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Edited Transcript of 017670.KS earnings conference call or presentation 2-Aug-19 6:00am GMT

Q2 2019 SK Telecom Co Ltd Earnings Call

Seoul Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of SK Telecom Co Ltd earnings conference call or presentation Friday, August 2, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jeong Hwan Choi

SK Telecom Co., Ltd - Senior VP & IR Officer

* Lee Jonghun

SK Telecom Co.,Ltd - Head of 5GX Infra Innovation Team

* Poong Young Yoon

SK Telecom Co., Ltd - CFO

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Conference Call Participants

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* Hong-sik Kim

Hana Financial Investment Co., Ltd., Research Division - Analyst

* Jong In Yang

Korea Investment & Securities Co., Ltd., Research Division - Analyst

* Min Jun Jang

Kiwoom Securities Co., Ltd., Research Division - Analyst

* Neale Anderson

HSBC, Research Division - Head of Telecoms Research, Asia Pacific

* Stanley Yang

JP Morgan Chase & Co, Research Division - Analyst

* Taewon Kim

UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming

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Presentation

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Operator [1]

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(Interpreted) Good afternoon. First of all, thank you all for joining this conference call. And now we will begin the conference call for the Fiscal Year 2019 Second Quarter Earnings Results by SK Telecom. This conference will start with a presentation followed by a divisional Q&A session. (Operator Instructions)

Now we shall commence the presentation by SK Telecom.

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Jeong Hwan Choi, SK Telecom Co., Ltd - Senior VP & IR Officer [2]

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(Interpreted) Good afternoon. I'm Jeong Hwan Choi, the IRO of SK Telecom. Today's conference call will consist of the presentation on the earnings results for Q2 of 2019 and the future management plans and strategic direction by Poong-Young Yoon, CFO and Executive Vice President of the Corporate Center, followed by a Q&A session.

Today's conference call will provide consecutive interpretation, and we also have here with us executives from relevant business divisions to help deepen your understanding.

Before we begin, we want to remind you that all forward-looking statements are subject to change depending on the macroeconomic and market situations.

Let me now present our CFO.

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Poong Young Yoon, SK Telecom Co., Ltd - CFO [3]

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(Interpreted) Good afternoon. This is Poong-Young Yoon, CFO of SK Telecom.

Let me first discuss the consolidated earnings highlights for Q2 of 2019.

Consolidated revenue for Q2 2019 recorded KRW 4.437 trillion. With the MNO revenue turning around and media and security businesses continuing to grow, it increased by 6.8% year-on-year and by 2.4% quarter-on-quarter.

Consolidated operating income recorded KRW 322.8 billion. While operating cost slightly increased due to the 5G service launch, all of the media, security and commerce businesses successfully improved their earnings, thereby helping maintain the operating income similar to that of the previous quarter.

Net income recorded KRW 259.1 billion, down 71.7% year-on-year and 30.7% quarter-on-quarter due to lower equity method income on SK Hynix.

Let me now move on to discuss major achievements of each of the 4 business areas. MNO revenue turned around and recorded KRW 2,435.8 billion, up 1% quarter-on-quarter. ARPU also saw a quarter-on-quarter increase of 0.4% at KRW 30,755, while the handset subscriber number recorded net adds for 6 consecutive quarters leading the revenue turnaround.

Just 3 months since the world's first 5G commercial launch on April 3, SKT acquired 530,000 5G subscribers as of the end of June and expects to exceed the 1 million subscriber mark in August. As such, SKT continues to firmly hold its leadership position in the age of hyper-innovation with 5G.

In order for our users to experience 5G service and its benefits quicker, we are currently pursuing an efficient coverage expansion strategy by building 4 main clusters, namely, service, major commercial areas, summer and B2B. Going forward, we will continue our efforts to provide the highest quality and differentiated level of 5G service.

In Media business, IPTV revenue recorded KRW 322.1 billion. Continued subscriber growth, higher share of premium service or UHD subscribers as well as greater content usage led to a 15.2% year-on-year and 2.1% quarter-on-quarter revenue increase. Along with such continued growth of IPTV, we are currently undergoing the merger process of SK Broadband and t-broad, which was decided this past April.

The merged company will have more than 8 million subscribers, meaning it will have a strong foundation for content production and profit generation and we look forward to further strengthening its competitiveness as a result of diversification of pay-tv platforms.

Meanwhile, the media business is preparing for yet another leap. After signing the agreement to integrate our oksusu service with the 3 terrestrial broadcasters' POOQ, we are preparing the launch of a new OTT brand as well as attracting new investments.

The newly acquired investments will be utilized to strengthen the media content competitiveness based on our IPTV and OTT subscriber base as well as the content production and distribution capabilities of the 3 broadcasters.

