SK Telecom Co Ltd (SKM) 2017 Q1 法說會逐字稿

(foreign language) 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 Q1 of 2017 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. We also have here with us executives from the relevant business units to help deepen your understanding.

(foreign language) 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. Hwang Keun-joo.

(foreign language) Good afternoon, this is Hwang Keun-joo, CFO and Executive Vice President of the Strategy and Planning Division at SK Telecom. (foreign language) This past March, SK Telecom set an unprecedented record of marking 20 consecutive years of being ranked #1 in the National Customer Satisfaction Index Survey conducted by the Korea Productivity Center.

SK Broadband and SK Telink also maintained their positions in first place in broadband internet and IPTV, as well as international telephony business. We believe these are results of our continued efforts to realize the highest customer value, having been recognized by our users and investors alike. Going forward, we will continue to do our upmost to become a leading company in the new ICT era through constant innovation.

(foreign language) Let me first discuss the consolidated earnings highlights for Q1 of 2017. (foreign language) Revenue recorded KRW 4,234,400,000,000 billion, up 0.1% year-on-year. As for quarter-on-quarter, it fell by 2.7% mainly due to smaller revenue of subsidiaries, including SK Broadband. (foreign language) Operating income increased by 2.1% year-on-year, and 36% quarter-on-quarter and recorded KRW 410.5 billion. This was mainly due to stronger cost control of subsidiaries, including SK Planet and SK Broadband. EBITDA recorded KRW 1,203,200,000,000 billion, up 4.5% year-on-year and up 9% quarter-on-quarter.

(foreign language) Net income also increased due to larger equity method income on SK Hynix among others. While the increase was limited year-on-year due to the sale of LOEN Entertainment last year, it increased by 22.9% quarter-on-quarter to KRW 583.5 billion. (foreign language)

With that, I will now move on to the achievements and strategic direction of our businesses. (foreign language) First, MNO. During the first quarter, we achieved a more sophisticated customer structure in a stable market marked by lower churn rates. With effective segment marketing efforts, targeting the graduation and enrollment season, net handset subscriber additions, especially teenagers, are growing this year.

(foreign language) Also our strong market leadership was confirmed with active sales of iconic devices that were recently launched as well as marketing efforts that enhance the data usage value. We believe that these efforts will translate into a solid foundation for revenue in the future.

(foreign language) Through cooperation with in-company Big Data expert organizations and the data system upgrades scheduled for mid-May, we expect the company's offering of personalized services based on data analysis to become even more accurate. We will do our best to effectively present such differentiated products and services to our users.

(foreign language) Positive signs continue in the media business as well, IPTV subscribers and revenue continued to grow during Q1. With a growing subscriber base, qualitative growth is also taking place with a portion of prime price plans and UHD subscribers growing. Having been awarded the best mobile video app at the MWC this past February, oksusu is seeing continued user growth, thereby contributing to the company's efforts to enhance its competitiveness to become the #1 fixed mobile media platform.

(foreign language) Preemptive efforts in preparation for the IoT era to arrive in full scale continue. As you may know, through partnerships with major construction companies, more and more newly built department complexes now come with our Smart Home solutions built in. Recently, it has also been combined with our voice recognition engine, which allows our Smart Home solution to become even more competitive, while also serving as an effective tool in pursuing partnerships with various players. We will continue to offer new business models with IoT solutions applied to various business areas such as Smart Home, connected car, logistics, manufacturing, finance, energy and public services.

(foreign language) Let me now move on to artificial intelligence, the core enabler that will contribute to the sophistication and differentiation of our businesses. Ultimately, we plan to maximize our understanding of customer needs by combining various data that derive from major businesses areas, such as MNO, media and commerce, with AI technology, and achieve an evolution of the AI platform so that it can meet more detailed personalized needs.

(foreign language) Meanwhile, as our voice recognition device, NUGU, seeks the growth potential of the domestic AI market, sales are growing, once again, this year with continued support. With more users, voice recognition accuracy is further improving and, within this virtuous cycle, daily lifestyle services, such as shopping on 11th Street were recently added. By partnering with affiliates and applying cutting edge AI capabilities, such as natural language processing, cognition and inference, we will advance our technology competitiveness and business value further as well as aim to expand the related ecosystem through open API and partnerships with third parties.

(foreign language) Next, the commerce business carry out by SK Planet. As you well know, the mobile-first trend in the commerce industry is intensifying. Mobile sales already represent more than half of 11th Street's total GMV, and based on Big Data analysis of shopping patterns, 11th Street is offering the optimal product curation, thereby, sophisticating the shopping environment.

