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Edited Transcript of 017670.KS earnings conference call or presentation 31-Jan-19 7:00am GMT

Q4 2018 SK Telecom Co Ltd Earnings Call

Seoul Feb 1, 2019 (Thomson StreetEvents) -- Edited Transcript of SK Telecom Co Ltd earnings conference call or presentation Thursday, January 31, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jeong Hwan Choi

SK Telecom Co., Ltd. - Head of IR

* Won-Young Yoon

* Yoon Poong-Young

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Conference Call Participants

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* Hoi Jae Kim

Daishin Securities Co. Ltd., Research Division - Analyst

* Hong-sik Kim

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

* Jay Yoo

BofA Merrill Lynch, Research Division - VP

* Jong In Yang

Korea Investment & 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

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Presentation

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Operator [1]

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(foreign language) 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 2018 fourth 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. - Head of IR [2]

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(foreign language) 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 2018 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. (foreign language) 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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Yoon Poong-Young, [3]

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(foreign language) Good afternoon. This is Poong-Young Yoon, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights for 2018.

(foreign language) With the effect of the tariff cuts, including the increased selective discount rate that took effect from September 2017 fully reflected for the year, consolidated revenue recorded KRW 16,874 billion, down 3.7% year-on-year.

Despite the environment in which a decline in revenue was inevitable due to lower MNO revenue, growing new ICT business such as media and security made up for the fall. While the security business' contribution was limited, as it was only reflected from Q4, its effect will be much greater beginning from 2019.

(foreign language) Operating income and EBITDA recorded KRW 1,201.8 billion, down 21.8% year-on-year; and KRW 4,485.3 billion, down 6.2% year-on-year, respectively. Although decrease in revenue led to that of operating income as well, we reported the lowest marketing costs in 10 years and improved 11ST's profitability, which are meaningful results in that pre-existing issues were resolved.

(foreign language) Annual net income recorded KRW 3,132 billion, up 17.9% year-on-year due to increased equity method income on SK Hynix.

(foreign language) Nonconsolidated CapEx for 2018 recorded KRW 2,127.9 billion, which is within the range of the KRW 2.1 trillion level that was guided early in the year.

(foreign language) As for Q4 2018, with IPTV achieving record high earnings and ADT Caps now included in our consolidated results, consolidated revenue recorded KRW 4,351.7 billion, up 3.9% quarter-on-quarter. Operating income decreased quarter-on-quarter due to one-off costs related to the restructuring of SK Planet.

(foreign language) I will now move on to the strategic direction for 2019.

(foreign language) During the past year, SK Telecom implemented a total of 8 programs, including a no-contract plan, safe roaming and T Plan in order to regain trust by innovating customer value. As a result of improving customer experiences through such efforts, handset subscribers recorded quarterly net additions to reach an annual total of 185,000, while annual churn rate recorded a record low 1.22%.

(foreign language) This year, in MNO business, we will build on last year's efforts and continue to change and innovate, while making sure these efforts bear fruit. While the effective of tariff cuts are expected to persist this year, we will once again see the MNO revenue grow within the year.

(foreign language) In 2018, we laid the foundation for growth as a new ICT company by reorganizing our business to center on media, security and commerce in the non-telco area.

(foreign language) In media business, IPTV achieved a near 10% subscriber growth year-on-year, acquiring 4.73 million subscribers. And in Q4, the mix of high ARPU UHD subscribers exceeded 50% for the first time. Led by such quantitative and qualitative growth, SK Broadband posted its highest ever quarterly as well as annual revenue and operating income in Q4 and fiscal year 2018.

(foreign language) Recently, we've also signed an MOU regarding cooperation on an integrated OTT service between oksusu and the 3 terrestrial broadcasters Pooq service and agreed to enter the next-generation broadcasting solutions market with the largest U.S. terrestrial broadcaster, Sinclair.

Also, our AI-based personalized music platform, FLO, which was launched in December, reached 1.3 million MAU as of now, stepping up to become the third player in the industry within just a month of its launch. As such, we will not rest on our laurels, but continue efforts to expand our business area and seek new opportunities for growth.