Security business revenue recorded KRW 297.2 billion, a 7.5% increase quarter-on-quarter. Such revenue growth was led through ADT Caps diversifying its sales channel for security products and SK Infosec expanding its converged security platform business. Thanks to such revenue increase and post-merger optimization of NSOK, operating income increased by 26.7% quarter-on-quarter to record KRW 41.7 billion.

On top of maintaining a solid growing trend, the synergy between the Security business and SK's ICT family companies began to take full effect. A prime example is T map Parking, a parking platform launched this past June. With ADT Caps in charge of operating directly-controlled parking lots, not only did it secure a new growth engine, but the service was also further enhanced based on the synergy created with ICT family companies.

Our commerce business turned a profit for 2 consecutive quarters recording KRW 193.6 billion in revenue and KRW 1.3 billion in operating income similar to those of last year as well as the previous quarter.

With the 11ST reaching BEP last quarter, our TV commerce service SK stoa not only more than doubled its total sales volume, but also reached BEP this quarter making its growth all the more meaningful. As such, the commerce business strategy will focus on the fundamentals such as various merchandise planning and enhancing user convenience, rather than destructive price competition so that we may achieve a healthy growth going forward.

Lastly, I would like to discuss the interim dividend. While there is the burden of investment in 5G this year, in accordance with the company's principle of maintaining a stable level of dividend, the BOD has resolved to pay out an interim dividend of KRW 1,000. We will continue to maintain the balance between investment for growth and shareholder return.

Analysts and investors, by turning our MNO revenue around, we were able to bring you the good news of achieving an even growth of all 4 businesses. The foundation has been laid solid. We ask for your continued support and encouragement in our journey to overcome the challenging environment and to bear the fruits of growth. Thank you.

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Questions and Answers

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Operator [1]

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(Interpreted) Now Q&A session will begin. (Operator Instructions) The first question will be provided by Taewon Kim from UBS.

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Taewon Kim, UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming [2]

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(Interpreted) I have 2 questions. My first question is we saw that your 5G subscriber number increased quite rapidly during the second quarter. And in regards to that, of course, there will be a necessity for you to increase your coverage as well as enhance service quality. So in that context, what -- are there any [im]possibilities of you maybe making changes to your CapEx in comparison to what was guided earlier?

And my second question is, we are seeing various changes in the overall environment for your media business during the second quarter. There seems to be a lot more competition in the OTT market and also the fixed media markets such as IPTV. What is your strategy for your media business in that context?

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Poong Young Yoon, SK Telecom Co., Ltd - CFO [3]

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(Interpreted) First, thank you for your questions. Let me first address your question regarding the CapEx guidance for 2019.

First of all, as I mentioned during the first quarter's earnings conference call, the annual CapEx for this year is expected to be about 30% to 40% higher than that of last year.

And regarding the 5G service, we are keeping a keen eye to monitor the rapid pace of the 5G subscriber increase as well as the device launches so that we can establish and roll out our network to make sure that our users will be able to experience the greatest and the most differentiated level of 5G service.

As for the very exact investment amount into 5G because of certain market competition situations, it could be fluid. So it's quite difficult to give you the exact number as of now, but we will do our best to make sure to maintain the CapEx as efficiently as possible within the guided amount.

Let me now move on to discuss our mid- to long-term media business strategy. Through our merger of our cable TV and IPTV as well as the launch of the new OTT brand, we will now have under our umbrella the whole pay-tv platform.

And once the 2 deals of the new OTT brand as well as the merger of SK Broadband and t-broad is completed, we will be equipped with about a subscriber base as large as 10 million subscribers.

And based on such platform and subscriber base growth, we will be able to further strengthen our capabilities in terms of content production and distribution and we believe that we will be able to achieve further media business growth. Thank you.

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Operator [4]

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(Interpreted) The next question will be presented by Min Jun Jang from Kiwoom Securities.

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Min Jun Jang, Kiwoom Securities Co., Ltd., Research Division - Analyst [5]

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(Interpreted) I have 2 questions. My first question is, we saw your ARPU turn around on a quarter-on-quarter basis. If we assume that the rapid 5G subscriber growth is to continue, when will we be able to see the ARPU turnaround on a year-on-year basis? And will we be able to see that happen during the second half of this year?

My second question has to do with 11ST. If we are to say that it has remained in the black during the second quarter as well, it seems that the annual change process seems quite achievable as of now. So is it safe to say that we have definitely seen a change in the cost structure for 11ST? And what is your -- what is the outlook on the profit margin for 11ST during the second half of the year?

