SK Telecom Co Ltd (SKM) 2016 Q4 法說會逐字稿

Good afternoon and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference call by the fiscal-year 2016 fourth quarter earnings results by SK Telecom. This conference will start with a presentation followed by a divisional Q&A session. (Operator Instructions)

Now we shall commence the presentation by SK Telecom.

Good afternoon. I am Jeong Hwan Choi, the IRO of SK Telecom. Today's conference call will consist of the presentation on the earnings results for Q4 as well as the annual results for 2016 and the future management plans and strategic direction by Hwang Keun-Joo, CFO and Executive Vice President of the Strategy and Planning Division followed by a Q&A session.

Today we have here with us relevant management here to help deepen your understanding.

Today's call will provide consecutive interpretation. We want to remind you that all the forward-looking statements are subject to change depending on the macroeconomic and market situations.

Let me now present Mr. Keun-Joo Hwang.

Good afternoon. This is Hwang Keun-Joo, CFO and Executive Vice President, Strategy and Planning Division at SK Telecom.

Let me first discuss the consolidated earnings highlights for Q4 and 2016. Revenue for 2016 recorded KRW17,091.8 billion, down 0.3% year on year while recording KRW4,352.3 billion for Q4, up 2.6% quarter on quarter due to revenue growth of subsidiaries including SK Broadband.

Operating income and EBITDA for 2016 recorded KRW1535.7 billion, down 10.1% year on year and KRW4603.4 billion, down 2.1% year on year respectively due to depreciation and increased losses of subsidiaries.

As for Q4, operating income recorded KRW301.9 billion, down 28.8% quarter on quarter and EBITDA recorded KRW1,104.2 billion, down 7.1% due to year-end seasonality among others.

Mainly due to divestiture of investment assets, net income for 2016 increased by 9.5% year on year to record KRW1,660.1 billion and recorded KRW474.7 billion for Q4, up to 47.4% quarter on quarter.

The provided earnings result show that while a temporary rise in cost related to responding to competition and loss of subsidiaries has had a negative impact on the profit, our M&O revenue grew quarter on quarter and media revenue remains strong thereby proving that the fundamentals of our business are unshaken. We will continue to manage the quality of consolidated earnings including our subsidiaries to achieve improvement.

Let me now move on to the strategic direction for the year 2017.

At SK Telecom we plan to make the leap to become Korea's leading new ICT Company by discovering new business models that reach beyond the current competition paradigm as we welcome the era of the fourth industrial revolution marked by convergence and intelligence. To do so we will further strengthen our M&O leadership as the number one operator as well as expand the business portfolio into the two axis of media and IoT based on our unique AI platform thereby leading the new ICT ecosystem.

First, in the M&O business we will achieve revenue growth based on our sound handset subscriber base by increasing the customer pool of premium price plans. Also through cooperation with various players in the industry and developing 5G core technologies, we will continue to strengthen our prestige as the industry leader pioneering the 5G era.

In the media arena we will continue the current growth. With SK Broadband at the center we will grow the giga-internet and higher price plan subscriber base as well as enhance the content power while also strengthening the competitiveness of the media business such as IPTV by utilizing the mobile channel oksusu. We will also strengthen the data analysis system to provide customized content tailored to each user through more accurate analysis of usage patterns.

As for IoT, since the commercialization of the LoRa network last year we are expanding the ecosystem through partnerships and cooperations with various players. Going forward, enterprise solutions, self-driving cars and smart home will be our main business areas as we continue to seek various business models and monetization.

The quality of data accumulated throughout the IOT business development process will serve as a bridge to discovering more business models.

As technologies related to AI and cyber agents take center stage, our voice recognition device NUGU will also become more functional with greater personalized and intelligent services centering on search and suggest features. While such AI-based platform technologies seek their own business models, we will also be supporting demonetization of the aforementioned business areas organically integrated into the form of commerce.

