SK Telecom Co Ltd (SKM) 2014 Q1 法說會逐字稿

Good afternoon. Welcome to the conference call for the fiscal year 2014 first-quarter earnings results by SK Telecom. This conference will start with a presentation followed by a Q&A session. And now we'll begin the conference of the fiscal year 2014 first-quarter earnings results by SK Telecom.

Good afternoon. My name is Young-Gyu Park, the IRO of SK Telecom. Today's conference call will consist of the earnings presentation by our CFO, Su Cheol Hwang, on the earnings results of Q1 2014, as well as the future management plans and strategic direction, followed by a Q&A session.

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

The conference call will proceed with consecutive interpretation. Let me remind you that all the forward-looking statements are subject to change depending upon the macroeconomic and market conditions.

With that, let me invite our CFO.

Good afternoon. My name is Su Cheol Hwang, the CFO of SK Telecom. Let me start with the consolidated financial results for Q1.

Owing to the consistent subscriber migration to LTE to date, as well as the positive results from our growth businesses, our top line recorded KRW4,201.9b, up 3.4% year on year.

EBITDA posted KRW955.6b for Q1 due to the temporary marketing expense hike to counter the overheated competition, decreasing 11.8% year on year. Operating income declined 37.6% year on year to KRW252.4b, while net income contracted 22.7% year on year to KRW267.3b.

I would like to discuss our strategic direction and performance by business line. Our efforts to change the marketing competitive paradigm into a product- and service-oriented one are being pursued in a steadfast manner. Despite our commitment and action for market stabilization, we regret the fact that the fierce market competition persisted during Q1.

However, starting from Q2, the government's market stabilization policies are further taking root, leading to a more benign competitive landscape. We expect such changes to result in earnings enhancement as well.

In spite of the one-off negative factors, including the network outage in March, the billing ARPU for Q1 came in at KRW35,309, rising 4.9% year on year. This growth is quite meaningful since it exceeded the annual average growth of 4.6% from last year. Through ongoing LTE subscriber share expansion, as well as the launching of diverse products and services optimized for the evolving network environment, we plan to sustain the upward ARPU trend in the future and maintain our market leadership position.

In early April we launched a price scheme offering additional data volume for the specific high-end price plan in order to stimulate the high-end subscriber acquisition through more compelling consumer data usage environments and to effectively and rapidly address the new price plans introduced by the competitors. Currently, more than 60% of the new and handset upgrading subscribers are opting for this price scheme. We expect this price line to boost the ARPU growth momentum for the future.

Furthermore, by providing specialized data price plans for a specific time, place and occasion, which is TPO, we enabled minute-based data usage, even for those subscribers feeling the burden of fixed high-end price plans, which will ultimately expand the user base. Going beyond simple data offering, we are pursuing continuous revenue growth by launching products combining diverse content as well.

Our CapEx plan for this year already reflects the buffer necessary for the expanding data demand. Therefore, we believe we could sufficiently fulfill the data demand going forward without increasing the CapEx guidance. Even from the mid- to long-term prospective, we expect to sustain the top line growth through increased data usage by maintaining the downward CapEx trend through the expansion of the dedicated spectrum for LTE and improved speed and capacity from technology development, among others.

The T Phone unveiled in February is still in its early stage, but the user satisfaction to date is quite positive. Since the service upgrades are still continuing we anticipate more rapid subscriber expansion once the suspension of new subscriber acquisition is lifted. With such widening of the user base, T Phone will solidify its position as yet another differentiating point and help develop diverse new business models as a bona fide communication platform.

The IoT, or Internet of Things, business is drawing a lot of attention lately. However, it is a business we have been pursuing for many years with over 1m M2M lines for advanced remote metering and mobile payment in place already. Our three core business areas we are pursuing include the automotive, which interlinks transportation and smart cars; asset management, which is based on the control over high net worth assets and cargo; and agriculture based on smart farms.

We are leading in the near field sensing technologies and the standardization efforts. By encouraging Korea's first commercialized open IoT platform usage and by lowering the module price points, we plan to further widen the business platform.

One of our core B2B solution areas, safety and green business, will leverage these IoT technologies. We will also expand the scope to include new business models encompassing cloud and big data businesses in the future. As can be seen, we believe such systematic preparations and proactive business development will unleash significant business opportunities in the IoT market, marked with great growth potential.

The portion of the total revenue for B2B solutions business rose 38% year on year to KRW115.5b, signaling a growth trend in earnings.

As for NSOK, the security company we acquired this year as part of our safety business, we will utilize our ICT capabilities to expand its customer base while securing differentiated competitiveness through a mutual synergy by introducing packages linking with our smartphone products.