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Poong Young Yoon, SK Telecom Co., Ltd - CFO [6]

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(Interpreted) Thank you, Mr. Jang, for your questions. Let me first answer your first question regarding the ARPU. As you said that due to growing data usage as well as the effect of the 5G launch, we did indeed see the ARPU turn around during this quarter. And if such trends were to continue, we believe that we will be able to see the year-on-year ARPU turnaround during the fourth quarter of this year.

And let me move on to discuss the operating income outlook for 11ST. I believe that the -- it is very meaningful, the 11ST results are very meaningful and that we showed that 11ST is capable of achieving BEP in 2019. And on an year-on-year basis, we believe that we will be able to achieve BEP through efficient marketing and cost efficiency. However, it is important to maintain a balance between increased profitability as well as achieving growth in GMV. So as for a very detailed outlook, I think we need further -- we need to see what happens. Thank you.

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Operator [7]

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(Interpreted) The next question will be presented by Jong In Yang from Korea Investment & Securities.

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Jong In Yang, Korea Investment & Securities Co., Ltd., Research Division - Analyst [8]

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(Interpreted) I have 2 questions. The first has to do with your 5G launch. Recently, we have seen some of the competition in the 5G market intensify quite a bit. So I'd like to hear about your outlook in terms of the market competition as well as your outlook on the subscriber number target or market share target for 2019 and 2020.

My second question has to do with your dividend. When will we be able to see Hynix's dividend being linked to SKT's dividend? And will that have any relation to when you become an intermediate holding company?

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Poong Young Yoon, SK Telecom Co., Ltd - CFO [9]

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(Interpreted) Thank you, Mr. Yang, for your questions. Let me first go on to discuss the marketing competition environment for 5G.

We believe that the 5G subscriber mark -- number will exceed the 1 million mark during August and we see that the -- by the end of this year, we will achieve at least 2 million. So it is indeed increasing at a faster pace than we had first expected. And in 2020, considering current trends continue, we expect that number to reach 7 million subscribers.

So going forward, we will continue to achieve subscriber growth by providing customer benefits and services in a differentiated type of content per 5G cluster and make sure that we do everything we can to stabilize the market situation as well.

Let me now address your question regarding our dividend. Despite the burden in terms of cash flow that we have this year due to the launch of 5G service, under the principle that we maintain a stable level of dividend, the Board of Directors this past July resolved to pay out an interim dividend of KRW 1,000.

It is true that earlier this year, we did review a new dividend policy that could possibly link SK Hynix's dividend to ours. However, we decided that rather than linking or including some of the external factors for SK Hynix's business such as the macroeconomy -- the uncertainty of the macroeconomy as well as trade issues, that it is better to maintain our more stable DPS first dividend policy.

After the year-end dividend, although the burden of resources due to investment in 5G continue, we will do our best to maintain a stable dividend.

And as for the last part of your question, while it is true that we are continuing to review various options in terms -- regarding our governance structure, nothing has been decided as of yet. And we ask for your understanding in that it's difficult for us to mention any kind of relationship between Hynix and our turning to an intermediate holding company. Thank you.

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Operator [10]

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(Interpreted) The next question will be presented by Stanley Yang from JPMorgan.

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Stanley Yang, JP Morgan Chase & Co, Research Division - Analyst [11]

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(Interpreted) If this is not just for SK Telecom, but all competitors and all players in the industry, it seems that the overall service quality after the 5G launch is quite an issue. What is SK Telecom's answer in terms of the fundamental reason for that becoming an issue? And when will we be able to see that be resolved so that the level of 5G service quality would be what we actually had expected? And as, of course, these service quality will have an impact on the ARPU as well, can you maybe mention your target or strategy in terms of the penetration rate of the 5G service?

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Poong Young Yoon, SK Telecom Co., Ltd - CFO [12]

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(Interpreted) Thank you, Mr. Yang, for your question. I'll first answer your question regarding the 5G quality.

At the very first stage of the 5G launch, there were some issues regarding the optimization of the device and equipment. So that had led to a certain issue regarding the service quality.

We have continued to put in our utmost efforts to improve the call quality for 5G network. And as a result, we saw that the speed is unmatched to LTE and that is greatly faster than that of LTE. And when it comes to some of the more safety or stable -- stability-related indicators such as the call drop rate or the streaming quality, it is indeed much better than that of LTE. And we will continue to build on such efforts so that our customers will be able to experience the highest quality of 5G.

Let me now move on to your question regarding the penetration rate for 5G subscribers. As I mentioned earlier, the subscriber number outlook for the end of this year for 5G subscribers is 2 million, and 7 million for 2020. Thank you.

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Operator [13]

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(Interpreted) The next question will be presented by Neale Anderson from HSBC.

