SK Telecom Co Ltd (SKM) 2011 Q4 法說會逐字稿

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

(Interpreted). Good afternoon. My name is [Hyung-joo Park], the IRO of SK Telecom. Today's conference call will consist of SKT's CEO, Sung-Min Ha's earnings presentation on the annual results for 2011 and the management plan and strategic direction for 2012, followed by a Q&A session. To help deepen your understanding we have with us executives in charge of the relevant divisions. We will provide consecutive interpretation for the conference call. Let me also remind you that all the forward-looking statements are subject to change, depending on the macroeconomic and market situations. Let me now present to you our CEO, Sung-Min Ha.

(Interpreted). Good afternoon. My name is Sung-Min Ha, the CEO of SK Telecom. As we usher in the auspicious year of the dragon I wish all of you good health and happiness.

During 2011 SK Telecom laid a solidified foundation to continue its lead in the data market by commercializing LTE and securing the 1.8 gigahertz frequency, among others. In addition to the MNO business, the spin-off of SK Planet and acquisition of Hynix were pursued to lay the stepping stones for new growth and opportunities for the future.

Amidst the daunting challenges such as tariff cuts and the emergence of disruptive business models we achieved meaningful earnings results in 2011. Under consolidated IFRS the 2011 revenue was up 2.2% year on year to KRW15.940 trillion, boosted by the increasing number of 3G smartphone and LTE subscribers. Operating income stood at KRW2.130 trillion, decreasing 6.3% year on year due to the rising CapEx from the data traffic increase as well as the higher frequency cost. EBITDA marked KRW4.520 trillion, expanding 1.4% year on year. Net income came in at KRW1.580 trillion, down 10.4% year on year.

For the convenience of the investors and analysts we have prepared the standalone results for SK Telecom, including SK Planet. Revenue recorded KRW12.700 trillion, rising 1.2% year on year. Marketing expense came down 2.1% year on year to KRW3.250 trillion thanks to the market stabilization policy and effort. Operating income marked KRW2.100 trillion, while EBITDA and net income recorded KRW3.920 trillion and KRW1.710 trillion respectively.

That was the earnings highlights for 2011. Let me now move on to the management plan and strategic direction for 2012. In 2012 we will focus on developing new business models, leveraging the growing LTE market. Coupled with the growing B2B business, we plan to match or better the previous year's revenue growth rate. CapEx will remain at the same level as the previous year at KRW2.3 trillion to accommodate the accelerated rollout of the data-centric high-speed LTE network. Our operating income target is to be on par or higher than the previous year, balancing both growth and profitability of the business.

In 2012 we will seek new growth by transforming into a data-centric business structure in line with the widening adoption of LTE services, while solidifying the fundamentals of both SK Planet and Hynix so that they could successfully take root as new growth pillars of the Company.

Even in the LTE space SK Telecom continues to live up to its high-quality premium network reputation, leveraging our unsurpassed technological prowess and network operation technologies accumulated over many years. And as a testament of our leadership we were the first to reach the 1m LTE subscriber milestone on January 31 and are continuing to widen the gap with the competition. We will create new revenue sources and maintain our market leadership by expanding the LTE ecosystem through alliances with diverse range of partners, thereby enhancing our offerings of differentiated LTE-specific services unique to SK Telecom.

At the same time we will execute CapEx and marketing in the most cost-efficient manner while strengthening the fundamentals of the core infrastructures, such as the distribution network and products, to further enhance profitability of our MNO business. Also we will continue to identify new opportunities for industry-specific solution, such as in healthcare and education, that leverage the connectivity-technology-based business model.

In order to emerge as a comprehensive ICT company through collaboration and synergy with the non-telecom subsidiaries, SK Telecom will further enhance SK Planet's core service portfolio and expand the subscriber base into the global market, thereby build a value-creating global platform company. The Hynix acquisition is about to close in the middle of February. This is a meaningful move with a long term view for SK Telecom to expand our business into the broader definition of the ICT category. Under the umbrella of SK we will pursue stabilization of the management and synergy to reinforce Hynix's competitiveness.

