from NH Investment and Securities.

``We expect the company’s operating profit and net income to improve for the rest of the year, although its weakening position in the telecommunications market fuels long-term worries.’’

KT saw its average revenue per user (ARPU) decline 5 percent in the first quarter, a fall that was attributed to the government’s anti-inflation efforts that resulted in mobile phone carriers shaving 1,000 won off their basic monthly rates. However, the firm believes its ARPU will improve once it attracts more LTE customers.

KB Bank Investment & Securities analyst Lee Ji-hyun said the local brokerage expects KT to turn its ARPU around in the third quarter.

Though Lee highlighted the stagnation of the market for wired services, she believes the drop in earnings will be much lower than before, while KT’s non-telecommunications subsidiaries’ earnings are likely to increase further.

But the focus on non-telecommunications subsidiaries by KT could also become a drawback.

“BC Card, Skylife and KT Rental have done well to give an edge to KT and are creating expectations from the market for a further rise in the non-telecommunications sector of the company,” said Kim from NH Securities.

“An increasing dependence on them may cause problems with shareholders, who may ask company executives to invest more in the firm’s somewhat declining telecommunications business,’’ he added.

KT has not stuck to its plan to further develop its non-telecommunications areas.