Following last year's solid result, SK Hynix achieved robust results for Q1 as well. Many external expert groups are forecasting a positive outlook going forwards. We believe such stellar results from SK Hynix will add to SKT's overall enterprise value.

As discussed until now, SKT will achieve the top line growth in both the telecom and new business areas while maintaining its market leadership. Equipped with the fundamental service upper hand, sound financial stability and the cash flow generation capacity, we expect to sufficiently address other players' subsidy competition while sustaining a solid financial structure.

Dear investors and analysts, the enterprise value and shareholder value are the core values SKT has strived to enhance for the past three decades. Along with the stable dividend, we will do our best to further enhance the shareholder value through diverse methods while shoring up our enterprise value by expanding our LTE-based services and ensuring market stabilization and new business growth.

Let me extend our deepest appreciation to all the investors and analysts once again for your unwavering support for SK Telecom. Thank you.

We will now begin the Q&A session. Please go ahead with questions.

Now the Q&A session will begin. (Operator Instructions). Jong In Yang, Korea Investment Securities. Kim Hoi Jae, Daishin Securities.

I have the following two sets of questions. Post the listing of the rotational operation suspension on the three telcos we believe that the market dynamics will turn to intensify competition. There is that ongoing concern in the market at the moment. So, what is the management's view about the outlook for marketing competition for the second half?

My second question has to do with your LTE launching, which would have the capacity for 220 mega bps of speed support, and what is your plan for that rollout? And also, what impact will it have on your handset lineup as well?

I believe your first question has to do with our outlook on the market competition after the rotational operation suspension is lifted. I regret the fact that because of the competitive proactive measures taken by our competitors during this first quarter the earnings results overall for Q1 was rather lackluster, so we regret that fact.

But, Q2 onwards, we believe that, of course we cannot completely rule out the possibilities of our competitors launching guerrilla-type marketing or ambush marketing time to time. However, considering the fact that the government is quite committed in market stabilization through actions such as subsidy limit regulation and also the fact that LTE market is entering into a new maturing stage, I believe that the second-half marketing landscape will be relatively benign compared to Q1.

To elaborate a little bit more about the government's strong commitment to stabilize the market going forward, I believe that that will play a very significant role. And on top of that, as a leading market player in this industry, we also have a strong commitment for market stabilization. And I believe that throughout our society, various sectors or various opinion leaders have certain expectations for market stabilization. And, on top of that, if you considered the financial limitations of our competitors, I believe that the likelihood of the subsidy marketing competition becoming even more fierce going forward would be quite unlikely.

To address the ongoing competition, we are very committed to enhancing our competitive dynamics, focusing more on the products and services and network capabilities. And we would do very much on our efforts. We will make full effort so that we could perhaps close to ending the subsidy-oriented competition in the market. And, we will therefore focus more on the retention-oriented marketing activities to defend our existing high quality customers instead.

Regarding your second question about our Company's plan to commercialize the 225 megahertz system network and how it will have an impact on the handset lineup going forward, as for the second half of this year we have plans to launch the 225 mega bps downlinks to speed, combining 10 megahertz plus 20 megahertz component areas together.

Regarding the LTE-A service for -- derived from the 225 mega bps downlink speed, we have already made a proactive preparation to fully go ahead with the development. So we are -- we have pretty much completed the preparation stage. And we are also closely collaborating with the manufacturers of the handset so that we could pre-emptively launch these handsets going forward for the benefit of the consumers.

Hoi Jae Kim, Daishin Securities.

I have the following two sets of questions actually. First of all, regarding the LTE-related unlimited price plan recently launched, there are market concerns about the possible capacity shortage regarding the data traffic that is expected to grow quite a bit. So, I was wondering, within your current spectrum capacity, how much data usage can you actually handle? If you could provide us with some specific numbers that would be appreciated.

And, relatedly, I believe that out of the 3G-related spectrum allocated to SK Telecom before, I believe about 20 megahertz dedicated to 3G may be converted to the LTE purposes. So, I'm wondering whether that actually can be converted indeed.

My second question has to do with your marketing. I believe that the most important costs for the longest ever rotational operation suspension on the telcos recently was the competition for market share in your industry. So what is your market share related position going forward?

And also, could you give us some specific details about your current status and prospects about T Phone initiatives as well?

You asked about our capacity to accommodate the data demand growth arising from the LTE unlimited price plan. And, relatedly, I will also address your question about the possible conversion of our existing 2.1 gigahertz spectrum.