(foreign language) Recently leadership in mobile shopping was further strengthened with the launch of a chat box service that makes personalized product suggestions, based on individual customer preferences. Along with such efforts to enhance the competitiveness, we will see to it that earnings results improve as well through a more detailed profit and loss management.

(foreign language) The fourth industrial revolution has already begun and industries around us are being reorganized accordingly. Companies that fail to keep pace with the changes and self-evolve will have no choice but to be left behind. We ask for continued support from our investors and analysts so that SK Telecom may not rest on our laurels, but take a confident leap forward as a leader of the new era to come. Thank you.

(foreign language) We will now begin the Q&A session.

(foreign language) (Operator Instructions) (foreign language) The first question will be provided by Stanley Yang from JP Morgan.

(foreign language) I have the 2 following questions. My first question has to do with the poor marketing cost situation during the first quarter. What are -- what is your outlook regarding the marketing cost in the second quarter? And how about for the entire year of 2017?

My second question has to do with the newly appointed CEO's plans regarding the investment in non-telco business areas and the new ICT area. We heard a lot about the new CEO's vision to invest in these areas. So I would like to hear a little bit about some of the more detailed investment plans. I would also like to know if these plans will have anything to do with either this year's or the mid- to long-term payout policy -- dividend policy.

(foreign language) Thank you for your question. I will -- let me address your first question regarding the marketing cost for the first quarter.

(foreign language) First of all, based on our main principle of transitioning into a competition paradigm focusing on products and services, what we will be focusing on this year is the net handset subscriber additions, and therefore, utilizing that to lay the foundation for future revenue.

(foreign language) Especially in the second quarter, as you all know so well, with the launch of the Galaxy S8, the new flagship device, we will be executing various differentiated marketing efforts, thereby laying a stronger and more solid foundation for revenue growth.

(foreign language) However, it is true that we can't completely exclude the possibility of the competition heating up slightly as a result of the company's efforts to secure the early flagship device demand. However, because we have every determination to continue the current stabilizing trend in our market that is based on differentiated level of products and services, we will manage the marketing cost so that it will not -- it will be similar or maintains at similar levels to that of last year.

(foreign language) Let me address your second question. (foreign language) As was made clear during the conference call for last quarter, in the era of the fourth industrial revolution as the new ICT leader and the leader of the new ICT ecosystem, we will be leading innovation and growth and we plan to maximize total value by concentrating SK Group's ICT capability.

(foreign language) And as for the specific areas of business, we -- based on our foundation of a differentiated level of competitiveness in our core business areas, which include AI network and cloud, as for the MNO business, through deep change of our business model, we plan to secure a foundation of establishing better customer relationships. And as for the media business area, we will secure unique and differentiated type of content, thereby strengthening our mobile OTT capability. In the era -- area of IoT, we plan to realize a seamless connection of various future devices. And lastly, in commerce, as a core monetization tool, we plan to support the maximization of profit of other industry.

(foreign language) Also for the successful establishment of our ICT portfolio, and to create an adequate structure internally, we have gone through with certain measures such as moving the AI business division and the Data Science business division directly under the CEO.

(foreign language) Next let me address your question regarding the shareholder return. (foreign language) First of all, because one of the ultimate goals of a company seeking growth is the enhancement of shareholder return, we believe that it is only right that profit growth as a result of growth investment should be translated into shareholder return. (foreign language) However, if you consider the fact that the new ICT era as well as -- if we consider the opportunity factors of the soon to come 5G era, we believe that it is now time for us to put our upmost in preparing ourselves to grow.

(foreign language) And so for the time being, as long as we have secured the stability of our shareholder return, we plan to maintain the balance between our investment for growth and shareholder return. (foreign language) And we will do our best so that when the investments for growth come to fruition, it will lead to higher and greater shareholder value. (foreign language) That concludes my answer to your 2 questions.

(foreign language) Next question will be presented by Mr. Yang Jong In from Korea Investment & Securities.

(foreign language) I have 2 questions. My first question has to do with your MNO revenue. I can see that your subscribers have grown, but when will we see the revenue turn around? My second question has to do with the fact that during the last conference call, you also said that SK Planet's operating losses will narrow. So if possible, I would like to know your outlook on the annual operating loss.

