SK Telecom Co Ltd (SKM) 2012 Q3 法說會逐字稿

[Interpreted] Good afternoon and welcome to the conference call for the fiscal year 2012 third quarter earnings results by SK Telecom. This conference will start with a presentation followed by Q&A session.

Now we will begin the conference of the fiscal year 2012 third quarter earnings results by SK Telecom.

[Interpreted] Good afternoon, my name is [Young-Gyu Park], the IRO of SK Telecom. Today's earnings call will consist of the presentation by our CFO, Seung Yun Ahn on the earnings results of Q3 2012, as well as our business plan and strategic direction going forward followed by a Q&A session.

To help deepen your understanding, we have also with us executives from relevant business units.

We will be providing consecutive interpretation for the call. I would like to also remind you that all the forward looking statements are subject to change depending on the macroeconomic and market conditions.

Let me now present our CFO, Seung-yun Ahn.

Seung-yun Ahn [Interpreted] Good afternoon. This is Seung-yun Ahn, the CFO of SK Telecom. I would like to thank all the investors and analysts for taking part in today's earnings call for the third quarter 2012.

Let me begin with the consolidated results for Q3.

Revenue stood at KRW4,125.5 billion rising 2.9% quarter on quarter and 2.0% year on year led by the ARPU expansion from LTE subscriber increase and the business growth of SK Planet.

Despite the slow seasonality of the third quarter in the middle of summer vacations, the robust LTE subscriber growth led to the ARPU of KRW33,135 pushing up the ARPU trend for two consecutive quarters. We believe the outstanding value of SKT's LTE services is being recognized by our subscribers.

In the process of addressing the LTE competition, the temporary marketing spend increase resulted in a KRW370 billion of operating income, up 27.6% quarter on quarter but down 46.4% year on year. EBITDA marked KRW959.9 billion, expanding 7.7% quarter on quarter but decreasing 21.1% year on year.

However, the market is maintaining a stabilized trend since mid-September and we anticipate this trend to continue throughout fourth quarter, contributing positively to the Q4 results.

Now that I have discussed the earnings highlights, let me now move on to the business plan and strategic direction going forward.

The current telecommunications market is undergoing a rapid transition into the LTE service driven paradigm. The exploding consumer needs for high caliber data services, together with the telco's marketing efforts to secure a stronger foothold in this new growth pillar by creating the perfect combination for this transition.

Against such backdrop, SK Telecom was ahead of such market ways, securing over six million LTE subscribers as of late October, obtaining number three position among all LTE operators in the world.

SK Telecom will refrain from price competition and further solidify our fundamental competitiveness including unsurpassed network quality and differentiated product and customer service capabilities, thereby galvanizing our market leadership position in the LTE market as well to ensure both growth and profitability.

On the network side, SKT is offering unparalleled LTE services with stable call quality and technological prowess, leveraging our world best telecom network management technology, [Pettar] Solution.

We introduced the commercialized multicarrier technology on July 1st for the first time in the world to effectively address the recent data usage surge. We plan to expand the multicarrier technology to Seoul and six metropolitan cities by the year end, and widen the coverage to 23 cities by the beginning of next year.

To meet the abovementioned network upgrading requirements, we anticipate CapEx expenditure to increase KRW500 billion from the annual guidance of KRW2.3 trillion to KRW2.8 trillion. We are revising up the CapEx guidance to further reinforce our differentiated technological leadership on the LTE network which will be the heart of our future growth.

In the midterm perspective, we believe the CapEx trend going forward will level down from technological advancement and investment efficiency gains. Considering the significant time gap expected between 4G and the Next Generation evolution, the current LTE investment will contribute to our bottom line for quite some time.

On the service front we offer our high end communication service HD Voice integrating voice, video and data as well as the ICS service in the pipeline, to continue to meet the ever rising consumer needs. In addition, we will leverage our platform capacity and contents and service upper hand to create unparalleled customer experience while accelerating the shift towards mobile centric lifestyle.

