SK Telecom Co Ltd (SKM) 2011 Q3 法說會逐字稿

(Interpreted). Good afternoon. Welcome to the conference call for the fiscal year 2011 third quarter earnings results by SK Telecom. This conference will start with a presentation followed by a Q&A session. And now we will begin the conference of the fiscal year 2011 third quarter earnings results by SK Telecom.

(Interpreted). Good afternoon. My name is Soo Cheol Hwang, the Head of Financial Strategy and Management Office at SK Telecom. Today's conference call will consist of the earnings presentation by our CFO, Seung-Yun Ahn, covering the consolidated results for the third quarter 2011 as well as the management plans and strategic direction going forward, followed by a Q&A session. In order to help deepen your understanding we also have with us executives from the relevant divisions. Today's conference call we'll provide consecutive interpretation.

I would also like to remind you that all the forward-looking statements are subject to change depending on the macroeconomic and market situations. Let me now present our CFO, Seung-Yun Ahn.

(Interpreted). Good afternoon. My name is Seung-Yun Ahn, the CFO at SK Telecom. Let me extend my appreciation to all the investors and analysts for taking part in today's earnings call for the third quarter of 2011.

SK Telecom is ushering in an era of full-fledged high-speed wireless Internet starting with the launching of the nation's first LTE smartphone and LTE tariff plans at the end of September. Since its official establishment on October 1, SK Planet is moving in high gear for new growth. By proactively keeping abreast with the rapid pace of changes in the external business environment, while pursuing mid to long term changes into a data-centric business structure, fit for the true smart era, SK Telecom will do its utmost to achieve resilient profitability and new growth.

Let me begin with the third quarter results for 2011. Revenue for Q3 2011 marked KRW4,060b, up 1.9% year on year supported by the strong wireless Internet results from the smartphone subscriber base expansion. Operating income posted about KRW530b, decreasing 17.2% year on year due to the increased depreciation and other temporary expenses. Leveraging our competitive edge in the overall market competitive factors such as the network quality, handset line-up and service products, we have efficiently controlled marketing expense, which recorded KRW780b, down 8.2% year on year and 4.6% quarter on quarter. EBITDA came in at KRW1,170b, edging down 1.2% year on year.

On a standalone IFRS basis, revenue marked KRW3,200b while operating income and net income posted KRW510b and KRW390b respectively. That was the earnings highlights.

Let me now turn to the management plan and strategic direction going forward. Through our efforts to help create an era of wide adoption of smartphones, SK Telecom acquired around 10m smartphone subscribers to date, achieving our year-end target well ahead of schedule. In addition the recent LTE premium handset line-up extension and the subsequent sales growth are ensuring smooth sailing towards the annual LTE subscriber target.

Through LTE, which is a data-centric network, we seek to improve users' data environment and offer diverse high-quality services to further enhance our service value. We expect LTE to play a key role as an infrastructure for future MNO growth. With the rollout of the LTE network and services which boast higher investment efficiency vis-a-vis 3G, we believe there will be a contribution to the Company's profitability.

In addition to the faster speed, our LTE service offer HD resolution multimedia and video calls which significantly differentiate against the existing services. The high level of satisfaction shown in the customer response so far is deemed sufficient to continue fuelling the initial LTE sensation. The current pool of LTE users consist of the power users in their 20s and 30s who are used to the wireless Internet and high resolution video services.

Our excellence in coverage extends to in-building and underground areas ensuring high network quality far more advanced than the competitors. Starting from January next year, we plan to roll out the LTE coverage to 28 cities. With the ultimate nationwide rollout of the service areas, we anticipate the accelerated growth in both the LTE subscribers as well as the connected devices such as tablet PCs.

As an MNO operator, SKT faces numerous challenges in its business environment. The regulatory environment, ongoing market competition, the competitive landscape changes due to new entrants in the market and the expansion of disruptive BMs such as mobile VoIP and free text messaging services are proving to be factors limiting our profitability. SKT will do its best to maintain robust profitability by overcoming such challenges through cost innovation and market stabilization.