(foreign language) Thank you, Mr. Yang for your questions. (foreign language) I'll first address your first question. (foreign language) It is true that our MNO revenue has been negatively impacted by the selective discount plans. (foreign language) However, we are attacking the new core demand and we're also seeing results of our strategy to expand high quality subscriber pools, which include moving the kids phone accounts into regular line accounts. And so during -- as a result, during the first quarter, we saw a significant increase in net handset subscriber adds and we believe that these are signs that we are laying the foundation for revenue growth going forward.

(foreign language) And as for the recently launched premium device Galaxy S8, we expect most of those customers to be heavy data users. And so we believe that this will also help to growing MNO revenue. (foreign language) While we believe that the turnaround will take place beginning from the third quarter this year, but we will do our best to advance that in any way we can. (foreign language)

Now moving on to your second question. (foreign language) Regarding the operating loss of SK Planet, it recorded KRW 50 billion this quarter, which was KRW 6.8 billion greater than that of last year, but excluding the spin-off effect, it actually decreased by KRW 41.7 billion. And compared to the previous quarter, it actually increased by -- it improved by KRW 68.7 billion. (foreign language) And during the first quarter with a more laid back market situation and also through more efficient cost structure -- marketing cost structure of 11th Street, we achieved revenue growth as well as improved profitability.

(foreign language) Going forward, maintaining our current direction of achieving a healthy growth, we will continue on with our cost efficiency efforts and hopefully during -- in the second quarter, we are targeting to present you with a more visible revenue growth as well as profit increase. (foreign language)

(foreign language) Next question will be presented by Mr. Kim Hoi Jae from Daishin Securities.

(foreign language) I have 2 questions as well. My first question has to do with 5G. We have seen a lot of growing interest in 5G this year. I would like to hear about what kind of measures are you taking to prepare for the 5G era regarding your network and business models. My second question has to do with the LoRa network. You have begun commercialization of your LoRa IoT exclusive network. And what I'd like to know is, compared to your competitors, what kind of competitive edge do you have?

(foreign language) Thank you, Mr. Kim, for your questions. (foreign language) Let me answer your first question regarding 5G. (foreign language) For an early commercialization of the 5th generation network, we have made a proposal to the 3GPP regarding the completion of NSA, or non-standalone, standardization with major global ICT companies. And we plan to roll out the test network by the year 2017.

(foreign language) One of the main, or core, technologies of 5G is the network slice connection technology and we have made proposal about that, and also we are leading the standardization process and the technology development related to 5G, which include world's first 5G overseas roaming and handover demonstration.

(foreign language) And at SK Telecom we are planning for a world's first commercialization of 5G in the year 2019. And now while there are -- there could be possibilities of very low CapEx compared to investments in LTE, but we cannot give you detailed plans regarding that at this particular time. (foreign language) However, I will say that the actual investment amount can fluctuate according to the frequency band allocation as well as competition strategy, but we will do our best to stabilize our CapEx through efficient network investment.

(foreign language) While nothing is made for certain yet, the business models for the 5th generation era will have to do with solidifying the MNO value through greater data usage and, secondly, expanding connectivity and increasing value in the AI-based new ICT business area. (foreign language) While the profit outlook is not something we can communicate at this time regarding 5G, what we can say is that we will move beyond being just a network provider, but do everything we can to become a smart pipe in the process.

(foreign language) Next moving on to your second question regarding the LoRa network. (foreign language) The current status of the IoT business is focused more on public services and it has not yet moved on from B2B to B2C. (foreign language) In order to break through this current situation and to enter into this era full scale, we believe that the role placed on the shoulders of Telco operators who have the capabilities and the expertise in network as well as the factors that can be utilized including location data and payment and reward system data is very important.

(foreign language) Last year, for the first time, we completed the IoT hybrid network rollout based on our LoRa network. And we also laid the foundation for an ecosystem surrounding that. And we also pushed on with our effort to create new solutions based on partnership. (foreign language) And we are confident that we will be leading the IoT business area because we have a large, accumulated Big Data as a result of various efforts and expertise, which include solution development.

(foreign language) Our hybrid IoT network is a result of a combination of the LoRa network as well as our LTE-M network. (foreign language) With LoRa network, we can provide small capacity, low-speed services with lower cost and for LTE-M network, we can provide the larger capacity with higher speed.

(foreign language) While the LoRa network and NB-IoT have their own pros and cons, however what we believe is more important is who secures the market first and who has a stronger or who is able to create the surrounding ecosystem. And in this context, I believe that it is not -- it won't be meaningful to discuss whether LoRa or NB-IoT is better than the other. (foreign language) I hope that answered your questions. (foreign language)

(foreign language)

(foreign language) This concludes the Earnings Conference Call for Q1 of 2017. Thank you.