(foreign language) In security, by completing the acquisition of ADT Caps and its merger with NSOK as well as the acquisition of SK Infosec, we have fully prepared the business to become the new growth engine. Through a differentiated security service based on synergy, which include home-related total service offering and new ICT-based parking lot service in connection with T Map, we will grow ourselves into a leading company in the security market.

(foreign language) 11ST, which has successfully raised KRW 500 billion last year, achieved meaningful results in that the annual revenue for 2018 was maintained at the similar level of 2017 while operating losses were reduced by over half. And in Q4, in which 11 shopping holiday, the biggest shopping festival of 11ST, is included, the business managed to increase the revenue while cutting costs at the same time.

(foreign language) Aiming to reach BEP in 2019, 11ST will pursue profitability-based growth, and rather than consumptive price competition, the business will evolve into a commerce portal that puts customer convenience first through AI and data-based customer experience innovation and a unique service offering.

(foreign language) Moving on to our preparation for 5G. On December 1 last year, SK Telecom successfully completed its 5G transmission and began operation of 5G AI machine vision for our first 5G client. This year, we will be providing 5G service focusing on the metropolitan area and major cities and will lead Korea's 5G based on our AI-based network operation technology and stability backed by quantum cryptography.

(foreign language) Based on the growth of the new ICT businesses in media, security and commerce, along with a differentiated 5G service, we will achieve revenue growth again this year. The annual consolidated revenue target for the year is KRW 18 trillion, which is a KRW 1 trillion and 6% year-on-year increase.

(foreign language) Dividend for 2018 was decided to be maintained at KRW 10,000, including the previously paid interim dividend of KRW 1,000 at the meeting of the Board of Directors, and it will be finalized after the AGM, expected to be held in March.

From 2019, we are reviewing changing the criteria for dividend calculation, so that the fruits of successful investments such as SK Hynix can be returned to our investors as well. Once a decision has been reached through the approval of the BoD, we will announce it in further detail.

(foreign language) 2019 is an important year that will be an inflection point for SK Telecom. In MNO, we must put in efforts to recoup our investments for the future as meaningful results. And in new ICT businesses, it is the year to bring intangible results. The management environment, including the macroeconomic outlook, is tough as well. However, we will build the foundation for the limitless potential of 5G to become Korea's engine for economic growth. SK Telecom will succeed together with you. We ask for the support and trust of our investors and analysts. Thank you.

(foreign language)

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) The first question will be provided by Hoi Jae Kim from Daishin Securities.

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Hoi Jae Kim, Daishin Securities Co. Ltd., Research Division - Analyst [2]

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(foreign language) I have 2 questions. My first question is, I would like to hear more about what you mentioned in the opening speech regarding your dividend. Does this mean that we can understand this to mean that SK Hynix's dividend could directly be linked to SKT's dividend? Or are you talking about a more special dividend like more of a one-off dividend? And secondly, could you please give us the CapEx guidance for 2019, including your investments in 5G?

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Yoon Poong-Young, [3]

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(foreign language) First, thank you, Mr. Kim, for your question. (foreign language) Let me first give you a little bit more detail about the dividend policy. (foreign language) First of all, we are still -- we still stand by our position in that we are considering in a positive manner, linking partially the dividend that comes from SK Hynix with our own dividend. And as of now, we are contemplating a new dividend policy that reflects the stronger non-telco business portfolio. (foreign language) Under the new dividend policy, we are considering an option where the year-end dividend will be maintained as KRW 9,000 as in link to the MNO business earnings and changing the interim dividend so that we could provide a more upside compared to the pre-existing interim dividend level in link to the dividend income that comes from our subsidiaries, which include SK Hynix. (foreign language) However, as for the detailed amount regarding the interim dividend, we will first have to go through the approval and decision made by the Board of Directors and then we will be sure to communicate it with the market.