SK Telecom will leverage the growth of MNO platform and semiconductor businesses to become a complete global ICT company. At the same time, by generating visible growth at SK Planet and stabilizing the management of Hynix, we aim to bolster the enterprise value of SK Telecom.

Lastly, let me touch upon the shareholder return. For 2011 we expect to pay cash dividend of KRW9,400, including the interim dividend of KRW1,000 previously paid, upon approval of the general shareholders meeting. The management at SK Telecom will seek new growth and continued profitability going forward. And our plan is to maintain the cash dividend level of last year for 2012 as well.

I would like to once again extend my deepest appreciation to all the investors and analysts for your unwavering support. Thank you.

(Interpreted). Now Q&A session will begin. (Operator Instructions). The first question will be provided by Lee Dong-seop from SK Securities and the next question will be provided by Stanley Yang from Nomura Securities. Mr. Lee Dong-seop, please go ahead with your question.

(Interpreted). I have the following two questions. First of all regarding the LTE subscribers, first of all what is your annual target for the rest of the year?

And how do you plan to deal with the market situations in terms of specific strategies? So if you could share with us some details about your plan going forward, that would be appreciated.

And second related question has to do with the actual contribution by ARPU. In case you reach the annual target for LTE subscribers, how much actual ARPU contribution can we anticipate?

(Interpreted). Let me address your first question regarding our market strategies for the LTE space. As I mentioned in my opening remarks, as of the end of January this year our LTE subscriber number has already exceeded 1m. So as was already discussed through the media including the newspapers already, we are anticipating about 5m threshold for the rest of the year. But of course the development and evolution of the LTE market will be very much affected by the competitive landscape. So we are seeing at least 5m and perhaps even up to 6m would be possible.

Of course there are some preconditions to this statement in that market stabilization has to precede and SKT will compete simply using our inherent competitiveness. And of course we have our differentiated strategies and differentiated advantages as SK Telecom because we are known for our strong network operation capabilities.

And, as you're well aware, we have very specific SKT-related technology development called PETA solution, which is a very differentiating technology. And compared to our competitors we are confident that we will be able to offer a network operation that is much more efficient and effective. So through such LTE network provision by SK Telecom our subscribers will be able to enjoy richer and more fuller conveniences through our services.

And your second question was the impact on the ARPU with the increasing number of LTE subscribers. Of course we do have some internal calculations that we do make. However, with only 1m population as the statistical number to work on I believe that it is a little too early to give you a specific ARPU contribution along with the number increase on the LTE subscriber side. So I think that beyond the second quarter, which means beyond the first half of this year, we will be able to finally get a better clarity on the trend going forward. I believe that it was last October we went through tariff reduction and there was some impact of course. However, with the LTE services provided it is only obvious that our ARPU trend will be turning upwards.

(Interpreted). The first question will be provided by Stanley Yang from Nomura Securities. And the next question will be provided by Yang Jong-In from Korea Investment Securities. Mr. Stanley Yang, please go ahead with your question.

(Interpreted). I had the following two large sets of questions. First of all I would like to ask about your views about the marketing competition environment for the rest of 2012. Recently one of your competitors has announced a rather aggressive-sounding subscriber target number. So what is your strategy to counter such competition in the market?

And regarding your market share in this category, in the previous quarter you have mentioned your market share target of 50.3%, but already your number stands above that at about 50.6%. So what is your strategy regarding the market share? Do you plan to continuously update and modify your target number or do you have a strategy to just simply focus on retaining high-ARPU subscribers only?

And also during the fourth quarter, regarding LTE, I believe that your SAC number has gone up. So there are concerns in the market that in the remaining part of 2012 marketing expenses will continue to rise. So, if so, how much increase in the marketing expense should we anticipate?

And my second question has to do with MVNO. Now that the MVNO services have launched in the market, what types of threats, or I guess threats or difficulties, can such situation pose upon SK Telecom and what type of countermeasures does SK Telecom have in place?