As it formally embarked on its new journey on October 1, SK Planet is boldly moving towards the vision of becoming a global platform innovator under the slogan of -- HUG, Hug the Planet with Human, Unique, Global -- as its core values.

SK Planet will not only put the value enhancement of customers and its business partners as the top priority and offer differentiated products and services, but it will also create an innovative and unique corporate culture that leads to a great workplace. On top of the growth in the existing services we will accelerate new business opportunity development efforts so that we could achieve the revenue target of KRW3.5 trillion and enterprise value of KRW5 trillion in five years' time.

T-Store, which has shown a remarkable growth during the past two years, exceeded 10m in the number of registered users. The diverse developer support policies and the creation of the right ecosystem to date made such achievement possible. With the growing user base, we will continue to solidify the win-win partnership with the business partners including the developers. Following China and Taiwan, T-Store is actively pursuing global expansion including entry into the Japanese market.

T-Map service will expand the user base by offering its services not only to SKT's own subscribers but also to the subscribers of other telcos. Going forward, we plan to further develop it into an essential service platform for both drivers and pedestrians alike.

The 11th Street, which widened its market share to 30% recently, is continuing its growth in both volume and quality by maintaining operating profit since June this year. Moreover, in the rapidly burgeoning mobile commerce area, Mobile 11th Street secured the number one position with 42% market share. We will continue leading the active development of mobile commerce in the future. In addition we plan to launch an open shopping gateway comprising open market, online shopping mall and online store within this year to reinforce our competitiveness.

As a major pillar of the MNO business, we expect B2B to lead the growth. While developing new business models geared towards industry-specific specialization such as ICT's convergence with healthcare and education as well as developing B2B solutions, we are expanding our market influence in the B2B leased line business through the integration of capabilities among our subsidiaries. Through such efforts we are making visible results in the B2B area.

The recently announced joint venture agreement with Seoul National University Hospital is expected to serve as the major momentum in the development of the healthcare industry since it is a meaningful beginning of a marriage between the best players from both healthcare and ICT. The planned joint venture entity will pursue the following three major business areas. First, the next generation customized medical service model development, interlinking prevention, diagnosis, treatment and management. Second, the global expansion of the digital hospital based on ICT. Third, the joint R&Ds to promote the development of the healthcare technologies.

In the education area, we not launched the education platform Smart Learning in July, but also made inroads into the Indonesian market, currently awaiting the service launch in November. In the retail area we introduced the Smart Cart in China and we are currently implementing a pilot test in Korea with E-Mart. As mentioned earlier, following the era of wide adoption of smartphones, SKT plans to help open an era of LTE and offer far more enhanced value compared to the existing services thereby creating a new growth momentum.

As for SK Planet, we will build a win-win ecosystem based on diverse platforms and solidify the company as a main growth pillar by creating new value from the core of the ecosystem. We will proactively address various factors such as regulatory environment, new market entrants and expanding disruptive BMs by leveraging our fundamental competitiveness and by fulfilling innovative activities as a market leader. Lastly, we will put market stabilization at the top of the priority list based on our market competitiveness and maintain profitability.

I would like to thank all the investors and analysts once again for your unwavering support for SK Telecom.

(Interpreted). Now Q&A session will begin. (Operator Instructions). The first question will be provided by Sun Chung from BNP Paribas Securities and the next question will be provided by Yang Jong In from Korea Investment Securities. Mr. Sun Chung, please go ahead with your question.

Thank you for the opportunity to ask the first question. It's regarding LTE, if you could specify in terms of LTE subscriber target for year-end as well as 2012. I'm curious, given that the new tariff scheme has removed unlimited data plan, if there's any risk of achieving your original target of LTE subscriber.

And the second part of the question is related to LTE handset line-up. If you could maybe give us a refresh on the total number of smartphones and also highlight the LTE product mix going into 2012. Thank you.

(Interpreted). Let me first answer your questions regarding our LTE subscriber target for both year 2011 and '12. Regarding the year-end target for LTE we are looking at 500,000 subscribers by the year end. As you are well aware, at the end of September we have launched new LTE smartphone line-up and before that period of course we did not have enough smartphones available, so we had some stagnant growth there.