(foreign language) Let me now move on to your second question regarding the CapEx for 2019. (foreign language) I believe that we can provide you with exact guidance for the CapEx for 2019 once the major variables, which include the 5G service and price plan scheme as well as the device lineup, become more concrete. (foreign language) While due to the commercial launch of 5G, the total CapEx could hike slightly, we stand by our pre-existing plan in that we will sink the revenue generation level that can guarantee investment profitability and the investment amount. (foreign language) We do expect the 5G price plan scheme as well as the device lineup to be visualized within the first half of the year, so including such details and other various factors, I will tell you what I can. (foreign language) When it comes to investment in 5G, we will be sure to prepare ourselves so that we will never be short of a successful commercial launch and to lead the market in 5G, and we will implement a very thorough analysis of our customer demand before making our investments. (foreign language) We will also be sure to nimbly modify our overall investment amount that goes into the pre-existing network infrastructure, including LTE as well as reasonable methods to cut costs so that we come up with the optimal investment amount. (foreign language) Thank you.

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Operator [4]

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(foreign language) 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 [5]

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(foreign language) I have 2 questions. My first question has to do with your corporate governance restructuring. There was recent media coverage saying that SK Group will go forth with their restructuring of the corporate governance within the year. So could you please give us an update regards to the overall schedule and direction? And my second question has to do with the MNO profitability. It is on the decline, as we all know. When can we see MNO's profitability turning around?

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Yoon Poong-Young, [6]

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(foreign language) Thank you, Mr. Yang, for your questions. (foreign language) We are continuing to review enhancing enterprise values through restructuring our governance structure. And as part of such efforts, we are focusing currently on ICT business portfolio -- strengthening our ICT business portfolio. (foreign language) And especially in the year 2018, we laid the foundation for self-sufficiency for our 2 business areas, commerce and security, among our non-telco businesses, which include the restructuring of 11ST as well as successful funding and the acquisitions of ADT Caps and SK Infosec. (foreign language) And this year, we will continue our efforts to enhance the value of our non-telco businesses, namely, media, security and commerce, so that it can generate more synergy between these business areas, thereby maximizing the effects of restructuring. (foreign language) As of now, we are focusing on laying the foundation for increasing the value of our media business. And with the recent signing of an MOU between oksusu and Pooq and the integration between Pooq, which is owned by the 3 terrestrial broadcasters, we expect to see visible results within the first half. (foreign language) As for the time line in terms of when such restructuring will take place, it will be decided in an organic manner, considering the optimal time line once such ICT business portfolio is completely built. And as of now, nothing has been decided. (foreign language) Let me now move on to address your second question regarding earnings outlook for 2019, especially focusing on the MNO revenue. (foreign language) In 2019, with the commercial launch of 5G, we will see tangible earnings results related to businesses -- related to ICT, namely security, media and commerce, along with achieving MNO revenue growth. And through such efforts, we expect the revenue to grow by over KRW 1 trillion compared to the previous year. (foreign language) As for MNO revenue, while we do expect the tariff cut effect to persist, based on growing customer data demand, we will be offering reasonable price plans and also through net subscriber additions, we expect it to turn around during the second half of this year. And while there could be a slight hike in certain costs related to the commercial launch of 5G, we plan to minimize the effect of that by strengthening our principal in increasing the efficiency of our business operation, which include cutting marketing costs. (foreign language) As for SK Broadband centering on IPTV and T-commerce businesses, we expect it to maintain 2-digit-level growth so that it can contribute greatly -- contribute more going forward to our consolidated results. And we also do respect tangible results regarding new media-related businesses, which include OTT service. (foreign language) Thank you.

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Operator [7]

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(foreign language) The next question will be presented by Jay Yoo from Merrill Lynch.

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Jay Yoo, BofA Merrill Lynch, Research Division - VP [8]

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(foreign language) And I have 2 questions. My first question has to do with your media strategy. You did touch upon it briefly just now. But regarding the integration or merger between oksusu and Pooq, I know that you are only in your -- that you've just signed an MOU, so you are in the initial stages and there are a lot of variables, but I would like to hear about your overall business direction. Is it going to be a 2-track strategy both attacking the domestic market and the overseas market? And also, what will your profit model be like? And my second question has to do with 11ST. I know that you told us that you are focusing on strengthening internal capabilities and that was actually your answer at the [Teju] event as well. However, when we look at the e-commerce market, competition is very fierce still and I do not think that there was a lot of action after spinning off 11ST. So could you maybe give us more color in terms of your strategy for 11ST? And in terms of the revenue, it fell slightly year-on-year. Can you give us an outlook for the revenue for 2019? And also, do you still believe that you will be reaching BEP within the year?

