U.S. Markets close in 5 hrs 51 mins

Edited Transcript of 017670.KS earnings conference call or presentation 7-May-19 6:00am GMT

Q1 2019 SK Telecom Co Ltd Earnings Call

Seoul May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of SK Telecom Co Ltd earnings conference call or presentation Tuesday, May 7, 2019 at 6:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jeong Hwan Choi

SK Telecom Co., Ltd. - Senior VP & IRO

* Poong Young Yoon

SK Telecom Co., Ltd. - CFO

================================================================================

Conference Call Participants

================================================================================

* Hoi Jae Kim

Daishin Securities Co. Ltd., Research Division - Analyst

* Hong-sik Kim

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

* Jae-min Ahn

NH Investment & Securities Co., Ltd., Research Division - Internet and Media Analyst

* Joonsop Kim

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

* Stanley Yang

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

Now we shall commence the presentation by SK Telecom.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] Good afternoon. I am Jeong Hwan Choi, the IRO of SK Telecom. Today's conference call will consist of the presentation on the earnings results for Q1 of 2019 and the future of 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] Good afternoon. This is Poong-Young Yoon, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights for Q1 of 2019.

Consolidated revenue for Q1 2019 recorded KRW 4,334.9 billion with the MNO revenue fall slowing and becoming more stable as well as the security business including ADT Caps and SK Infosec contributing to consolidated revenue. It increased by 3.7% year-on-year. Due to the revenue seasonality of the previous quarter, it decreased by 0.4% quarter-on-quarter.

Consolidated operating income recorded KRW 322.6 billion, similar to that of the previous year, thanks to marketing cost efficiency and improved results of subsidiary companies offsetting the decrease in MNO revenue. Through differentiated marketing, 11ST succeeded in securing profitability reaching a quarterly BEP. And the security business also contributed to consolidated earnings by maintaining a stable operating income. Compared to the previous quarter due to the previous one-off loss as well as SK Infosec earnings newly being reflected, consolidated operating income increased by 43.2%.

Net income recorded KRW 373.6 billion, down 46.1% year-on-year and down 21.3% quarter-on-quarter due to lower equity method income on SK Hynix.

Let me now move on to major business achievements. On the 3rd of April this year, SK Telecom opened the era of hyper innovation with 5G with the world's first 5G subscriber. We have identified media, AR and VR and games as the areas that will go through the most dramatic change in user experience through 5G as well as areas that our customers are most looking forward to, and we are launching related services accordingly.

First, along with our 5G service launch, we have opened the 5GX section in oksusu where customers can enjoy 4K UHD-level content, VR and other 5G-exclusive video content. We are also preparing providing real-time multi-view and live AR-VR broadcast of League of Legends international tournaments loved by esports fans worldwide as well as immersive VR content for K-Pop idols. By offering such unique content, we will introduce you to the completely new 5G service and its possibilities.

In media, with IPTV subscribers continuing to increase at a steady pace, we have secured yet another foundation for growth. Following the MOU signed in February, on the 26th of this month, SK Telecom signed an acquisition agreement to acquire t-broad, the nation's second largest multiple system operator. The merged entity will grow into a competitive media platform based on the 8 million pay-TV subscriber base while also contributing to the enterprise value and consolidated earnings growth.

Building on the MOU to create an integrated OTT service signed this past January, we had entered into an official contract in April, thereby taking another important step to launching a new OTT company. The newly launched service will grow into the nation's leading pay subscription-based OTT centering on the monthly subscription business plan with a cutting-edge media technology-based premium content offering.

Furthermore, through efforts such as establishing an esports joint venture and forging a partnership for a comprehensive cooperation in the media industry with the Comcast group and cooperating with the 3 terrestrial broadcasters on 5G-based new media businesses, we have secured a solid support system that will allow us to strengthen our media competitiveness. As I explained last quarter, we will continue to expand our areas of business and create new growth opportunities in our media business in the future.

In April this year, we signed a deal to acquire Incross, a company specializing in digital advertising. We will prepare ourselves for the video advertising market that will get a boost from 5G and seek stronger synergies with our various business models, including T Map, 11ST and the integrated OTT service.