And through the introduction of MVNOs in the market effectively it will be bringing down the prices on the telecom services. So do you think that it means that the government will be stepping back on the artificial pressure on further tariff reduction because of it or do you anticipate even further tariff cut pressures?

(Interpreted). Let me answer your first question regarding the marketing competition landscape. I do understand that there exists a certain level of concerns in the market regarding this point so I must look back at last year's situation. During the first half last year there were some competition to grab more number of smartphone users and in the second half there was the launching of the LTE phones. So there were somewhat overheated competition in the market. And against that backdrop SK Telecom has countered with the minimum countermeasures possible in order to maintain our market share.

You mentioned our target of 50.6% in the market and our thinking has not changed over the recent period that we have to maintain at least that much market share in order to maintain the market leadership.

And during the fourth quarter it is true that because of LTE there has existed certain type of overheated competition and during the month of January of course there were some causes for concerns of course. However, as the number one player in the market we have the top of the network quality and services available. And as was announced yesterday and the day before yesterday, we are introducing products as well. So based on our fundamental competitive edge, we will be refraining from boosting the market competition through over-expenditure of marketing expenses. And to do that per segment, per customer needs, we will be better communicating our benefits to our customers so that we could maximize efficiency of the marketing expense usage.

And regarding your second question about MVNO, if you only look at the landscape in a short-term perspective one might say that it could negatively impact the P&L of MNOs. However, if you have a slightly longer viewpoint and look at the benefits that subscribers could gain from such diversity in the market, I believe that we could sufficiently create win-win synergies with MNOs and MVNOs. From the perspective of SK Telecom we are currently discussing various contract arrangements with potential MVNOs in the market in the voice/data areas and we will be developing various business models going forward to ensure such a win-win relationship with such MVNOs.

And you asked about the reduction of tariff. And as you'll recall, the basic fee or the monthly fee has been reduced in the month of September last year and there were some impact on the financial statements after that point. But as you look back and as you look at the market currently there has been actions such as the introduction of MVNO and there has been efforts to revitalize the market. And we need to seek most number of benefits for the benefit of the consumers. So rather than simply having a short-term view, I think that we should take on a more mid to long-term perspective on this matter. So I believe that we, with investment in the overall broader ICT industry, we should better utilize the tariff policies in a very wise manner.

(Interpreted). The first question will be provided by Yang Jong-In from Korea Investment Securities and the next question will be provided by Kim Hong-Sik from NH Investment. Mr. Yang Jong-in, please go ahead with your question.

(Interpreted). I have the following three questions. First of all, if you look at the numbers for the fourth quarter your depreciation and amortization number has actually come down. Considering how you are increasing your CapEx, the decreasing depreciation number seems to be quite odd. So I was wondering do you have any anticipated number for the D&A for 2012? If you cannot provide a detailed number, can you at least provide us with a direction as to is it going to go up compared to 2011 or it goes down against the previous year?

The second question had to do with your -- the fourth quarter consolidated income, how that -- when compared to the standalone version you have an opposite direction or trend compared to the third quarter in that your standalone version is higher than the consolidated version, which means your subsidiaries' results must not be fairing very well. So I was wondering is it going to be a trend in this direction going forward?

The third question has to do with SK Planet. The market is quite interested in their performance so if you could provide us with the revenue number or the bottom line number for the fourth quarter of 2011, that would be appreciated.

And if possible can you give us some color as to their 2012 expected guidance?

(Interpreted). Regarding your first question about the depreciation number, it is true that during the fourth quarter the number has come down. And it is because there have been certain types of assets that no longer needs to be depreciated. In other words, the depreciation cycle has ended. Therefore this trend will not be persisting going forward. For the rest of 2012, as was mentioned earlier, the expected CapEx is about KRW2.3 trillion, on par with the previous year, so the overall D&A line will be about the same between 2011 and 2012.

And to answer your question about our subsidiaries' performance for the fourth quarter, it depends on the Company how that they have impacted our P&L. The biggest impact in subsidiaries happen to be SK Broadband as well as Telink. When it comes to Broadband, they are showing a steady improving trend in terms of their performance. And when it comes to Telink, because their business focus is on international telephony as well as VoIP, it is true that there has been a somewhat downward trend of their performance. However, I think that this was a transitional sort of a result during the fourth quarter because there was the end of the year bonus payout etc. So in the rest of the 2012 we do not anticipate such similar payouts.