Thanks to such efforts, the T Freemium service launched in April recorded two million subscribers and 15 million cumulative downloads in just six months since launching. T Baseball also posted around 800,000 downloads in just three months post launching.

SK Telecom has the honor of ranking number one in three major consumer satisfaction indices for 13 consecutive years, reconfirming external recognition by our customers on our differentiated customer service. Our customer experience management CEM system first introduced in 2008 was upgraded this year under the CEM renovation initiative.

As a result, the number of customer complaints dropped by more than 50% year on year while further boosting the customer loyalty.

As you can see, our competitiveness in network innovative service and customer satisfaction, together with a long held premium brand image, will unleash greater potential in the telecom market in which fundamental competitiveness will prove to be even more critical in the future.

SK Planet, since its launch in October last year, secured solid market presence in each of its business areas by establishing midterm business direction, by successfully expanding the platform business, by focusing on global expansion and by strengthening its internal capabilities such as technological capacity realignment.

As manifested by the Company's philosophy of openness from the beginning, SK Planet plans to announce Planet X soon, which is an open platform of open API integrating eight core service functionalities from the 11th street T Map, T Cloud, T Ad and MelOn, among others.

Through such initiatives, SK Planet will gain a strong foothold in the smart ecosystem.

In terms of the business results to date since launching, SK Planet is creating a new profit base for the future by exceeding SKT's subscriber number in its total membership base through its further competitive edge in T Store and T Map, among others. The 11th street is also continuing an impressive upward trend of GMV or growth merchandise value, exceeding KRW1 trillion in GMV for this quarter alone.

Given its strong subscriber base power index that guarantees continued growth and its expected annual financial performance, we can place SK Planet's current value at KRW2 trillion and its KRW5 trillion target by 2015 is well within reach.

As for the global business, we set up a joint venture in Turkey to secure a global bridgehead in ecommerce to commercialize its business in the early part of 2013. In October, we also launched the global tick tock version, reflecting more customer needs on top of its existing speed and stable technologies.

Through this effort, we are pursuing an evolution into a mobile social platform in the future.

On the domestic front, SK Planet will solidify its position as number one commerce and digital marketplace by interlinking MelOn, HopIn and other social services with T Store and 11th street as the basis, while pursuing global expansion as well.

As another pillar of SKT's growth, we are expanding our B2B corporate business. In the B2B arena, we plan to evolve from the current communication centric business to a solution business comprising five core solution areas including Smart stores, smart work, smart Cloud, green and safety and mobile [add-on] payment. Through organic collaboration with SK Broadband and SK Telink our solution revenue is expected to grow 80% year on year. In two or three years time, we expect solution business revenue to exceed KRW1 trillion.

Notably our smart store solution call My Shop which was commercialized in July is far more than just a POS with simple calculating functionalities. It provides a package of diverse must-have solutions for the entire business areas from business start-up promotions, customer management, store operation, business management as well as business expansion and close-down. The market response is quite positive.

In the meantime SKT selected and is operating healthcare and education solutions as core business areas in an attempt to expand the scope of ICT to keep abreast with emerging technology and market demand changes.

In the healthcare area we have set up a joint venture with Seoul National University Hospital while investing in [nano N-tech] to form our healthcare hub to create new values through the integration of medical customers and device markets. In September, we made investment into a Chinese molecular diagnostics device company, [TM Long] to pursue global entry as well.

On the education front we entered into an agreement with Turkey's largest appliance market Vestel to jointly enter into education market in Turkey, Europe and Central Asia, leveraging our key smart learning platforms.

We are pursuing win-win partnerships with relevant companies to further develop this business.

Dear investors and analysts Just as SKT has always led the telecom industry in both technology and service, we are continuing the success in transitioning our services into 4G LTE arena thereby creating the foundation for continuous growth and profitability. By pursuing a new growing B2B business in earnest with SK Planet which has secured a stronghold in its business in just one year, since spin-off we are discovering new values in creating innovative services to diversify away from the network and traffic centric business.