However, recently after the launching of the eight LTE specific smartphones, we have been seeing a rapid increase of the subscriber growth. For instance, last Monday, of course we had some weekend impact, on that single day alone we had an increase of 15,000 new subscribers on that single day alone. So as of the end of October our subscriber number stands at about 120,000. Therefore based on our differentiated handset line-up and based on our service quality we believe that reaching the 500,000 year-end subscriber target will be a smooth transition. And for your reference, for the next year we're looking at about 5m or more subscribers.

And you asked whether we have any risks pertaining to not offering any unlimited data services in reaching our year-end target for LTE subscribers. But as the recent trend shows in and of itself, I believe that reaching the year-end target for the subscriber number will not be a big issue. And when compared to using the same data amount on the 3G network, when using the LTE services, the users could enjoy very differentiated customer values including much faster speed and differentiated handset line-up as well as LTE specific services. Therefore even without offering the unlimited data service plans, we believe the migration towards LTE will be made in a smooth manner.

And for your information, the price plans we have for the LTE subscribers, include LTE 52 and 62 price plans in which we offer 1.5GB and 3GB capacity for the users. I think that using that capacity, the users will not experience any inconveniences in terms of the data usage.

Let me now move on to the LTE handset line-up question. This year, by the year end, we are planning to launch in total 10 different handset line-ups. When it comes to the modem type of handset, we have already launched two models already and we plan to launch seven smartphone models and one model for the tablet PC. And starting from next year, we plan to launch 50% of the new smartphone launching in terms of the LTE specific handsets.

(Interpreted). The next question will be presented by Yang Jong In from Korea Investment Securities and the following question will be presented by John Kim from Deutsche Securities. Mr. Yang Jong In, please go ahead with your question.

(Interpreted). I have the following three questions. First of all, regarding your platform-related competitiveness and differentiation. You mentioned that SK Planet plans to reach the revenue target of KRW3.5 trillion and enterprise value of KRW5 trillion in five years time. So in order to achieve such a goal, what differentiated core strategies do you have in mind?

And the second question has to do with the LTE coverage. Since the launching of your LTE service, the market response initially has been quite positive. Now if the subscriber response is much better than expected on your end and if the response for your competitor's nationwide rollout ahead of your schedule seems to be very positive on their end, are there possibilities of you accelerating the nationwide rollout plan to an earlier date than currently planned?

And the third question has to do with the LTE-related market competitive dynamics, how that would impact the competition as well as the structure of the marketing activities. Now that KT will be soon launching their LTE services as well, how do you foresee the marketing landscape going forward for the end of this year as well as next year?

(Interpreted). Let me first answer your questions regarding the differentiation offered by the SK Planet platform business. First of all, when it comes to SK Planet's platform business, I would like to remind you that SK Telecom has accumulated 10 years worth of data-service-related business know-how and experiences. Therefore I believe that we have the most optimized portfolio of business capabilities that we could offer to the market. And therefore we have the best of the breed services and technologies available in this regard in the country. Therefore I believe that for the platform business, we already have a sufficient asset pool that we need to pursue in this business.

And when it comes to the platform-business-related approach, we plan to further reinforce the win-win collaboration framework in creating the ecosystem and we plan to further solidify our technologies for the platform business. For instance, SK's platform will make sure that anybody could perform and pursue development and business activities using our platform and in doing so we will be further opening up our APIs so that we could support the relevant business activities.

And in order to embed our core technologies within the business itself, we will be working hard to further reinforce and strengthen our manpower and expertise, as well as creating the right development environment. For instance, we currently have about 20% of the manpower to be the specialized or experts in this particular regard, but we want to increase that ratio to up to 60% by year 2015.

And the third differentiation is the scope and the target of our platform business. First of all, we will pursue the -- Beyond SKT -- strategy under which we will be targeting all players within the country and also we are targeting beyond the domestic market, which means we will expand further outside of Korea. For instance, in terms of T-Store and T-Map services which used to be closed services only offered to SKT's own subscribers, we will be opening up these killer contents to and we are already opening it up to other subscribers of KT and LT UPLus as well.