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Neale Anderson, HSBC, Research Division - Head of Telecoms Research, Asia Pacific [14]

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Just another question on 5G, I'm afraid. In the pack in the presentation, you mentioned various 5G clusters of services that you're exploring on showcases, I guess. Could you tell us which have seen the most interest from customers, particularly enterprise and government? And also, which type of service you believe is most likely to really become possible or see strong growth only when Release-16 5G is launched probably next year?

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Poong Young Yoon, SK Telecom Co., Ltd - CFO [15]

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(Interpreted) Thank you, Mr. Anderson, for your questions. Let me first answer your question regarding the 5G cluster strategy. In order to provide our users with a completely new experience with 5G, we are operating 4 major clusters in areas where there is greater data density. And these 4 clusters are service areas in for AR/VR, major commercial areas, summer and B2B. Because we are in the very initial stage because these clusters are being formed as we speak in the month of August, I think it's quite early to tell which clusters are doing the best.

However, what we can say that is in each of these clusters, our SK Telecom users will be able to experience an unmatched level of service quality and product as well as new experiences. And so we feel that this will do quite well going forward.

And to answer your second question regarding our outlook for 5G growth next year, I will have Lee Jonghun, the 5GX Infra Innovation team leader, take that question on.

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Lee Jonghun, SK Telecom Co.,Ltd - Head of 5GX Infra Innovation Team [16]

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(Interpreted) What we can say regarding the release of the new 16 is that due to its characteristic, we will be able to see the much more enhanced and advanced ultra-low latency technology take place. And in particular, we expect the latency in base stations to be only 1/8 compared to the previous level. And based on the 5G-based IoT, we will be able to see massive connectivity-related services. Thank you.

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Operator [17]

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(Interpreted) The last question will be presented by Hong-sik Kim from Hana Financial Investment.

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Hong-sik Kim, Hana Financial Investment Co., Ltd., Research Division - Analyst [18]

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(Interpreted) We do thank you for better results, but there were certain issues regarding your stock price so I would like to mention a few of them.

First of all, your 5G subscriber target was too conservative, I feel, and that has led to lower hype for the 5G service launch in terms of the share prices.

And secondly, the talk of linking your dividend -- the Hynix's dividend to our dividend, a lot of that was expected to happen for the interim dividend, but again, that didn't happen as well. So that also had a negative impact, I would say.

And lastly, well, there were a lot of assumptions and talk about your changing your governance structure, I feel that there was mixed messages given. So that again was another negative effect on the price.

I do have some questions, mainly 3 of them. The first is, is it safe to say that your ARPU grew by -- grew quarter-on-quarter for every quarter?

And my second question is, during the first quarter conference call, you did say that there is a possibility of structurally linking Hynix's dividend to your dividend. Is this a possibility in a very real sense at all? And I hope that you do really mention this in a quite clear manner because this is something that a lot of your larger shareholders, including pensions in Korea are very interested in.

And lastly, regarding your changes or your possibility of changing your governance structure. I would like to hear an answer as to are you currently still going through with that process? Is it something that we can see happen?

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Poong Young Yoon, SK Telecom Co., Ltd - CFO [19]

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(Interpreted) Thank you, Mr. Kim, for your questions. Let me first address your question on the ARPU. As I mentioned before, with the growing increase of 5G subscribers, we do feel that the ARPU will rise on a quarter-on-quarter basis going forward.

And nextly, addressing your second question on linking the Hynix's dividend to ours. First of all, compared to when we first mentioned the possibility of linking Hynix to our dividend, a lot -- there has been a lot of different situations. We felt that considering the current external issues regarding trade issues and whatnot, we felt that we needed to review once again whether it is truly beneficial for our shareholders if we were to link SK Hynix's dividend to ours. And as a result of such contemplation, we decided that as of now it is better to stick with our stable DPS.

However, we will be continuing to review other options in the second quarter -- second half. And once anything becomes more concrete, we will be sure to communicate that with the market.

And lastly, to answer your final question on the governance structure. We are indeed currently going through reviewing of the most efficient governance structure for our company. However, in order to -- in order for a governance structure to change, there is a very complex process involved that needs to meet all of the very different needs of all stakeholders involved. And also considering our efforts to grow our media business and the changes that the media environment is currently undergoing, we feel that we are going to need more time.

And so as for the governance structure change, rather than giving a short-term answer, we feel that we should take more time to contemplate on how we can truly benefit both the enterprise value and our shareholder value. Thank you.

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Jeong Hwan Choi, SK Telecom Co., Ltd - Senior VP & IR Officer [20]

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(Interpreted) This concludes the earnings conference call for Q2 of 2019. Thank you.

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Editor [21]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.