SK Telecom Co Ltd (SKM) 2015 Q2 法說會逐字稿

(interpreted) Good afternoon. I am Jeong Hwan Choi, the Head of IR.

Today's conference call will consist of the presentation on the earnings results for Q2 2015, and the future management plans and strategic direction by our CFO, Yong-Hwan Lee, followed by a Q&A session.

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

Today's call will provide consecutive interpretation. 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 Mr. Yong-Hwan Lee.

(interpreted) Good afternoon. This is Yong-Hwan Lee, the CFO of SK Telecom.

During the second quarter, SK Telecom completed the blueprint for the transformation into a media platform player, one of the Company's three next-generation platforms, by successfully taking in SK Broadband as wholly owned subsidiary. Also based on our to-notch service and product competitiveness, we strengthened customer benefits, and led the way to a healthier marketing environment centered on handset upgrades. All of which resulted in the lowest churn rate since 2003, at 1.3%.

Building on this momentum, the Company plans to do its best to increase the enterprise value by transforming into a telecommunication-based next-generation platform player, as well as enhanced customer value.

Let me now discuss the consolidated earnings highlights for Q2 2015.

Revenue recorded KRW4,255.7 billion, a 1.2% decrease year on year, due to decreases in interconnection revenue and signup fees. Compared to the previous quarter, it increased by 0.4%

Operating income recorded KRW412.9 billion, down 24.4% year on year, as a result of decrease in revenue and the reflection of one-off labor costs. Quarter on quarter, it increased by 2.5% due to lower marketing costs, among others. EBITDA recorded KRW1,151.4 billion, down 8.9% year on year, and up 1.7% quarter on quarter.

Net income stood at KRW397.9 billion, a 20% decrease year on year, due to a decrease in income, and a 10.1% decrease quarter on quarter, mainly due to a smaller equity method income on SK Hynix.

With that, I will now move on to major achievements and the strategic direction of the Company.

To achieve the Company's goal of a KRW55 trillion enterprise value by the year 2018 announced with the arrival of our new CEO, SK Telecom plans to continue its stable M&O business, as well as utilize the business to transform into a next-generation platform player to fully pursue future growth.

This month we launched Club T Kids, our first lifestyle-enhancement platform that integrates content, community and commerce. Based on T Kids Phone, which has over 200,000 users, we analyzed the complex customer needs to provide both parents and children with a completely new lifestyle value through Club T Kids, which consists of the care service platform for parents, and the peer community platform for children. Club T Kids has created an open ecosystem through cooperation with various partners in areas including field trips and snack services, which attest to the potential of the Company's platform business.

Going forward, SK Telecom will continue to develop new lifestyle enhancement platforms that provide value in all areas of daily life that is completely new to our customers. And aim to create over 50 specialized services and acquire over 10 million subscribers by 2018.

Also T Phone, which was launched last year, has presented a new possibility of communication platforms based on telephony communication. And we are continuing to expand our communication platform business by launching various applications related to T Phone. The subscriber number for the service surpassed 6 million in July, and continues to grow, while a platform ecosystem will be built through further partnerships and information-sharing efforts.

As mentioned above, SK Telecom is preparing to take another leap as a media platform player, with the 100% acquisition of SK Broadband. By concentrating the media capabilities of SK Telecom and its affiliates, we will lead the new rule of game in the media industry, grow into a leading player of the market, and acquire 15 million fixed and wireless subscribers by the year 2018. Currently, various options are under review regarding SK Telecom's media business.

The IoT platform business is being pursued centering on the B2C areas such as smart home, and the B2B area such as security and energy. In the B2C arena, a smart home service connecting dehumidifiers, door locks and heaters through partnerships with four home electronics companies was launched in May. Through a wider range of service and partnerships, we plan to grow this service further by launching up to 20 new products within the year, based on over 20 partnerships. We will also identify new promising business areas other than smart home, such as the auto industry, that can utilize the network to provide various ICT services.