And also in order to further strengthen our internal capabilities we will be expanding into the global business areas and also open up and make inroads into other markets as well. To that end we will be entering into various strategic alliances and also we will be making various inorganic growth strategies so that we make such global expansion possible.

Through such differentiated capabilities and differentiated approach we will try to achieve becoming the true global platform innovator.

Let me now move on to your question regarding the LTE coverage. SKT's basic plan is to roll out to 28 cities by January of next year and by year 2013 we will be rolling out to 82 cities in total. That is our current strategy for LTE. For your information, 28 cities would be covering over 80% of the total population whereas covering up to 82 cities means covering 95% of the total population. But going forward we would be closely monitoring the LTE market dynamics and look at the competitive landscape. And we will flexibly deal with the coverage schedules as needs arise.

Of course expanding into more physical areas would be critical. However, more than that, we believe that having the right quality of services in those rolled-out cities would be more meaningful and important. Starting from Seoul area we would be expanding into the major metropolitan areas in the country and then ultimately to the nationwide rollout. In such phased approach we will be actually maximizing our services. For your information, we currently have over 1m repeaters already installed on the 800 megahertz spectrum nationwide. So using such existing infrastructure from the very get-go of the business we will be able to offer the most differentiated services compared to competitors.

Let me now address your third question regarding KT and other competitors offering LTE services and how such competition will be changing the dynamics of the marketing environment. I believe that compared to our competitors SKT already enjoys a higher quality network as well as a better line-up of handsets. And also because of the early commercialization of LTE services in the country I believe that we already have the strong image in the LTE category among the consumers. Therefore, in that regard I believe that we already have the upper hand in this LTE market as well.

Therefore, despite the newly planned launching of LTE services by our competitors, I believe that the basic fundamental competitiveness of LTE will not be faced. And also because we will be very much reliant on our fundamental competitiveness as the Company in this regard we do not have plans to execute overheated marketing expenses going forward either.

So when it comes to LTE I believe that rather than approaching it as a competition per se, I believe that we should look at it as a total market migration as a whole. In other words, as our competitors begin to launch other LTE services I believe that the LTE as a service-as-a-whole category will become the mainstream services offering in the country, which will further accelerate the migration of the entire market. So I believe that, all in all, seeing how compared to the 3G network LTE offers higher profitability and growth potentials, I think that such trend will be only positive for the overall market.

(Interpreted). The next question will be presented by John Kim from Deutsche Securities. And the following question will be presented by Stanley Yang from Nomura Securities. Mr. John Kim, please go ahead with your question.

Yes. Thank you for the opportunity to ask questions. I have two. First is on your result, about your other commissions. If I remember correctly, the management suggested last year that the trade-off for Hana SK Card JV takeover your handset receivable duties was you would incur higher commissions. But savings from your net interest expense would allow SKT's pre-tax earnings to be about KRW20b better off. But if we look at your other commission expense growth on year-to-date basis, this line item grew by about KRW280b, but your year-to-date net interest expense decreased by only KRW2b. So can you share some details about what's driving your other commissions' growth?

And if you can share the status on net benefit from your handset receivables arrangement, that would be great.

Second question is on Hynix. I do understand it will be very difficult for the management to provide much detail. However, given SKT is currently the only bidder in the process and CEO Ha recently expressed his commitment to the acquisition in the local press, if we were to assume your bid were to be successful for a moment, can you provide some more color on what operating synergies do you see for SKT and how long this might take to realize? Thank you.

(Interpreted). Let me first answer your first question regarding the net benefit of the transfer of the handset installment payment receivables. The basic gist of this particular reshuffling of the handset installment payment related receivables is that the acquirer of such receivables will not be SK Telecom any more but SK, Hana SK Card. Assuming that we did not actually transfer the acquisition entity of such handset installment payment receivables to Hana SK Card, we would have actually had to fund it through the market in order to cover for such a receivable acquisition endeavor. And as a result I anticipate that our interest expense would have gone up quite significantly as well.