We believe the recently acquired SK Hynix will also contribute to SKT's value accretion beyond Q4, we'd expected demand hike for mobile and other non-PC DRAMs and NAND products. The management and staff of SKT will not remain complacent and constantly challenge ourselves for a new leap forward with the faith that all these efforts will come back to us in the form of enhanced enterprise value. I would like to thank all the investors and analysts once again for your support for SK Telecom. Thank you.

With that we will now begin the Q&A session. Please go ahead with questions.

Now Q&A session will begin. (Operator's instructions). The first question will provided by [Junin Yung] from Tria Investment and Securities. And the next question will be provided [Tung Jim Kim] from Eugene Investment Securities. Mr Yung, please go ahead with your question.

[Interpreted] I have the following three questions. First of all, regarding the penetration ratio of LTE subscribers among the three top telcos in Korea, you are ranking about at the middle. However, when it comes to the RP growth rate during the third quarter, you show the slowest growth rate in ARPU so what are the reasons behind that? And the second question has to do with your recent move to sell some of the building that you own at the moment. So what is the size of the sales of these buildings that you have in mind?

As far as we understand SKT's financial structure is quite sound. So what are the reasons behind your plan to sell these buildings? And the third question has to do with you CapEx increase. You talked about the increasing CapEx guidance to KRW2.8 trillion. So could you give us the breakdown at the high level, with regards to where you would be spending this money?

Let me answer your first question regarding the ARPU growth rate. You mentioned that our ARPU growth was not as high as your expectation was, but let me remind you that the third quarters each year has always been a slow season in terms of the summer vacations and other seasonality factors. So if you look at the previous year's figures, if you look at Q2 to Q3 transition last year, because of some -- even if you exclude the tariff cut effect, actually the ARPU came down by 201. And this year because of the growing number of LTE subscribers, despite the low seasonality, we have seen the ARPU increase by about KRW213.

What is unique about SKT in terms of the subscriber mix is that compared to other companies, we tend to have a higher portion of the 2G subscribers who tend to have relatively lower ARPU figures. However, when you look at the makeup of the 2G subscribers that we currently own in our portfolio they tend to be quite loyal to the brand SK Telecom. And we cannot overlook the possibility of these current 2G subscribers turning into LTE subscribers going forward as well.

Also you have to remember that when it comes to the 2G networks we have completed all the network investment to date and there is no longer any depreciation burden as well. So considering all that this is not all that negative. So I believe that those are some of the reasons for the ARPU growth trend. So in a nutshell I believe that -- well when it comes to the ARPU increasing trend for all three telcos in the country, coming from the LTE penetration rate increase, I don't think that there exists any fundamental differences per se between the three telcos. It's just matter of the speed and for how long such realization of ARPU gain will be made for respective companies.

In other words, for those players with a faster penetration rate increase will be experiencing faster ARPU increase effect, but for a shorter duration of time. Whereas in the case of SK Telecom, we tend to have a bigger subscriber pool, therefore relatively speaking our conversion speed might seem to be a little bit slow, but then again at the end of the day our realization of the ARPU gain will be spanning across a longer period of time.

Let me now answer your second question which has to do with our plans to sell some of buildings. The buildings in question that you have asked about with regards to our plans to sell the properties includes the SK Green building located on Namsan area. There are two customer support centers in [Jungwon-gu and Guro] areas respectively. We are anticipating about KRW200 billion or higher sales gain from the selling activities of these properties. And the proceeds from the sale of these properties will be used to support and improve our financial structure.

As you have pointed out, we currently experience no issues or problems regarding our financial stability. However, we are pursuing this plan at the moment in order to further boost our asset related efficiency. Let me now address your third question which has to do with the increase in CapEx going forward and the composition of the spending area of that amount. For your information, going back to our beginning of the year, annual guidance for CapEx, we had announced KRW2.31 trillion out of which if you exclude the network related facility investment, the remaining -- the so-called general investment, including some of the marketing activities would amount to about KRW400 billion.