In the B2B area, we will continue to introduce products that can enhance an industry's productivity and efficiency by taking advantage of our unique capabilities, including big data and the cloud.

For a more diversified growth portfolio, SK Telecom launched a new lifeware brand by the name United Object, or UO, in May. We plan to deliver a consistent brand value of the UO brand by gradually unifying the names of lifeware products including the Smart Beam, the Smart Band, and Air cube, as well create new markets beginning in China, extending to the United States and Europe, through innovative products.

In fact, the UO Smart Beam Laser, the mini HD Pico projector launched in May, and the UO Linkage, a high-quality Wi-Fi audio product launched in July, have both attracted great interest at home and abroad after having been revealed at the past CES and MWC.

Also as the focus of the medical market is shifting from cure to early diagnosis and prevention, the in-vitro diagnostic device market holds great potential. To strengthen its business capabilities, Nano EnTek recently acquired Bio Focus, a diagnostic kit manufacturer, which resulted in a $30 million export contract to Kazakhstan. We look forward to seeing various results in the global market, including a more diversified portfolio of products related to in-vitro diagnosis, stronger global sales, and full-scale business activities in China.

Meanwhile, SK Planet is focusing on the next commerce area, with Syrup and 11th Street at its center. 11th Street is continuing its growth through a solid increase in volume thanks to a differentiated offering of services, such as the mobile service and Shocking Deal, while Syrup is also gaining a stronger foothold through a growing service lineup that includes Syrup Pay, Syrup Table, and Syrup Order. The related businesses are also seeing a stronger global presence.

With the new regulatory paradigm settling in the market, SK Telecom introduced the Band Data Plans in May that represent a new data era. As a first in the industry, the Band Data Plans provide unlimited fixed wireless calls and options to resell, gift or share data capacity freely, thereby allowing us to secure the leadership of the initial data-centric pricing market.

Over 150,000 users subscribed to the Band Data Plan on the very day it was launched, the highest number ever for a price plan. And new records are being set with over 2 million subscribers within about a month since its launch.

Following the introduction of new plans such as the Band T Sports Pack, Band Btv Mobile, Band Commute Free, and Band Subway Free, we have also launched Band Timefree, which provides unlimited data for six hours a day with the heaviest data traffic. As such, the Company is focusing its efforts to provide users with more powerful price plans.

Through a stronger price plan lineup, we expect a mutually beneficial environment for both subscribers and the carriers, in which users can enjoy greater data benefits at a lower price. And operators can secure new growth engines as the data usage patterns evolve. Currently the data usage per LTE customer is continuing to grow at 3.3 gigabytes in June from 3.0 gigabytes in March.

Products based on customer segmentation and second devices, including T Kids Phone, T Outdoor and T Pet, are resulting in higher customer retention and growing MNP in numbers. And we believe that improved products and services and our evolution into a lifestyle enhancement platform will become the main reasons that customer choose SK Telecom and stay with us. We'll also further strengthen our membership service, a unique strength of SK Telecom, including the DIY membership program launched in April, Membership as You Wish.

While ARPU for Q2 increased due to the seasonality of the previous quarter and continued growth of the LTE subscriber base, it was not as high as the yearly outlook of 4.5%, due to the initial impact of the Band Data Plans, a higher discount rate for monthly price plans, and subscriber number increase. However, we stand by the ARPU growth outlook, based on continued growth of the LTE subscriber pool and greater data usage.

Lastly, I would like to discuss shareholder return. The interim dividend for 2015 has been decided on KRW1,000, the same amount as the previous year. As for the annual dividend, various options will be reviewed in a flexible manner to enhance shareholder value, while considering investment for the Company's growth and the cash flow.

Also the Company plans to resell the 1.69 million treasure shares used in acquiring SK Broadband within the next two years. And we are planning for a KRW400 billion share buyback within a year, beginning this September.