In other words, I don't think that you should definitely compare last year's interest expense versus this year's interest expense on an apple-to-apple comparison, but rather I think we should look at it from the opportunity cost perspective. So I believe that, rather than simple apple-to-apple comparison in terms of the simple number, I think that we should look at the comprehensive aspect of the transfer of the responsibilities. When it comes to more specific numbers, we would definitely try to answer your questions on a one-on-one meeting opportunity.

When it comes to your question regarding the acquisition of Hynix, I don't think that we could say that we are indeed the only bidder in this whole process as of yet. Of course the final bid is scheduled for November 10 this year. I believe that we have to wait until the final date to be quite sure about the situation.

And regarding the synergy that we could create together with Hynix, I don't think that we should only look at the short-term synergy that can be created between the two entities, but rather we should look at it from the mid to long-term perspective instead. If you look at ICT technology in its broad definition and scope, I believe that if we somehow leverage existing SKT's technologies and experience and know-how, and perhaps we could go beyond the current portfolio of semiconductor products of Hynix and expand into additional adjacent product portfolios centered around semiconductor products that could possibly create synergies.

(Interpreted). The next question will be presented by Stanley Yang from Nomura Securities. And there is no one waiting for the next question. Mr. Stanley Yang, please go ahead with your question.

(Interpreted). I have one question. Regarding smartphone penetration which currently stands at 35%, we had various impact that was predicted in the past. For instance, as the smartphones were first introduced, we felt that it would lead to ARPU increase because of the penetration of the smartphones. And because of such high expectations last year, in the beginning of the year, the stock price actually showed an upward trend as well. But if you look at the total results, as of the Q3 results, if you look at the billing ARPU figure provided by the Company, compared to last year, on a year-on-year basis, the ARPU has actually edged down by about KRW1,400. So contrary to our expectations ARPU has actually come down. So what are the reasons behind that?

And at the same time, if you look at the marketing-cost-related trend, if you look at the Q3 cumulative figures on a year-on-year basis it actually came down by KRW180b. So as that came down, the marketing expense came down, but overall ARPU came down as well. So perhaps it has something to do with your accounting treatment, because your tariff discount was increased and perhaps your subsidy was reduced further. And perhaps as a result accounting-wise such a figure came out.

However, even if you consider the whole picture, I don't think that you could say that the smartphone penetration increase has led to positive impact on the margin as a whole. So as the smartphone penetrations increase going forward and as we foresee the LTE migration, do you think that the margin will continue to suffer like that going forward because if you look at LTE, currently you are seeing some upselling effect? And I believe that your tariff reduction on the LTE seems to be much lower than the previous 3G network. So can we now anticipate more ARPU upside going forward because the market cannot help but to expect such an increase?

And also, so by your 2013, for instance, as the marketing expense on LTE comes down, can we actually anticipate some ARPU increase?

(Interpreted). Yes, you asked about the impact of the smartphone penetration increase and how it impacts the margin. And how it will impact the ARPU numbers, and how we should actually interpret the numbers. And as we migrate towards LTE, how that will, going forward, impact the margins. Those were your questions so let me address those.

If you look at the Q3 numbers and if you were to look at the overall blended ARPU, we did have some discount that was applied, and also we saw the tariff reduction and also the subscriber number increased. And there was a growing number of second device tablet PCs as well. So as a result the whole entire ARPU figure has slightly edged down.

If you look at the actual numbers for the second quarter, the ARPU was about KRW3,592 and it came down in Q3 to KRW33,210. So for the third quarter the actual ARPU decrease impact was about KRW500 due to tariff reduction. So, assuming that we did not offer such tariff reductions, for the third quarter, the actual figure would have gone up to KRW33,710 which means it would have been a turnaround for the trend. And, as you are well aware, the number of smartphone user base is increasing. And as we see such an increasing trend existing feature phone subscribers are bound to migrate to the smartphone base. So I think that we are at an inflexion point where we are about to see the uptake or increase of the ARPU trend overall.

So in the mid to long-term perspective, barring any such tariff reduction that is imposed because of the external environment, I believe that it is only right to expect ARPU increase with the rising penetration rate of smartphones.