So let me just remind you that the increased portion which is KRW0.5 trillion in CapEx increase will be entirely allocated to the network of CapEx investment on LTE network. And as you are well aware the number of LTE subscribers are increasing faster than anticipated. Whereas we had originally expected about 5 million LTE subscribers by the year end, we are now anticipating about 7 million, which means the number of LTE subscribers are growing calling for more network support.

And in addition to that we are implementing various network competition enhancing state of the art technologies, such as Multi Carrier technologies. So we are actually making preemptive investment in those new technologies which should be made next year perhaps, but then again we are actually accelerating such investment early on.

The next question will be presented by [Tung Jin Kim] from Eugene Investment Securities and the following question will be presented by [Den Kong] from Deutsche Securities Korea. Mr Kim please go ahead with your question.

[Interpreted] I have the following three questions, first has to do with the marketing competition. After the end of September, I believe that the market competition is cooling down quite a bit. So can you actually share with us the recent marketing competition trend beyond October period this year to date and also how do you foresee the marketing competition cooling down even further during the fourth quarter?

And while you're at it, could you give us your outlook on the marketing competition next year as well. My second question has to do with iPhone 5 according to some news press report it seems that some of the, I guess, reservation purchase on iPhone will begin sometime next week and starting from the 23rd on, the product will be officially launched. So there are some market concerns that the marketing competition will intensify once again, but then again some of the other observers are pointing out that Samsungs' handsets have improved so much that perhaps the iPhone 5 will not be as popular as we would anticipate. Therefore, I was wondering SKT's strategy in actually utilizing and managing the sales of iPhone going forward.

My third question has to do with your CapEx plan. You mentioned that you will expanding or revising up the CapEx guidance for the year by KRW500 billion. So what is your CapEx outlook for next year?

[Interpreted]So let me first answer your first question regarding the market dynamics right now as well as our outlook for next year. If you look at the most recent trends including October and the beginning of November figures, thanks to the refraining of the marketing expenditure by all three telcos as well as the government market survey that is continuing right now, I believe that the market competition is stabilizing quite a bit. Of course, we don't know exactly when during the fourth quarter iPhone 5 will be officially launched, but when such time comes temporarily the market might be slightly intensifying in terms of the competition around iPhone products.

So there is that likelihood slightly. However, considering the fact that the government is currently still serving the market conditions right now and also the fact that we are awaiting the KCC's ruling within the end of this year. And also if you consider the fact that all three telcos have to manage their year-end profitability quite stringently. I believe that there is even more likelihood that the marketing environment going forward will remain quite stable.

And if I may look ahead into 2013, of course, there might be a very low possibility of some intensified competition to acquire subscribers in the beginning of the year. However, as we proceed towards the second half of 2013, the likelihood of the market cooling down even further is quite high. And as you're well aware within the second quarter and the third quarter of this year, all three telcos were quite aggressive in terms of the competition to win higher market share in the N&P area. However, none of the players actually gained quite a bit from this competition and we all realized short-lived such performance improvement can be.

So I believe that there definitely was some learning curve, so in the long run, I believe that all the telcos going forward will be more focused on the fundamental competitiveness enhancement. When it comes to the stance of SK Telecom in the future we will continue to refrain from intense competition around the subsidiary provision and starting from November we have introduced new types of fixed price plans that is unique and that is also introducing the penalty system. I believe that all those efforts are leading to less mobile number portability.

So if either player join forces in the same direction, I believe that we could expect higher lock-in effect of the subscribers in the future while we focus more on the true fundamental competitiveness. Of course, we do expect other players to make additional efforts as well, but considering the fact that our Company plans to further lead the market stabilization. Focusing on enhancing our fundamental competitive edge, I believe that we will continue to solidify our leader position in the LTE segment as well, based on our differentiated network and product capability.