Since we have with us, the CFO of SK Planet, I will have the microphone over to the CFO of SK Planet.

(Interpreted). Let me try to address your question regarding SK Planet results for 2011 and also our plans or targets for the rest of the year 2012. When it comes to the fourth quarter of 2011 SK Planet's revenue stood at KRW280.7b, our operating income at KRW8.2b and, to be more specific, the 11th Street, our open market business, has maintained number two in term of market share and it is further solidifying its position in the respective market. They have recorded over 11.5m visitors and also we are trying to further emerge as a global marketplace for the respective open market business.

For the rest of 2012 SK Planet plans to become a global power player with a more expanded business portfolio in our business. We will be realigning and also further improving upon our fundamental competitiveness to that end and we will lay the right foundation to become a global business innovator in our business area.

To do that first of all we will be maximizing the synergy effect with SK Telecom in that we will be optimizing our services to fit the LTE services provided by SK Telecom. And also we could serve as a test bed for SK Telecom in launching their new services going forward as well so that we could further support SK Telecom provide the best services possible.

And also when it comes to our anchor businesses, T-store and commerce area, in terms of our market power and competitiveness we plan to further move into the market in a more bold and aggressive way. And also when it comes to the new businesses, we will continue to identify and discover the right types of platform business models so that we could further expand the services offered. And also in the global market we will tap into various new areas when it comes to entering into the global [M] marketplace.

And I believe that when it comes to the SK Planet's business characteristics, of course we need to have the right subscriber base and also the customer power, and also the business models and synergy between the business models and growth potentials as well. But considering how this year is going to be truly year one of the actual full-scale business of our company, rather than just simply focusing on the short term financial gains, I think that we should take on a more mid to long term viewpoint to further maximize our subscriber/customer power and focus on our fundamental competitiveness.

(Interpreted). The next question will be presented by Kim Hong-Sik, NH Investment and Securities, and the following question will be presented by Kyle Huh from Deutsche Bank. Mr. Kim Hong-Sik, please go ahead with your question.

(Interpreted). I have the following two questions. First of all if you look back at 2011, to cut to the chase, you have not met the guidance for the year after all. And I believe that the first half of 2012 will not be a very easy environment in terms of competition either. So on a year-on-year basis I think that you are anticipating some profit growth so can you share with us the basis? On which basis are you saying that you will be able to grow your profit? And quarter by quarter, by which quarter do you think you would be able to turn around your profit trend?

My second question has to do with the regulation. I think that there have been pressures coming from KCC and there are two major elections planned for the rest of the year, which means there will be a higher pressure coming from the political sector regarding the tariff cuts going forward. And if you look at the basic fees for LTE smartphones it does seem rather high and currently you are providing discounts on top of such basic fees. So from the perspectives of the subscribers and the governments, and the regulators these basic fees might appear a little too high, calling for further pressure to cut down on the tariff. So I was wondering, rather than going it this way, do you have plans to actually provide the discounted tariff number as the official basic fee?

(Interpreted). To answer your first question about not meeting our annual guidance for 2011, what you said is correct but, however, you also attest to the fact that the competition and the management environment back in 2011 was indeed quite daunting. And in 2012 we will be looking at another year in the smart era and I believe that 2011 has laid the foundation for a full scale smartphone era. And I think that based on that we can anticipate bigger growth in the LTE space, in the smartphone space, in 2012 as well.

So the biggest questions posed to the operators against this backdrop is to increase the profit on the LTE side and to more efficiently manage the cost in this environment. So to that end SK Telecom is preparing various activities as we speak and I believe that we will be able to see results from such activities that are ongoing right now. And, as was mentioned earlier, yesterday we have introduced new price plans and services in the market which will give back more benefits to the subscribers and thereby help increase ARPU for the Company and contributing to the bottom line of SK Telecom as well.