I will now discuss the Company's management plans for the year 2017. First of all the target consolidated revenue for 2017 is KRW17,800 billion. We will do our best to grow our revenue by launching new products and services that provide greater customer value for data usage as well as continuing to enhancing the competitiveness of our media and commerce business areas.

SK Telecom ended last year with a non-consolidated CapEx of KRW2 trillion as was guided at the beginning of the year. We are also planning on KRW2 trillion for 2017. While there are factors that entail new investments such as the newly acquired frequency spectrum for ICT related businesses we will manage the expenditure at a similar level as that of last year through higher investment efficiency.

The annual dividend for 2016 was determined at KRW10,000, including the paid out KRWl,000 interim dividend at the meeting of the Board of Directors and will be declared final after the approval of the Annual General Shareholders meetings. We will continue to maintain the balance between a stable shareholder return and growth.

Going forward, SK Telecom will continue to lead the ecosystem of the new ICT era and do its utmost to earn the recognition of our customers and the market through growth. We ask for the continued support of our investors and analyst. Thank you.

Now Q&A session will begin. (Operator Instructions). [Kim Hoi-Jae], Daishin Securities.

My first question has to do with the main areas of focus in terms of the new CEO's plans for 2017. And my second question is, you announced your plans to invest KRW11 trillion over he course of next 3 years including -- in various areas including the new ICT business area on January 11. And my question is will this plan have an impact on your CapEx plans for the New Year?

First of all, thank you for your question and let me address your first question regarding the main areas of focus of the new CEO.

First of all, our new CEO firmly believes that SK Telecom's goal is to secure the leadership as the new -- as the leader in the new ICT ecosystem within the era of the fourth industrial revolution. He also believes that we must lead innovation and growth. And when we talk about new ICT at SK Telecom, it refers to the conversions of the innovation technologies, including artificial intelligence and big data and also the creation of the new business model throughout the industry, thereby creating a system of sharing, openness and cooperation.

And in order to do so we will first of all strengthen our traditional core business area, which is the M&O business model and also focus on the two axis of our business models, which are media and IoT.

And we also plan to create our unique artificial intelligence platform. So we plan the convergence of all of the aforementioned four business areas and we believe that they should ultimately be integrated with the commerce business model. We believe that all of this will thereby create a virtual cycle in which all of these business areas are organically integrated. And to achieve this bold innovation is necessary and this will be achieved by openness and cooperation with various industry players, and this refers to both domestic and overseas companies. And if deemed necessary we are also willing to cooperate with our competitors as well.

Let me now address your second question regarding the impact of the announcement of our plans to invest KRW11 trillion on our CapEx plan.

As you mentioned, we did make announcements on our plans to invest KRW11 trillion over the course of next three years including investments -- including SK Broadband and SK Planet in order for us to lead the establishment and development of the new ICT ecosystem and to promote consistent and permanent growth.

To go into a little bit more detail, we will be allocating KRW6 trillion in infrastructure for network leadership and KRW5 trillion in establishing the ICT ecosystem and to finding the next growth engine.

And these investments not only include investments and network but also R&D and technology as well. As for when and how much these investments will be taking place, we will make sure to communicate it with the market according to the overall industry environment and changes in the trend.

And SK Telecom will make sure to refrain from any sort of excessive investment burden through efficient network investments.

[Yang Jongin], Korea Investment & Securities.

I have the following two questions regarding your subsidiary companies. The first question has to do with SK Planet. I like to hear about the overall business direction in 2017. We are seeing revenue growth, so when will we be able to see the deficit shrinking. And also if the external funding does not go as planned, will this lead to lower marketing cost?

My second question has to do with SK Broadband. I would like to hear about the major business achievements as well as your business direction and outlook for 2017.

Thank you for your questions. Among the two questions, let me first address your question about SK Broadband.

As you all are aware of with the -- with new added value being created on giga-internet or IPTV on the fixed line service, we are seeing a new chapter being open on the fixed line business area.