SK Telecom will do its utmost to achieve the KRW55 trillion enterprise value target through enhanced profitability and growth. We ask for the continued interest and support of our investors and analysts in the future.

Thank you.

(interpreted) (Operator Instructions)

The first question will be provided Sean Lee from Citigroup. And the next question will be provided by Jong In Yang from Korea Investment & Securities.

(interpreted) Thank you. I have two questions. My first question has to do with the characteristic of the operating profit for Q2. We believe that now the operating profit can be seen as a result of a normalized operation of all three players, as the handset distribution has settled in the market. So I believe that the operating profit for Q2 is a good benchmark for us to think about what is going to happen in the future. Now aside from, even when we take into consideration the one-off items, you have recorded about KRW520 billion in OP. Would it be reasonable for us think that this is the level that we can expect in future quarters? And if you are saying that we can expect a greater operating profit, where and how is that going to be possible?

My second question has to do with the year-on-year fall of the operating profit. Again, as I mentioned before, even when we take into consideration the one-off items, in the past you have had an operating profit of over KRW540 billion. And as we understand, the operating profit is bound to go up under a more settled handset distribution act in the market. However, that was not the case for SK Telecom in the first quarter and the second quarter. Why is that? And what are we missing in terms of analyzing the situation?

And lastly I want to comment that as you know, your competitor released their earnings numbers today. And their operating profit was dramatically improved, as we had expected under market conditions. So again, I want to ask you why that is the not the case for SK Telecom.

(interpreted) Thank you for your questions. I will answer the first question. As you said, our current operating profit for the second quarter stood at about KRW520 billion, taking into consideration the one-off items. Now although year on year it decrease slightly, when comparing to the second half average of last year of KRW513 billion it did record an increase. And we believe that there are various other factors that need to be taken into consideration in the mid-to-long term.

Especially on the upside factors. We believe that there is potential for growth, as we are driving second-device sales, and LTE data usage is continuing to grow. Also as for the monthly discounts that are provided in lieu of subsidies, we believe that this will not have a severe impact on the profitability of the Company in the mid-to-long term.

On the other hand, when it comes to the B2B business, traditionally and seasonally compared to the first half of the year, B2B business does better during the second half of the year. So this has an upside potential for the remainder of the year. And we spoke about the IoT platform. And this also has growth potential during the second half of the year as well.

Also we have different business areas, including healthcare and lifeware, which I believe will show greater results in the future. And above all, we have constantly mentioned that we wish to transform ourselves into a telecommunication-based next-generation platform player. And as our businesses become more concrete, we believe that there will be opportunities for us to take yet another leap in terms of our earnings results.

So in a nutshell, I believe that in the mid-to-long term, operating profit will have opportunities for growth above the current level.

The answer to the second question, you said that even taking into account the one-off item, the operating profit did not do as well compared to the previous year. Now largely there was first of all the abolition of the signup fee this past November. So that resulted in a certain difference. And then at the end of last year from SK Telecom's point of view, the interconnection fee rate was decreased as well. So comparing year on year, these factors led to a lower operating profit.

And when we think about these factors, while it is true that we must continue with a solid M&O business and that it will continue to grow and it should, we have come to the conclusion that we must not remain solely focused on the M&O business itself. And in this context that is why we have begun our journey to become a next-generation platform player.

And also as for the current moment, we did not have enough time to see the details of the results and the characteristics of the results of our competitors. But basically we believe that because we run our markets in a different business environment, it will not be fair. In other words it will not be an apple-to-apple comparison.

And this is just an assumption. But in the case of 2014, our operation suspension of 45 days was concentrated solely during the second quarter. And that was not the case for our competitor. So at the time when they were solely operating, the marketing cost did rise a little bit. So I believe that that could be part of the explanation.

(interpreted) The next question will be presented by Jong In Yang from Korean Investment Securities. And the following question will be presented by Hoi Jae Kim from Daishin Securities.