To answer the first part of your first question, I believe that the increased data usage that is expected from the launching of the LTE unlimited price plan launch, I believe that with the current spectrums and network capacities we currently have, we will be able to sufficiently address the growing demand. As mentioned earlier, in our annual business plan already drafted, we have already reflected the expected data demand growth coming from such unlimited price plans. Therefore, we do not anticipate any major issues arising from the data traffic increase going forward.

And, regarding your question about the possible conversion of the part of the existing 2.1 gigahertz spectrum previously allocated to WCDMA and how it can be used for LTE data usage, to answer that question, I could tell you that among the 2.1 gigahertz spectrum allocated, of that amount, about 10 megahertz has been already converted to the dedicated use for LTE.

To elaborate just a little bit, even if the data traffic demand goes up even further in the future, we believe that we have more than sufficient spectrum available. And, because we have already begun the initiative of converting the existing 2.1 gigahertz bandwidth to LTE preferred spectrum, I believe that we are pretty much prepared for the three band carrier aggregation capacities or technologies already.

You also asked about our policies and positions about our market share related policies. Regarding the market share, as you are well aware, for a long time to date, we have been maintaining over 50% market share in the market. I believe that such market share is one of the biggest assets of our company because the number of subscriber base becomes a platform through which we could ensure future profit going forward.

And, also, the recent proliferation of the key phone related programs and the downloads by the users was only possible because of the wide subscriber base that we already had.

If you consider the network superiority of SK Telecom and also the product-related competitiveness and the financial soundness of the Company, and if you consider the competitors' situations all together, we will be basically very much focused on further enhancement of the fundamental competitiveness of the Company. And, you have to also keep in mind the external regulatory environment is quite conducive to the stabilized market environment going forward. So, with the reduction in the subsidy-related competition, I believe that naturally we will be able to maintain more than 50% market share in the future as well.

To answer your question regarding the current status and the outlook for T Phone initiatives, we don't have a subscriber target number per se for this particular initiative. But I could assure you that our initiative is on track as planned.

Of course, there were some limited impact in terms of the delays in the launching of some of the new handset lineup and the rotational operation suspension on the telcos. However, we are also planning to enhance the user -- the usage capacities through far more upgrades through handsets such as Galaxy S4 and other existing handset lineup so that we could further widen the market base.

Recently we have conducted a survey on the customer satisfaction regarding the service offered by T Phone initiatives. Although the sample size of this survey was quite limited, our initial feedback from the experienced users on this particular initiative is extremely positive to date, and I believe that the market expectations on the future T Phone initiative is going to improve even further.

Tong Yong Wu, CIMB.

Two questions from me. First of all, in your earlier earnings presentation made you talked about the high growth coming from the B2B business areas. So, for this year and the next year, if you could cite particular types of B2B business areas that you are expecting the highest growth going forward, could you be more specific about those areas? And, also relatedly, can you talk about your competitive upper hand in those respective solutions or B2B businesses compared to your competitors?

My second question has to do with the following. In the -- in April, you have launched the unlimited LTE data price plan. So, of course, in the short-term and the long-term perspective, this could offer you an upselling opportunity on your existing subscribers but we have to also look at next year and the following year in the long-term perspective. So, what are your strategies to further defend your ARPU growth going forward in the long-term perspective? So, if you have any blueprint, at least, could you give us a big picture about that?

Let me first address your first question regarding our B2B business. As you are well aware, in the B2B solutions business our annual revenue target is KRW1 trillion. During the first quarter this year we have already achieved KRW115.5b in top line which was a very encouraging growth year on year by 38%.

You asked about our competitive edge vis-a-vis our competitors. I believe that our strongest distribution areas include smart work as well as green business. These are particularly areas where we are quite ahead of our competitors, we believe. So, we recently acquired some new customers such as Korea Cyber University as well as Cosmochemical Company.

And in the safety area, as you are well aware, we have recently acquired a safety company called NSOK. And, we will be further maximizing the synergy between NSOK and the rest of the SK Telecom Group so that we could further boost the growth going forward.

In addition to that, in the IoT, Internet Of Things, as well as cloud sectors, our plan is to further enhance our capability so that we could not only achieve near-term targets, but also to ensure future growth potential.

As you are well aware, compared to our competitors' position, we have a very high end high quality customer base through which we are collecting quite a bit of data. As you are well aware, compared to our competitors, our customer base is quite high quality. And, on this customer base, we have collected and accumulated quite a bit of data to date. And, by enhancing our data analysis capabilities on those existing customer base, we believe that we could further ensure future profitability as well.