Let me now move on to your second question which has to do with the launching of iPhone 5. For your information, of course, iPhone 5 is not out on the market yet and the final details about the pricing as well as sale's terms and conditions have not been concluded yet. But the stance of SK Telecom is to make sure that we do not enter into another round of intensified marketing competition in the iPhone area. And we will continue to ensure offering a rational choice for the subscribers so that they can make the right decisions.

I may now move onto your third question which has to do with next year's CapEx outlook. Since we are in the process of drafting the management plan for next year at the moment, we do not have any conclusive number for next year's CapEx expenditure. However, of course, we could and we will have to anticipate some limited volatility depending on the growth of the LTE subscriber number, as well as the data usage trends. One thing that I could tell you for sure is that compared to 2012 next year's overall CapEx expenditure will be coming down somewhat.

[Interpreted] The next question will be presented by [Dan Kong] from Deutsche Securities Korea. Mr Kong, please go ahead with your question.

[Interpreted] The following two questions, first of all regarding your plans to introduce the penalty for early termination of the fixed price plan products in order to reduce mobility. I think that this is a very positive move on your part, but as you are well aware, there are some national assembly men who have been discussing possible tabling of another regulation that could tightly manage or cap the subsidies offered by the [telco]. I would like to know SK Telecom's official view on this. Do you think that such a regulation would be necessary or even possible?

My second question has to do with a recent comment made by one of the executives of SK Telecom. According to a testimony by one of the SKT executives, still out of the total billed amount to the current subscribers, over 40% has to do with the handset installment payment, but still nevertheless there are some politicians who are calling for the lowering of the monthly fees as well as sign up fees, so why do you think such a trend is still persisting?

[Interpreted] Let me first address your first question regarding the move to further regulate on the subsidies. As you have mentioned, I believe that due to the intensified marketing expense competition that was manifested during the second quarter this year, I believe that there were some issues raised on the part of the subscribers about the fairness between the different subscribers. And also because it became such a very hotly debated topic overall, I think that the whole discussion spilled over to the political circle as well. So as a result, I believe that such a tabling option of this particular regulation was proposed.

And as you know, the chairman of KCC, during the national assembly national audit process, has also testified that he is also planning for a possible revision of the Telecommunications Business Act in order to limit excessive subsidy payment.

If I may share with you the position of SK Telecom, we also believe that excessive marketing competition among players surrounding subsidy payment in a very indiscriminate manner should be actually refrained, and therefore to a certain level, perhaps some type of limitation placed on the subsidy could be not entirely a bad option.

Let me know turn to your second question.

As you have mentioned, out of the total monthly billed amount of the subscribers of telecom operators, around 50% range only would be attributed back to the telcos and remaining 40% range of the amount billed has to do with the handset purchase related payment. So that has been actually proven by certain statistics.

Because that is the reality that we are facing, and against that backdrop I believe that after the introduction of Smartphones into the market, I think that subscribers started raising more issues about the telecom related expenses being too high. But at the center of this controversy I believe lies the higher cost on the part of the handsets, which are mainly Smartphones.

So in our view, I believe that in order for us to further alleviate the telecommunications expenses burden on the part of the subscribers in a very practical way, we need to further address this issue from both the telecom usage fee versus the handset installment fee separately, so that we could respectively attempt to lower the burden on the part of the household.

As you are well aware, already when it comes to the telecommunications related tariff we have gone through a unilateral basic fee tariff cut during the second half of last year, which led to a significant drop in the revenue as well as operating profit for the telecommunications operators. Therefore, instead of pursuing a very artificial and very unilateral type of a push down of prices on the telco tariff, I believe that we have to come up with a more balanced policy going forward that could benefit many parties involved, while further helping the development of the overall ICT ecosystem.

[Interpreted] The next question will be presented by Jaemin Ahn from Kiwoom Securities and the following question will be presented by Neale Anderson from HSBC. Mr Ahn, please go ahead with your question.