(interpreted) Thank you for the opportunity. I have the following two questions. The first has to do with the monthly tariff discounts and the impact that it has had on your earnings. In the second quarter I know that the marketing cost slightly went down, and that had a positive effect. However, accumulated in the longer term, I believe that this could have a negative impact on the Company's numbers. So I would like to hear your outlook regarding the monthly tariff price plans.

And my second question has to do with the profile of the subscribers subscribed to data-centric price plans. I would like to know their monthly fee either went up or down, or how much of the subscribers either went up or down. And also I would like to know the influence that it will have on your ARPU for the next quarters.

(interpreted) Yes, thank you. To address your first question regarding the monthly discounts. It began in April 24 last year. And as you know, the extent of the discount has been lifted to 20%. And in fact the initial subscriber addition rate was quite high. However, when we take a look at it now compared to the initial period, the subscriber addition rate has come to a more stable trend.

And going forward, although we will have to see what happens, we believe that there will not be any dramatic additions to the subscribers for this plan. And of course when it comes to the more extended level of the monthly discounts to 20%, there is a possibility that it will partially impact our revenue in a negative way.

However cost-wise, it did lead to a lower marketing cost. And it also has lengthened the period that it takes for our subscribers to upgrade their handsets. And it has also accelerated the speed at which the market is shifting into a handset upgrade centered competition. So in the long term, I believe that profitability-wise, it will have a positive impact.

And to answer your second question regarding the Band Data Plans, we are providing unlimited voice calls at a KRW20,000 level price plan. So when it was first launched, many, many subscribers opted for the plan. Compared to the past, we believe that our users' data usage pattern is becoming more rational.

On the other hand, whereas in the past many subscribers first subscribed to higher-priced plans and then downgraded to a lower one after a couple of months. However, these days we see many subscribers who naturally opt for a higher data-centered price plan as their data usage pattern changes and increases. So I believe that all of these factors need to be taken into consideration.

So as such, although it is true that when these plans are first launched, there is an initial partially negative impact to a lower ARPU, however in the longer term when we look into the future, as their data usage continues to grow I believe that there are positive impacts that it will bring in terms of ARPU growth.

Also in terms of our marketing activities, because the Band Data Plan was very well-received by our customers, and it also gives us such a competitive edge in the market, we believe that in the longer term it will have a positive impact on our business.

(interpreted) Thank you.

(interpreted) The next question will be presented by Hoi Jae Kim from Daishin Securities. And the following question will be presented by Josh Bae from UBS.

(interpreted) Thank you. I have the following two questions. My first question has to do with your network strategies. Recently there are concerns over whether SK Telecom's LTE frequency band will be enough to accommodate your growing data traffic of your users. We are now about seeing that with the currency frequency band it will be able to accommodate the data traffic of about 16 million LTE users, as they are using about 4 gigabytes per month. Currently you have about 18 million users. So you could see that it's quite natural for these concerns to emerge.

Now there are talks that you will be changing 10 mega of your 2.1 gigahertz to use for LTE service provision. I want to ask you. Is this true? And if so, I believe that it is moving in a positive way. However, as your usage license will be expired by the end of next year, if this is going to continue, you will have to be allocated that frequency band immediately after it has been expired.

So I have given you a lot of comments. But I just want to know about your overall frequency-related strategies going forward.

And my second question has to do with your media business strategy. You have announced your plans to separate and merge Hoppin with SK Broadband. So I'd like to know your plans regarding this move.

(interpreted) Hello. This is the Head of the Network Strategy, and I will answer your first question. As of course I know that you understand that in terms of network, the most important asset will be the frequency band. However, when it comes to covering the data traffic usage of our users, it requires various factors, including a variety of solutions, our net operating capabilities, as well as accumulated expertise as a result of our experience over the many, many years.