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Yoon Poong-Young, [9]

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(foreign language) Thank you, Mr. Yoo, for your questions. (foreign language) Let me first address your question regarding oksusu and Pooq. (foreign language) The new entity that will be built through the merger of oksusu and Pooq is expected to launch within the first half of the new year. And as for the details after all the decisions have been finalized, we will communicate it. (foreign language) And when the new entity is established, we will be raising funds from external investors. And through these funds, we plan to strengthen the domestic content as well, so Korean content as well, and also enter into the global market as well, first, centering on the East Asian market. (foreign language) And as for the specific business model or profit model, we are still in the discussion process, but the basic outline will be that it will be similar to the model of Netflix. So by that I mean, a subscription-based VOD service. (foreign language) Let me now address your second question regarding 11ST. (foreign language) Basically, when it comes to businesses carried out by 11ST or Coupang, there are certain differences between 11ST and its competitors in the very nature of their businesses and they each have their strength. (foreign language) And I believe that the strength of 11ST lies in its product lineup as well as customer traffic because it is a open market-led business, and also the possible synergies that could be generated as it is a part of the SK Group. (foreign language) So the basic direction of the strategy for 11ST is that it will strengthen our customer shopping experience. And by expanding our product coverage through various external partnerships with various parties, it will evolve into a commerce portal with strong profitability. (foreign language) With the equity investment in Korea Center last December and other efforts, we will diversify our service and product lineups, centering on areas such as fashion mart and beauty. (foreign language) Also, as a member of the SK ICT family, we will strengthen our mileage partnership and other membership synergies that could take place and we will come up with ways to more strongly and intricately link the subscriber base with that of SK Telecom and 11ST. (foreign language) And also, by making the online space a main customer point of contact regarding all of our services provided, we plan to provide all of SK Telecom's tangible and intangible services through 11ST going forward. (foreign language) Thank you.

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Operator [10]

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(foreign language) The next 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 [11]

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(foreign language) I, first of all, just want to check something that was just mentioned and then I have my 2 questions. My first question is, you talked about a possibility of changing your dividend policy. Does this mean that if you were to increase this year's dividend, that means the interim dividend for 2019 that is to be paid in June, could that be greater than KRW 1,000? Also, my 2 following questions are, the first is, you gave us a revenue guideline of KRW 18 trillion and I believe that is based on the growth -- your acquisition of ADT Caps as well as your Media Business outlook. Could it be safe to say that your MNO revenue will also turn around within the year? And my second question has to do with the fact that the market has some concerns in that your marketing -- the marketing competition could be overheated due to early customer acquisition efforts of 5G service. I would like -- and there is also the talk in the National Assembly regarding a banning of discrimination when it comes to providing rebates. So I would like to hear SK Telecom's comments on that issue.

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Yoon Poong-Young, [12]

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(foreign language) Thank your for your question. (foreign language) First of all, as you may know, when it comes to changing -- or when it comes to any decisions regarding the dividend payout, including the interim dividend, it has to first go through the approval of the BoD. So I ask for your understanding in that we cannot give you any definite answers during this conference call. (foreign language) However, as you know, SK Hynix's dividend was increased to KRW 1,500 from the previous KRW 1,000. And this is something that works in a positive direction when it comes to our consideration of changing the interim dividend. (foreign language) Let me address the second question you asked, which was the outlook of our subsidiaries earnings for 2019 and especially the MNO revenue outlook. (foreign language) When it comes to the full year of 2019, because of the tariff-cut effect persisting, MNO revenue is expected to show a negative growth. (foreign language) However, beginning from the second half of the year, through greater subscriber additions as well as higher ARPU, we expect the revenue to turn around. (foreign language) And to address the last question that you asked, I will handle the mic over to Mr. Won-Young Yoon, Head of Corporate Relations Innovation Office.