Moving on to security. Through stronger sales power and product offering made possible by utilizing the assets of the SK ICT family, not only the existing security dispatching business grew, but we also saw an even growth in new businesses such as parking and home security. As we continue to stay focused on the main security business, we will expand new business areas such as commercialization of new ICT-based parking services as well as yield greater synergy in the physical and information security businesses through cross-selling with SK Infosec and converged security product development.

Lastly, our commerce business recorded a quarterly surplus, thanks to 11ST efforts to move away from unhealthy price and delivery competition and aiming to become a commerce portal through healthy growth. We will focus on ways to increase the number of returning customers centering on the elements of fun, information and participation and concentrate our resources in enhancing customer convenience.

Meanwhile, to increase the inter-business synergy in the commerce business, SK Stoa, which is in charge of the T-commerce channel, parted with its previous parent company, SK Broadband, and became a subsidiary of SK Telecom. 11ST and SK Stoa will cooperate closely to achieve both profitability and growth going forward.

Investors and analysts, we ask for your continued support for our serious efforts to enhance the enterprise value. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

[Interpreted] (Operator Instructions) The first question will be provided by Jae-min Ahn from NH Securities.

--------------------------------------------------------------------------------

Jae-min Ahn, NH Investment & Securities Co., Ltd., Research Division - Internet and Media Analyst [2]

--------------------------------------------------------------------------------

[Interpreted] I am Ahn Jae-min. The first question is related to your 5G service. I'd like to know about the number of 5G subscribers up to this point as well as, of course, what we are most interested in, the CapEx number for 5G. And will there be any changes to your depreciation and amortization costs?

My second question has to do with 11ST. You mentioned that they did indeed reach a quarterly BEP this past quarter, but we are seeing heated competition coming from tribals, namely Coupang and Naver. So there seems to be a growing competition in the area of commerce. So will you continue your direction in concentrating more on the profitability rather than the GMV? And are there any particular strategies for this year regarding 11ST?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] Thank you, Mr. Ahn, for your question. Let me first address your question regarding 5G. First of all, the CapEx -- nonconsolidated CapEx for 2018 was KRW 2.1 trillion, which included investments that went into preparation for the commercial launch of 5G. And as for the CapEx for 2019, we expect that it will be increased by about 30% to 40% compared to the previous year due to efforts to widen our coverage as a result of the commercial launch of 5G service.

As for the investment that goes into 5G, our basic principle and direction is that we will do what we can to make sure that we maintain -- we stay the industry leader. And as for the actual investment size for 5G as well as the number of base stations, we will be deciding on those numbers after an extensive study of the actual market competition situation as well as our customer demand. Especially, we are going to make sure that we have a full understanding of how the market responds as well as the device lineup and the overall supply chain of our equipment and take on a flexible manner in responding and making decisions related to this matter.

Now let me discuss the subscriber number for 5G. As you may know, it's only been short of a month since our 5G service launch and there's only one device provided. So we are at baby steps, so it's quite difficult for us to give you the actual subscriber number. However, our basic plan is that we will go beyond the current handset market share and that will be the basic principle and direction as we move forward with the 5G market.

And as for the next year with the wider range of devices provided as well as a wider service coverage, we will be expecting a higher number of subscribers subscribed to 5G, and we expect about at least 6 million to 7 million 5G subscribers.

Let me now touch upon the depreciation cost regarding 5G. This year, we do expect a depreciation cost to increase by about KRW 90 billion regarding the 5G spectrum. And as a result of greater 5G-related CapEx, we believe that the depreciation cost for tangible assets will also slightly increase. However, there will be some variables that contribute to lower depreciation such as the LTE equipment being fully depreciated. So we will be, again, as I said before, we will be responding in a flexible manner, so it's difficult for us to provide you with a exact amount. So we have clear understanding.

Now let me move on to our commerce strategy. Based on the characteristics of 11ST being an open market without any burdens of distribution or inventory and it has managed to enhance efficiency of its marketing cost spending. It improved its profitability by the highest -- by the most in the industry in 2018. And in 2019, the first quarter, it reached quarterly BEP.

In order to secure profitability continuously and consistently going forward, the increase in GMV as well as higher marketing cost efficiency need to take place simultaneously. And in order to do so, we want to make 11ST into a commerce portal so that we can expand direct visits of our customers as well as increase the number of returning customers. For example, recently, 11ST revived its own point system. And also by integrating its 11pay simple pay system and increasing the synergy effects of 11ST and other members of the SK ICT family, it is pursuing both GMV increase as well as profitability.