Next, I believe that your question had to do with our long-term strategy to help grow the ARPU from the LTE business going forward considering the fact that we have recently launched the unlimited data price plan for LTE. As you are well aware, despite a negative one-off that existed during the first quarter, on a year on year basis, our ARPU actually grew by 4.9%. As you have mentioned earlier, in the near-term, we believe that we would definitely enjoy the upselling effect from the recent launching of the unlimited data price plan. And, at the current trend, we believe that by the year end, two-thirds of the new subscribers will be LTE subscribers.

And, in line with such subscriber growth of the LTE segment, we are continuing to launch and introduce specialized products and services that befit the needs of the LTE subscribers. And, by also interlinking with diverse content-related assets that we have, we would further expand the usage foundation for data oriented usage. Through such efforts, I believe that we could further bring up the value of data so that we could ultimately boost the ARPU going forward.

And, also, in line of our efforts to further accelerate the data monetization of our LTE subscribers, we are coming out with varied strategies and products and services with the mid- to long-term perspective so that we could boost such data monetization.

Currently there are no participants with questions. (Operator Instructions).

Sean Oh, Merrill Lynch.

I have two questions. First of all, could you share with us your expected -- effective tax rate for the entire year 2014 as well as the first quarter of 2014?

And, secondly, I believe that your competitors have already reflected the interconnection fee related results in their books. I was wondering whether SKT has similar plans to do so, or whether your current numbers reflect it already?

To answer your first question about the effective tax rate for this quarter, during Q1 it stood at about 20%, which is flat year on year. And even on a quarter on quarter basis it edged down slightly.

Of course, we anticipate some minor changes because of the accounting treatment changes regarding the corporate tax rate. However, I believe that those expected changes in the application of the residential taxes have been already reflected in our calculation.

Could you actually repeat the second part of your question regarding the interconnection fee? Could you be a little bit more specific in your question?

Let me ask you with my second question. Regarding the interconnection fee, at yesterday's conference call by one of your competitors they mentioned that interconnection fee related income as well as expense came down significantly and they mentioned that they are reflecting the expected interconnection fee settlement which will take place at the end of this year early on. So, I was wondering whether SKT has a similar plan to reflect it earlier, or would you be reflecting it once everything is decided all at once during the fourth quarter?

The way I look at your numbers, I don't think that your interconnection fees projection reflects such changes in the interconnection fee. So, my guess is that you will be reflecting it in Q4. So, could you give us some guidance as to how much we should anticipate for Q4?

As far as the interconnection fee related conclusions on 2014 and 2015, currently, I believe that MSIP, the Ministry of Science ICT and Future Planning, is currently conducting the review on this matter as we speak. And, I believe that the final decision period has not been determined yet. So, once things are finalized, we will be reflecting it and recognizing it all at once.

Dan Kang, Deutsche Bank.

I have the following question about the launching of the unlimited LTE price plans recently. I'm wondering, out of many price plans available in the high-end segment of your price plan, which particular price point is attracting the most number of subscribers? In other words, do you have a larger portion of subscribers opting for this unlimited plan in the price point higher than, let's say, KRW100,000 or some price point lower?

And, relatedly, among your existing subscribers, what is the percentage of the subscribers actually downgrading in terms of the price plan? And, also relatedly, how much are actually upgrading?

To answer your question, since we launched this unlimited data price plan in the month of April, among the total handset upgrading and new subscribers, over 60% of such subscribers are opting for a price plan higher than KRW80,000 and higher.

We also have with us our marketing head, division head, so he will actually further answer your question.

Let me help answer your question. My name is Han Jung Kim, in charge of Marketing Strategy. Regarding the price plans available for unlimited data usage, we have the price point at about KRW80,000 and also KRW85,000 packages. So, among those two price plans, about 80% is opting for the KRW80,000 price plan whereas the remaining 20% is actually opting for the KRW85,000 price plan.

You also asked about the movement coming from our existing subscriber base. Those subscribers are opting for such unlimited data price plans recently launched. About 80% of those changing their price plans are actually upselling. In other words, they are upgrading higher to the KRW80,000 or higher price plan.

Regarding new acquisition of subscribers, because we are under the operation suspension at the moment, it's difficult to give you a very accurate trend estimate going forward. But, once the suspension of operation is lifted, we believe that over 60% of the new subscribers acquired will be opting for price plans either KRW80,000 or KRW85,000 price points.

If there are no further questions, we will conclude the Q&A session and hand it over to our CFO for his closing remarks.

Thank you for your participation in SKT's earnings call until the very end. All your questions and interest here today will help enrich the management activities of our Company going forward.

As mentioned earlier, SK Telecom will ceaselessly rise to new challenges to further strengthen its competitiveness while doing its utmost to ensure continuous growth and shareholder value enhancement.

With that, we would now conclude the earnings conference call for SK Telecom for Q1 2014. Thank you.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.