So I believe that it is quite difficult to say that a certain amount of frequency spectrum equals the direct number in terms of the data traffic that can be covered through that. However, as you mentioned at this particular time, we believe that our frequency spectrum is enough to provide our LTE customers with the data traffic that they need. However, when it comes to changing a part of our 2.1 gigahertz band to use for LTE, we will need further strategy.

So again, when we changed the 3G frequency band to use that 4LTE, you used asked about the competitiveness that it will bring to SK Telecom now. Again, in this question as well, we believe that not only is the frequency band important, however, it is also important to think about how we will use this, how we will operate the network, and how it will be utilized.

Lastly, you asked about the overall frequency-related strategies in the years to come. However, at this particular juncture, we do not have any details to share with you, as we believe that we will need to review various options and discuss with the governments, in line with the government's strategy.

(interpreted) Hello. This is the head of the Media business. And I will answer your second question regarding Hoppin. Hoppin will be separated from SK Planet, and transferred to SK Broadband in September. And this will improve the traditionally existing Hoppin competiveness when it was part of SK Planet, and the mobile results of SK Broadband in the future. So we believe that this will be a move to improve our overall mobile media strategy in the future.

And when these two businesses are integrated, it will a [separate] division, as well as our human resources will be relocated. So we believe that this deal will maximize our business potential, as well the (technical difficulty) of the two businesses. So as you can see, our plans and movements for a better mobile media platform is rapidly occurring at this moment.

The new integrated platform will combine the traditional content and services, as well as provide new various services and value to the mobile media market. It will combine the 6.84 million fixed mobile users, and the 4.5 million users of Hoppin to create user base larger than 10 million. And based on SK Telecom's accumulated expertise, we will also generate new profit-generating models, including sales of content as well as advertising.

(interpreted) Josh Bae, UBS.

Okay. My question is regarding the shareholder returns. You mentioned that you would consider various options regarding that yearend dividend. If you could please elaborate on this, can we interpret that this means there's potential upside to this year's yearend dividend compared to last year's?

Second, regarding the share buyback. You mentioned the KRW400 billion buyback within one year from September this year. And you also mentioned that you would refill the treasury shares you used to take the 100% stake in SK Broadband within two years. Can I just confirm if these two are separate share buybacks? Thank you.

(interpreted) First to answer your first question regarding shareholder return, I think it would be fitting for me to reiterate our basic principle when it comes to shareholder return. The most important for us when reviewing various options for shareholder return is the balance between investment for future growth and shareholder return. Also we plan to maintain this principle at the core in the future, as we review the various options.

So as we review it, we will make sure that we will maximize the enterprise value and meet the KRW55 trillion enterprise value target. And we will make sure to review this hand in hand with our investors.

And under this principle, we will consider various factors when we review what we will do with the yearend dividend, including room for growth as well as the Company's cash flow. And I want to again state that we are reviewing in a flexible manner. And by that I mean that our options do include an increased dividend.

And to answer your second question regarding the share buyback, we did state as you mentioned again during your question, that we will refill the treasury shares used for the acquisition of SK Broadband within the next two years. And we did announce our plans for a KRW400 billion share buyback by September of next year.

Now the KRW400 billion share buyback includes our efforts to make sure to protect what shareholder value that could have been damaged due to our use of treasury shares in privatizing SK Broadband. And it also holds our efforts regarding shareholder return itself.

Although we will have to take into consideration various factors, including the market situation as well as the share price, when it comes to the minute details. But I lastly want to comment that part of the KRW400 billion share buyback will occur within this year.

(interpreted) Jee-Hyun Moon, KDB Daewoo Securities

(interpreted) I have the following two questions. The first is I think that your LTE subscriber mix is increasing at a slower pace than what we have thought. So I would like to hear your strategies regarding the LTE migration in the future.

And my second question has to do with your subsidiaries and affiliates in terms of your long-term strategy. I would especially like to hear your strategies regarding 11th Street and SK Communications.