And regarding LTE, based on our existing experience of offering existing smartphones, we analyzed all the smartphone service usage patterns and we looked at ways to maximize the value of the subscribers. So we did introduce the most optimized price plans available for LTE users. Basically the price plan follows the similar pay-as-you-go price plan that was applied on 3G network. And, although it is similarly designed as 3G price plans, we do have some differentiated, customized features that are optimized for the subscribers. So I think that we have full potential for upselling potentials.

And if you look at the composition or the make-up of the recent LTE subscribers, about 75% of the new LTE subscribers are opting for LTE 62 or higher price plans. And as we introduced LTE-specific price plans, compared to the existing 3G special discount plans that we offered our actual discount portion is much smaller. So I think that going forward we have another potential to increase our profitability there as well.

And because of the premium positioning of LTE products, we will be able to apply the marketing expenses that fits the overall premium position. And also in terms of the investment for LTE, because of its inherent frequency and spectrum management efficiencies as well as the lower unit price on the installed equipments, the overall investment efficiencies will be much higher.

So all in all I think that LTE business will be contributing to the profitability of the MNO business.

(Interpreted). (Operator Instructions). The next question will be presented by Kim Hongseek from NH Investment & Securities. There is noone waiting for the next question. Mr. Kim Hongseek, please go ahead with your question.

(Interpreted). Let me first of all make sure that what you quoted earlier in terms of the number is correct. You mentioned that LTE price plan 62 or higher, the proportion is about 75%. Is that correct? Because I believe that LG U+ said that their proportion of 62 or higher is over 95%. So I was wondering why the difference there.

And secondly, your guidance on the LTE subscriber number seems to be rather low compared to our expectation, because LG U+ is targeting 4m by next year. And by the year end this year they're targeting 500,000. So if LG U+ actually does achieve 500,000 this year, would SKT be satisfied with the same number as LG U+?

And assuming that LTE subscribers are so-called premium subscribers, would that mean that more premium subscribers would be going over to LG U+ instead? So is there any reason why you would be satisfied with such low market share?

(Interpreted). Regarding your question, yes, the number that we quoted is correct. The price plan higher than 62 is about 75% of the new subscribers. And I don't think that comparing LG U+'s proportion as opposed to SKT's proportion in this regard at this particular juncture would be meaningful in that regard.

And also regarding our guidance for the subscriber numbers for the year end this year as well as next year, you mentioned that LG U+ also has set the target of 500,000 this year and 4m for next year. But I do not -- I'm not in a position to comment on our competitors' targets because it's their own internal target.

But what I could tell you is that SKT has considered its own service coverage and marketing capabilities and also the supply of the handsets available. And we're not trying to stretch our target too much but rather rationalize the target so that we are still very much focused on the profitability. And we will be leading the market stabilization in the process. That is the reason why we have come up with our guidance of 500,000 for this year and 5m for next year. But what I could tell you is that whenever we shared with you such guidances in the past, we have always overachieved the targets in good quality actually.

(Interpreted). And I have a follow-up question. Then what would be your market share target for LTE? Of course it all depends on your competitors in the market, but would you still plan to achieve over 50% market share in the LTE arena as well?

(Interpreted). As you are well aware, we have launched the commercial service of LTE faster than any other competitors. And in terms of the coverage and the quality of services, I believe that we have already significant market leadership in this regard. And I believe that such market share numbers and such results would be naturally following such market leadership.

So from my opinion, when it comes to the 4G services, I believe that for all three telcos in the industry, rather than competing only, of course we will have to compete to a certain degree, but we should more focus on each company's profitability enhancement so that the 4G business can contribute for the MNO growth momentum going forward. So I think that coming up with such industry-wide consensus would be even more important.

(Interpreted). This concludes the Q&A session. We will now hear the closing remarks by our CFO.

(Interpreted). Thank you for staying with us until the very end of today's Q3 earnings call. Against a backdrop of rapidly changing business environment, SKT will maintain its growth through new growth engines, such as SK Planet, while improving profitability in the MNO business. We ask all the investors and analysts for your unwavering support and interest for SK Telecom. The management at SK Telecom will continue to exchange views with the investors and analysts through diverse communication channels. Once again, thank you for taking part today. Thank you.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.