[Interpreted] Two questions from me. First of all, vis-a-vis during this quarter you have made certain sales of the Posco shares that you own, so what is your plan going forward regarding the remaining Posco shares still in your holding?

And the second question has to do with your dividend plan. I believe that your dividend payout of about KRW9,401 per share has been somewhat fixed to date. So looking ahead into next year, since we do anticipate quite a bit of competition in the next year period as well, what is the likelihood of your earnings being supportive of the same level of KRW9,401 dividend payout next year as well?

[Interpreted] To answer your first question, as you are well aware, during the month of October this year we have decided to sell half of the Posco holdings that we have within the Company, and we have made this decision to sell the 50% looking at the recent market trends. So the overall sales amount itself was about KRW440 billion, while the gain on the sale of the Posco shares amounted to KRW270 billion and such gain will be reflected in the results for Q4.

Regarding our plan to deal with the remaining half of the Posco holdings, at the moment we have nothing conclusive yet. We will be looking at next year's market situation quite closely to come up with further decisions on that.

Let me answer your second question now. To answer your second question regarding the dividend plan going forward, our basic principle to always emphasize shareholder return in a way that is quite balanced between your stable financial structure while actually enhancing the shareholder value, and at the same time pursuing growth. So that balanced viewpoint in our shareholder return policy has never been changed, but when it comes to the more detailed guidance about the dividend next year, I believe that we should actually communicate it with you when things become more clear after we come to more detailed management decisions on the next year's plan.

[Interpreted] The next question will be presented by Neale Anderson from HSBC. Mr Anderson, please go ahead with your question.

Thank you, I have two questions please. First on CapEx, you mentioned that the extra KRW500 billion would go to LTE. Can you give us more detail on this? Is it to add extra capacity, or maybe extend the multi-carrier coverage? That will be very helpful. Then what changed in the third quarter to convince you that increasing the CapEx was the correct course?

Secondly, and this may be related, what sort of data usage are you seeing from your LTE customers, and how have your expectations of how total data traffic will grow changed as a result of the fast growth on LTE? Thank you.

[Interpreted] When it comes to the detailed breakdown of that KRW500 billion increase in CapEx, we told you that it is mainly for LTE. Out of the KRW500 billion I would say about KRW300 billion would be allocated to multi-carrier, whereas the remaining KRW200 billion would be LTE capacity increase.

And when it comes to your second part of the first question as to what are the reasons why we came to the decision to increase our CapEx during the third quarter, to answer that question, as we went through Q1, Q2 up to Q3 we have made our utmost effort to instead of raising the CapEx itself, to somehow enhance the efficiency by adjusting the network portfolio further so that we could maintain the existing CapEx expenditure limit. However, despite such efforts that went on until Q3, the rapid LTE subscriber growth together with the need for capacity increase and our decision to deploy multi-carrier coverage in a timely fashion have led to such decisions during the third quarter.

Let me now turn to the third part of your question which has to do with the data usage pattern of the current LTE subscribers and our outlook going forward. If you look at the data usage per LTE subscriber it stands at about 1.8 gigabytes, which is actually showing an upward increasing trend since the end of last year, when we first introduced the LTE service.

For your information, per 3G subscriber, the data usage stands at one gigabyte, therefore compared to the 3G subscribers our LTE subscribers tend to use 60% more data.

[Interpreted] Currently there are no participants for the questions (Operator Instructions).

[Interpreted] With that we will conclude the Q&A session and invite the closing remarks by our CFO.

[Interpreted] Thank you for staying with us until the very end of today's call. All your questions and comments will contribute to the improved management of the Company.

As mentioned earlier, SK Telecom will further re-enforce its competitiveness through ceaseless efforts to challenge itself. We promise to do our utmost to ensure continuous company growth and shareholder value enhancement.

With that, this concludes our conference call for Q3 2012. Thank you.