(interpreted) Hello. This is [Jeong Bun Ho], Head of Marketing Strategy. And I will answer your first question regarding the LTE migration. As the end of the second quarter this year, our LTE subscriber numbers stands at 18 million at around 62% of the entire mix.

Regarding LTE subscriber numbers, we do not have an internal set guidance that we can give you that we have. However, overall after the launch of the Band Data Price Plans, the various launches of devices, as well as greater data usage of users, are all contributing to the current growth in LTE subscriber number. And I believe that based on these factors, by the end of this year we will be able to exceed 65% of the total mix.

Hello. (interpreted) This is [Chun-yo Lin], Head of Finance Management at SK Planet. And I will be addressing your second question.

Regarding your questions that had to do with SK Communications, I believe that you were asking this question regarding the regulatory issue that we have. At this time, SK Planet under the law, has to divest its equity by October 4, 2015.

Currently SK Planet is reviewing various options related to this matter. However, I hope that you can understand my saying this in that as SK Communications is listed in the KOSDAQ market, it will be difficult for me to reveal the details of this issue at this time.

And next I'd like to speak about the 11th Street business. As for the growth for 11th Street, we are taking two main directions.

The first direction is strengthening our mobile customized service. When it comes to the commerce market, the market growth with users using from PCs have come to a halt. So we are focusing our resources and efforts to creating better and more powerful mobile specialized services.

As a result, year on year in the second quarter, our business grew, the mobile business grew by 65% to KRW570 billion. And secondly, compared to the previous year we have strengthened the curation of our Shocking Deal service. And as a result, this particular service grew by over 160% during the second quarter.

And our second direction for growth for 11th Street is entering into global markets. We are utilizing the accumulated expertise of operating 11th Street in the domestic market. And we are currently operating n11.com in Turkey. And when it comes to the Turkish market, three major players are aggressively working to gain greater market share. We also have Elevenia in Indonesia. And we have also successfully entered the Malaysian market as well.

And in the domestic market, 11th Street has gained a very strong foothold, as you may know. And we also have a variety of rich experiences when it comes to customer service as well. So based on this expertise, we will continue to strengthen our competiveness of the 11th Street business.

And also we believe that SK Telecom has an upper hand in terms of providing unique services that our customers may enjoy, including T membership, T bundled services, and OK Cashbag as well. So we believe that through these competitive marketing activities, we will be able to consistently enhance customer value.

(interpreted) Hello. This is the CFO. I would just like to briefly leave you with these remarks. After the handset distribution act was enacted, when we look at the telecommunication market, you can see that the overall paradigm is being shifted. In other words, in the past the competition revolved more around MNP numbers. But this has now changed into more focus being put on handset upgrades. And in the past more focus was put on subsidy provision. And this has now shifted to greater services and products in terms of competition. And I daresay carefully that SK Telecom has led this particular change.

When we look at this change in the overall market, I believe that this is not a short-term change, but that we are at the doorsteps of a passageway that will lead to a long-term change. In other words, I believe that we are entering into what I may call the new normal.

And in this context, the traditional regulatory environment and competition environment can change. So I believe that this can also be interpreted to say that SK Telecom can be evaluated slightly differently than what it has been in the past.

And I believe that when we think about these changes, we must not remain solely focused on the telecommunication market. However, there is a necessity to look toward future growth. So in this context this is why we have constantly presented our pursuit to becoming a communication-based next-generation platform player. And in this context we are trying various things that we believe will result in actual visual results, beginning from the second half of this year. So I want to ask for your continued support in this matter.

And I want to lastly leave you with the remark that when we speak of the enterprise value target, this is not mere rhetoric, but in fact we are taking detailed and concrete measures and strategies in order to truly achieve this target. So I want to again leave you with this remark. And thank you for listening.

(interpreted) This concludes the earnings conference for Q2 2015. Thank you.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.