And as I explained in the open speech just before, we have brought SK Stoa under the SKT umbrella, so it is now a direct subsidiary of SK Telecom.

For TV shopping, it has both the capabilities of its own merchandising as well as logistics competitiveness. So in terms of the mobile shopping and TV commerce, we believe that it will create great synergies with 11ST, through which we will achieve greater GMV. Thank you.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

[Interpreted] The next question will be presented by Hoi Jae Kim from Daishin Securities.

--------------------------------------------------------------------------------

Hoi Jae Kim, Daishin Securities Co. Ltd., Research Division - Analyst [5]

--------------------------------------------------------------------------------

[Interpreted] I am Kim Hoi Jae. My first question is at the last Annual General Shareholders Meeting, the CEO mentioned that as your -- each of your business decisions are doing quite well. It's only a natural course that SK Telecom becomes an intermediate holding company. And as for the timing, because it is very important, the CEO seem to hint that it will be difficult to achieve that during this year. Now a lot of -- those of us in the market are saying that it's never going to happen, so we would like to hear your take at this particular time. And my second question is during your last earnings conference call, you mentioned that you are reviewing a new dividend policy where you will directly link SK Hynix dividend income to your interim dividend. So where do you stand on that as of now?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] First, I want to thank you for your question. First of all, we are continuing our efforts to secure subsidiaries that have adequate size as well as growth potential in order for us to maximize our enterprise value as a result of becoming an intermediate holding company. And namely among the 4 major business areas in the media business area, we will be launching a grand OTT service that integrates oksusu and Pooq and we are pursuing the merger of SK Broadband and t-broad.

And as for the timing, once the overall conditions are set in place, meaning that all of our subsidiary portfolio is focused on our 4 major business areas, and also when the time comes when both internally and externally the optimal conditions are all set in place, then we will go forth with getting a consensus among our stakeholders before we become -- before we take any action to becoming an intermediate holding company.

Let me now move on to your question regarding the dividend policy. As I mentioned in the last quarter, we still stand by our position in that we are reviewing ways to change our dividend policy that can link both the dividend income from SK Hynix as well as the profit that comes from our MNO business operation. However, this year, despite the partial increase of SK Hynix dividend income, because we are at a time when we need to invest in 5G network in terms of cash flow, we are quite at a -- we are faced quite of challenge this year. So we are currently in the process of deciding on the amount that will go into the investment in MNO and other details, and we will be able to communicate the amount to you after it has been decided at the Board of Directors' meeting. And I can assure you that we will do our best to maintain a stable level of dividend amount this year. Thank you.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

[Interpreted] The next question will be presented by Joonsop Kim from KB Securities.

--------------------------------------------------------------------------------

Joonsop Kim, KB Securities Co., Ltd., Research Division - Analyst [8]

--------------------------------------------------------------------------------

[Interpreted] I am Kim Joonsop of KB. I have two questions regarding your MNO and security businesses. The first question is regarding your MNO business. It is very important it seems when your MNO revenue will be turning around. So when do you see your MNO income turning around? And what are your strategies to achieve that? And the second question has to do with your security business. What is the outlook on the business areas based at -- or based on the synergy created with SK Telecom's new ICT technologies? And also what are your maybe more specific strategy when pursuing this goal?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] Thank you, Mr. Kim, for your question. Let me first address your question regarding the MNO revenue turnaround. With the continued increase of subscribers opting for the monthly selective discount price plans as well as the effect of the tariff cuts provided -- the tariff exemption provided to the basic pension recipients that began second half of last year, we did see a decline of the MNO revenue in Q1. However, the fall itself is narrowing, thanks to various factors, which include greater handset subscribers. Due to the growing data demand as a result of greater media consumption and also the growing number of handset subscribers and on top of that, we have, of course, the commercial launch of 5G. So we believe that the MNO revenue will be turning around during the second half of this year.

Let me now move on to address our strategies regarding the business carryout by ADT Caps. This year, ADT Caps will be focusing on the parking service and home security through which they will grow their new businesses. And in order to achieve this goal, they are utilizing the assets of the SK ICT family companies and strengthening their sales power and product offering. What we're seeing in our subscribers opting for the security products, we are seeing more of them coming through the SK Telecom distribution channels. Especially when it comes to home security products, we are seeing a higher representation of those that come through the SK Telecom distribution channel, and most of the subscribers are bundling their services with our wireless service as well.