Especially when you look at the IPTV business area it has been showing visible achievements throughout all different indices including revenue ARPU and subscriber number. And it has thereby led the growth of SK Broadband. For example, in 2016, the annual IPTV revenue grew by 33.4% compared to the previous year and ARPU grew by 12% and the subscriber base grew by 13.8% compared to the previous year.

As for high speed internet, with the expansion of the giga coverage as well as subscribers subscribed on the giga Internet, 2016 was a year for us to lay the foundation for full-scale growth. For example, when you look at the giga-internet subscriber portion from 4% in 2015, the number grew to 15% in 2016.

In the new year SK Broadband will base our plans on our strong service and content as well as infrastructure which are at a differentiated level of our competitors, and so we will not only achieve the subscriber base growth but also we will be expanding the portion of high added-value services including UHD and giga-internet thereby continuing the current strong growing trend.

As for your question regarding SK Planet, let me hand the mike over to [Hanshue Park], the Head of Finance Management at SK Planet.

Hello, I am Hanshue Park, as was introduced, Head of Finance Management at SK Planet.

If I may just briefly look over what was achieved in 2016 before I explain to you our plans for 2017, while it is true that our deficit saw a little, slight increase due to our aggressive market operating efforts, however when you look at the [GNV] and [UV] numbers, internally we believe that we have succeeded in securing the industry leadership.

If you look at 2017, we stand firmly by our direction that we will either maintain or strengthen the current leadership that we have in the industry. However, when it comes to the deficit or the gain and losses, it will definitely be improving and we expect it to turn around by the year 2019.

There are various factors that I can present to you as a foundation for our plans to achieve improvement in our gain and losses. The first I would say is the willingness of the management. From 2017, we will be selecting and concentrating areas of focus and we will also be strengthening the cost efficiency as well. So we firmly believe that numbers will definitely improve and you will be able to see them turn around by 2019.

And the second factor I would have to say is the level and direction of the market competition. Currently as you all are aware, the profitability of the players in the market are not very good. And recently when you look at our competitors all of us are moving toward reducing costs. Therefore I believe that we will be able to see a qualitative change in terms of market competition. And I believe that market competition will indeed be alleviated.

SK Planet is also planning to do so, we will be focusing more on providing quality products and services which include various customer friendly features including suggest and search features and also conversation-type commerce.

And to answer your second question, as of the end of 2016 SK Planets holds KRW300 billion worth of cash and we are also capable of financing whatever we need, therefore we -- it is safe to say that we are capable of running our own business for the time being. And so regardless of what happens with the external funding plans, I can say that there aren't any issues regarding liquidity.

And in 2017, again as I mentioned before, we will be focusing on selection and concentration and strengthening the cost efficiency. So we will not or we will refrain from cost-based competition. And so I want to make clear that the results of our plans for external funding and the marketing costs are not directly related.

Joon Lee, Citigroup.

I have two questions. The first has to do with SK Telecom's strategies regarding market operation for 2017. I would also like to know about your M&O profit outlook for the year as well.

The second question has to do with SK Planet's external funding, are there any details that you can update us on? And if these plans do not go as was initially planned by SK Planet, will SK Telecom be supporting SK Planet in any way? And also does SK Planet have any plans to acquire other commerce companies?

Thank you for your question, let me first address your first question regarding SK Telecom's market operation strategies for the new year.

At SK Telecom we stand firmly by our principal in terms of market direction that we will refrain from destructive market share competition and move to one that is based on quality products and services that give our customers true value.

Especially in 2017 through accurate customer data analysis we will strengthen the competitiveness of our products and services. We will also create new market centering on handset accounts and by securing a market operation system as that is based on cost efficiency, we plan to lay the strong foundation for stable profit growth.

And through these efforts, we will grow the Company by providing the actual value to our customers as well as the market that beset our prestige as the number one operator.