And you asked by when can we expect the turnaround and we are hoping that it will be around the third quarter, but it could be by the fourth quarter. So what we are actually hoping for is the turnaround by the third quarter, in which time our ARPU trend can be showing a turnaround trend. So we would be managing the Company with that goal in mind.

And to address your question about why not just communicate the discounted tariff as the basic fee for the telecommunication subscribers in order to deal with the rate cut pressure, was your question. But first of all, frankly speaking, from the perspective of the subscribers it doesn't matter whether we communicate before discount or after discount figure. It's the actual billed amount that they feel as to be the actual tariff being billed. So I don't think that there will be a big difference in that regard, first of all. And secondly, I believe that offering discounts to the existing tariff system is one of the marketing tools that telcos can operate. Therefore, we do not have plans to actually change the basic fee communicated to the rest of the subscribers.

And also we feel that it is important to more proactively communicate with the subscribers about what we do for their benefits. So recently we have changed our billing system so that we break things down into telecom-related expenses and contents-related fees, and also the installment payment on their handsets so that they get better communication about what they are actually paying for. And in order to communicate the fact that telecom-related expenses equals cultural-related expenses so to that end we are coming out with advertisement to emphasize such cultural aspect of telecommunications experiences.

(Interpreted). The next question will be presented by Kyle Huh from Deutsche Bank. There are no more participants waiting for the following turn. Mr. Kyle Huh, please go ahead with your question.

Thank you for the opportunity. I have two questions from our end. First is about the share price of the Company. Given that the Company's share price is near a 10-year low right now, does the management have plans to improve share performance?

And also what incentives if any does the management have in performance reviews to see SKT share price perform better?

Second question is about your view and outlook on tariff cuts in a little bit more detail. Last year management sounded somewhat optimistic that there won't be further tariff cut pressures for some time, but there was a cut actually. So on the back of recent changes in the industry, how has your outlook changed if any regarding tariffs environment for 2012? Thank you.

(Interpreted). Let me first address your question regarding the share price of the Company. Of course as the top management of a company of course we always want our company to be valuated at the optimal and the most appropriate way, and also the higher the better of course. However, when you look at a share price trend of a company, rather than just limiting the time period of your review to a certain period, let's say one year, but rather than doing that I think that we should keep in mind that a company is a continuing concern which requires a long term viewpoint. So I think that we need to consider the growth and the development of the company out of a big picture.

And I believe that, frankly, last year the share price came down quite a bit because of the acquisition of Hynix. So at the end of the day it is really up to us creating the right synergy between Hynix and SK Telecom, and thereby increasing the enterprise value of SK Telecom, that such an action should alleviate concerns in the market. So that will have a big impact on the share price going forward.

And aside from the Hynix acquisition, when it comes to SKT's fundamental competitiveness I think that quantitatively and qualitatively we are growing the LTE business in a very positive way and SK Planet is beginning to prove their value as a separate company as well. So I believe that such activities in our fundamental business areas will continue to positively impact the EV going forward. So we will do our very best this year to make sure that such visible results translate into share prices.

To address your questions about further pressure on the tariff cut, I believe that the most critical factor to consider right now is how we could make sure that the MVNOs and MNOs can create sufficient synergy, and thereby reducing the tariff effectively in the market and expand the market activities overall. That is quite critical because if that happens consumers will end up having more choices in the market and the tariffs will be set based on the market competition. So I think that if such things come in place the policies will be formulated keeping in mind such market dynamics.

Thank you.

(Interpreted). Then with that we will conclude the Q&A session and we will invite a closing remark by our CEO.

(Interpreted). Thank you very much for staying with us until the very end of the one-hour earnings conference call. As the market leader SK Telecom is achieving meaningful results by leveraging the competitive edge built upon a differentiated prowess and by leading the market stabilization with fundamental service advantages. In the future we will grow into a complete global ICT company with a leap forward boosted by MNO, Hynix and platform. I ask all the investor and analysts for your continuous interest and affection for SKT's efforts. SK Telecom will do its best to maintain diverse communication channels to exchange views between the management and all of you. 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.