And as for the parking service, based on the uptake of the new ICT-based T Map parking business, which will be commercially launched during the second quarter, we expect the business to yield a meaningful amount of revenue during the year -- during the year 2019. And on top of that with SK Infosec being a large enterprise and ADT Caps cross-selling each of their products together, we are seeing more possibilities in the converged security business area. And based on such synergies as ADT Caps is expected to grow their revenue -- annual revenue by over 20% from the KRW 0.78 trillion, which they recorded in 2018. Thank you.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

[Interpreted] The next question will be presented by Stanley Yang from JPMorgan.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] I am Yang. Can I just have one question regarding the ARPU? The ARPU for the first quarter compared to your competitors is quite low. In the previous quarter, it was similar, but we saw a lower ARPU number on SK Telecom for the first quarter of this year. Why is that? And going forward, do you expect this ARPU gap to continue on? And if not, what are some of your strategies for the second half of this year regarding ARPU?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] Thank you, Mr. Yang, for your question. In 2018, SK Telecom set forth to remove all negative experiences of our customers through change and innovation. And by doing so, we focused on eliminating the negative customer experiences and increasing the benefits that could actually be felt by our users. And as a result, we were ranked in all of the national customer satisfaction indices last year and also we saw a record low churn rate.

Based on such programs and efforts to pursue change and innovation, we did indeed see a slight lowering of the ARPU number. However, when -- as a result of it being more effective to our end, we saw the decline narrow. And also we believe that the MNO revenue, as a result of these efforts, will be turning around during the second half of this year. Thank you.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

[Interpreted] The next question will be presented by Hong-sik Kim from Hana Financial Investment.

--------------------------------------------------------------------------------

Hong-sik Kim, Hana Financial Investment Co., Ltd., Research Division - Analyst [14]

--------------------------------------------------------------------------------

[Interpreted] There were a lot of questions that were presented previously. I just wanted to make sure of one thing, is it true that you said that, by the end of the year 2020, you expect the 5G subscriber number to reach about 6 million to 7 million? I just want to double check.

And I have 2 questions. The first is that it seems that, although we are in the initial stage of the 5G commercial launch, it doesn't seem very positive for SK Telecom. I don't know how accurate the media is, but there are talks about how SK Telecom has acquired less subscribers on 5G compared to its market share structure. Why is that? And there are also worries that your ARPU number is actually falling because your higher ARPU subscribers are leaving you for your competitors. So what is your plan to respond to that? And what are your relative strategies?

My second question is it is quite encouraging that due to lower advertising cost, you saw a lower marketing cost in the first quarter. Based on IFRS 15, what is the marketing cost guidance that you could give us?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

[Interpreted] Thank you, Mr. Kim, for your questions. Let me once again touch upon the 5G subscriber number target. As for the target number that I gave you for the year -- end of the year 2020, we believe that, that target is quite feasible based on what we saw when we first launched the LTE and how fast the subscribers grew. And I think that because it's only been a month since its launch, we do not think that the market share as of now for 5G is that meaningful. And as said before, at this particular juncture, there's only one 5G device available and it's very initial stages in the market. So rather than the 5G subscriber number at this particular juncture, I can say that we will be seeing our usual handset subscriber market share structure.

And I know that there are some concerns in the market of a overheated competition happening due to more 5G devices being introduced in the market. However, from what we are seeing right now, the market is not showing any signs of being overheated in terms of competition, and the -- so we expect the overall market structure to continue its trend to become more stable in the 5G era as well.

And as for the marketing cost in the 5G era, we will be shifting away from consumptive and unhealthy cost-centered competition and focus on one that centers on service. So as for the marketing cost for 2019, we believe that it will not be higher than that of the previous year. Thank you.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

[Interpreted] Currently, there are no participants with questions. (Operator Instructions)

--------------------------------------------------------------------------------

Unidentified Company Representative, [17]

--------------------------------------------------------------------------------

[Interpreted] As we have no more questions, I believe this will now conclude the conference call for the earnings for Q1 of 2019. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]