Let me now move on to your question regarding the M&O profit outlook for 2017. Excluding the impact of the elimination of the sign-up fee, despite the growing subscribers subscribed to the selective discount plans we believe that the MNO service revenue, the falling trend of the M&O service revenue has become somewhat stable.

Currently the data needs are continuing to grow, which is leading to the growth of subscribers subscribed to premium price plans as well. So again, through accurate data analysis of our customers' usage pattern we will increase the product line-up that has greater so-called willingness to pay on the customers' end thereby translating this to greater M&O revenue.

And to give you a little bit more detail on that, over 40% of all new subscribers and handset upgrade subscribers are opting for price plans higher than the so-called 59 or the band data Perfect price plan. And also including T signature other customer-benefit oriented products are leading to an up-selling.

Now, moving on to your question regarding the funding plans for SK Planet. We firmly believe that the e-commerce market will continue to grow, and our plans are to make sure that SK Planet becomes the number one leader in that area.

However, along with the e-commerce business area SK Telecom is also has plans to execute investments in various areas of new ICT, namely IOT, media and platform. And so from a overall management portfolio management point of view, as well as considering resource allocation in these various areas we do not have any plans for capital increase as of now.

And first regarding your question, when you look at the current competition situation in the market, it is becoming very fierce, and when that happens it is inevitable that the profitability of these companies are compromised. And so when that happens the overall restructuring of the market and the industry is inevitable.

However, what I can tell you at this time is that SK Planet is not reviewing any potential M&As or investment in distributors as of now. Regarding any details that we may update you on regarding the funding let me hand the mike over again to Mr. Pak.

Yes, to give you a little bit of update on the funding plans, as you know the overall process is a series of negotiations. We began the process beginning last year and it is true that it is being somewhat delayed due to disagreements on the evaluation and terms of the funding.

And as I have said before, SK Planet is fully capable of financing what it needs and we also hold the cash that we need for the time being. So there aren't any issues regarding liquidity because acquiring further resources is not the only reason of our external funding plan. We do not have any reason to rush this. So we will take the time necessary in carrying out this process. As for the timeline, the size and the detailed terms of the funding, we will be sure to communicate that to the market when they become more concrete.

[Lee Hang Mo, Mirae Asseteo].

I will just add some of the details that I had, I wanted to ask you into one question regarding the depreciation, your marketing cost expenditure and your numbers of the subsidiary companies what is the profitability outlook, the gain and loss outlook for 2017? And I would also like to hear about the mid- to long-term profitability outlook of the Company?

Thank you, Mr. Hang Mo for your question. Let me answer your question on the earnings outlook for 2017 as well as the mid- to long-term outlook. In 2017 we will be managing the growth and profitability not just on SK Telecom alone but from a portfolio point of view that include our subsidiaries. As for the top line, we will achieve growth for the consolidated revenue through growth on M&O revenue as well as new business revenue growth that include our subsidiaries and IOT business area. M&O revenue for SK Telecom is continuing, will continue to improve because, as you may know, the subscribers opting for the selective discount plans is becoming a little bit more stable and we are also seeing consistent data usage growth.

Also new business area revenue that include our IOT business will continue to grow. Therefore we believe that the overall M&O revenue for SK Telecom will be improved due to these factors. As for our subsidiary revenue, as you know SK broadband and SK Planet are both showing strong signs of growth and they will contribute greater to the consolidated revenue.

In terms of operating cost for SK Telecom, we will achieve cost efficiency through a more stable market and as for our subsidiaries through efficient resource management, namely the selection and concentration method we will make sure to achieve overall profitability improvement.

Ahn Jae-Min, NH Investment Securities.

I have two questions. You did briefly touch upon this, but I am quite concerned about the following M&O market share. I believe that this will lead to a slower revenue growth, and so I'd like to hear your plans on how to respond to that.