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Won-Young Yoon, [13]

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(foreign language) Let me address your question regarding the National Assembly's issue -- discussion of the rebate issue. (foreign language) As you know, this is -- the bill was proposed by Congressman (inaudible) and it is a ban on having discrimination when it comes to providing subsidies. (foreign language) And this is understood in the context that because telcos are providing certain paybacks, so that it is -- so that the original handset pact that was executed is not really showing tangible effects. (foreign language) And from what we understand, the plans of the National Assembly is to hold a discussion session during either February or March and they will be collecting all relevant opinions of stakeholders to make a decision within the year. (foreign language) And if this bill were to pass, it could lead to less marketing cost as well as elimination of customer discrimination, thereby, ultimately contributing to enhancing customer benefits. (foreign language) That concludes my answer. Thank you.

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Operator [14]

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(foreign language) The next question will be presented by Stanley Yang from JP Morgan.

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Stanley Yang, JP Morgan Chase & Co, Research Division - Analyst [15]

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(foreign language) I have 2 questions. My first question is, you just mentioned that your MNO revenue for the whole year is expected to experience a negative growth. Then naturally, that could mean that your annual income, the profit, could also do that. So could you please give us a guideline for your annual operating income? And if you were to increase your profitability by cutting costs, where are some areas that you believe you could cut costs from? And I ask you this because it leads to my second question, which has to do with the dividend. In 2018, if you were to change the dividend -- in 2018, the payout ratio was nearly 90%. Now if you were to even just maintain the KRW 10,000 annual dividend because of your decline in earnings, that means your payout ratio could even reach 100%. So does this come at a burden at all to management? And are you just saying that because you do expect your profit to be better by -- from 2020, you are willing to take on this burden for 2019?

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Yoon Poong-Young, [16]

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(foreign language) Yes, Mr. Yang, thank you for your question. (foreign language) Let me first address your first question for the operating income outlook for 2019. (foreign language) As I did answer a while back, while we do expect a negative growth to take place for MNO revenue in 2019, we expect the revenue -- MNO revenue to turn around during the second half of the year. (foreign language) However, we do believe that if the current stable market conditions persist, that could lead to lower marketing costs. And also by nimbly responding and modifying our CapEx, we believe that, that could also lead to lower -- that could also lead to cutting costs. (foreign language) And through such efforts, we will do our best to protect our profit when it comes to our earnings for 2019. (foreign language) Let me now move on to your second question, which was about the payout ratio. (foreign language) In fact, when you look at nonconsolidated numbers for 2018, if we -- when you calculate the payout ratio of the KRW 10,000 per share, actually the number is 76%. (foreign language) And as I briefly mentioned, because we have plans to consider linking SK Hynix's dividend to our interim dividend beginning from 2019, the payout ratio, in fact, will be lower than that number. (foreign language) And so we do not think that the scenario you mentioned in your question of the payout ratio exceeding 100%, we don't think that is a possible -- a possibility. (foreign language) Thank you.

(foreign language)

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Operator [17]

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(foreign language)

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Yoon Poong-Young, [18]

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(foreign language)

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Operator [19]

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(foreign language) 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 [20]

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I just have 1 question and it's about ADT Caps. I mean, you've now had a while to consider the integration of that business with your existing operations. Could you give us a little bit more detail about the synergies you see, both on the revenue side and the cost side from the integration of ADT Caps? (foreign language)

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Yoon Poong-Young, [21]

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(foreign language) Thank you for your questions, Mr. Anderson. (foreign language) First, after the acquisition of ADT Caps, we are actively selling ADT Caps service and product from the distribution channels of SK Telecom and SK Broadband. (foreign language) And in October 2018, we launched [T Safe Security] and also the [TN Caps,] which is a bundled product of the security service plus the mobile communication service. This was launched in November 2018. (foreign language) Also, in January this year, we launched the [BN Caps] product, which is a bundled service that includes SK Broadband's broadband Internet service. (foreign language) And we have plans to launch -- to commercialize a parking lot service that is based on SK Telecom's parking solution service in cooperation with T Map. (foreign language) And by utilizing such power of SK Telecom in terms of distribution power and its technology, we will pursue growth of ADT Caps. (foreign language) Thank you.

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Jeong Hwan Choi, SK Telecom Co., Ltd. - Head of IR [22]

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(foreign language) This concludes the earnings conference call for fiscal year 2018. Thank you.