My second question has to do with the regulatory changes that may occur this year. There could be a early presidential election taking place this year and there are certain sunset clauses that will expire this year as well. So I would like to hear your plans regarding those changes.

Thank you, Mr. Ahn, for your questions. I will have Mr. [Im Byung-Hoo], Head of the Service Strategy answer your first question regarding the falling market share. And as for your second question regarding regulation I will hand the mike over to Mr. [Lee Sang Heon] Head of CR Strategy.

Hi, I am Im Byung-Hoo, Head of Service Strategy as was introduced. First of all, as you mentioned, it is true that our market share did slightly suffer. However if you look at the overall market environment we are seeing a more stable market that is focused on handset upgrades and you can also see that MMP numbers are shrinking.

And so under our strong direction, strategy direction of providing quality products and services that can benefit our customers in a very real way, we will refrain from market share competition and transition into a strategy that focuses on growing our subscriber base through quality products and services.

Hello, I am Lee Sang Heon, Head of CR Strategy, and I will be answering your question regarding the regulatory changes of the New Year. First of all, due to various recent situations and state of affairs, it is quite difficult for us to anticipate what the ICT-related policy direction will be of the next administration.

However, basically we believe that it will be focused on number one strengthening the national competitiveness through the fourth industrial revolution and, number two, finding the next growth engine. And I believe -- and we believe that the policy will also be focused on those two things as well.

And from an overall point of view considering the importance of the role operators have to play in achieving the fourth industrial revolution, we expect quite reasonable discussion to be held that takes into consideration the need for growth and customer benefit as well as how operators can contribute to these changes.

Next to address your question regarding the expiration or the amendment regarding the sunset clause in the Distribution Act. The subsidy cap is expected to expire by September this year and we expect there will be further discussions on amendments in the details of the Handset Act. We believe that even after the subsidy cap expires various things will be taken into account including the initial intentions of the Handset Act and the balance and the room for investments for the operators.

Ro Seungjoo, CLSA.

I have two questions. The first has to do with your dividend. We saw an increase on the dividend gains on Hynix and also your competitor has increased the dividend as well. So what are your plans regarding your dividend policy?

And my second question has to do with the new administration of the United States. There are talks about change, making changes to the net neutrality issue. So I would like to hear about SK Telecom's point of view on that. And do you have any plans to make it into a public discussion in Korea as well?

Thank you for your questions first all. Let me first address your question regarding the dividend policy. As you mentioned, there was an increase on the dividend in 2016 by SK Hynix, but this is not directly related SK Telecom's dividend policy.

As of now we believe that the annual dividend for this year will be maintained at the similar level of that of last year. As was mentioned during today's call, in order to lead the establishment and development of the new ICT ecosystem we plan to pursue a consistent and permanent growth going forward, and to do so we will be investing in -- we will be making investments to establish the ecosystem for the future as well as to lead the new network era.

However through efficient investment execution and resource allocation we will make sure to protect our shareholder value and also we will make sure to continue to maintain the balance between investment for growth and dividends. And going forward we will maintain our current principle that we want to make sure to protect or ensure both the Company's growth as well as increasing shareholder return in the future.

Regarding your next question on the net neutrality issue I will have the Head of CR Strategy answer this.

As for the net neutrality issue in Korea, the related guideline was devised in 2011 and two years after that specific plans and guidelines regarding a reasonable network operation was set in place and all operators are abiding by that. And at the end of -- near the end of 2016 KCC made announcements regarding specific guidelines on the net neutrality issue in Korea. However, the specific details have not yet been made.

And as for the United States, which has been strictly against net neutrality, they recently appointed someone completely opposite of that to head the FCC. However, as for specifics regarding Korea we will have to wait and see. However, what I can say is that we believe that in the future by activating various services including the zero rating the burden placed on customers will be decreased, and I think this will also have a positive impact on the revenue as well.

With that this concludes the earnings conference call for Q4 2016. 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.