SK Telecom Co Ltd (SKM) 2017 Q2 法說會逐字稿

(foreign language) Good afternoon, and good evening. First of all, thank you all for joining this conference call. And now we'll begin the conference call by the Fiscal Year 2017 Second 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.

(foreign language) Hello, I am Jeong Hwan Choi, the IRO of SK Telecom. Today's conference call will consist of the presentation on the earnings results for Q2 of 2017 and the future management plans and strategic direction by Young Sang Ryu, CFO and Executive Vice President of the Strategy and Planning Division, followed by a Q&A session. (foreign language) We have here with us executives from relevant business divisions to help deepen your understanding. Before we begin today's conference call, which will provide consecutive interpretation, we want to remind you that all forward-looking statements are subject to change, depending on the macroeconomic and market situations.

Let me now present Mr. Young Sang Ryu.

(foreign language) Hello, this is Ryu Young Sang, CFO and Executive Vice President of the Strategy and Planning Division at SK Telecom. (foreign language) Let me first discuss the consolidated earnings highlights for Q2 of 2017. (foreign language) Revenue recorded KRW 4,345.6 billion, up 1.8% year-on-year and up 2.6% quarter-on-quarter. Top line growth was led by continued growth of major subsidiaries such as SK Broadband and SK Planet as well as our MNO business revenue turnaround. Also, thanks to efficient cost management of our subsidiaries among others, operating income rose by 3.9% year-on-year and by 3.1% quarter-on-quarter to record KRW 423.3 billion. Net income recorded KRW 620.5 billion, up 113.2% year-on-year and 6.3% quarter-on-quarter, mainly due to increased equity-method income on SK Hynix.

(foreign language) In the MNO business, marketing cost increased due to targeting efforts related to net ad demand this year. And depreciation cost also increased due to the frequency spectrum newly acquired last year, leading to a 3.3% fall year-on-year in nonconsolidated operating income. Meanwhile, MNO revenue recorded KRW 2,721.2 billion up 0.7% year-on-year, thanks to a more accurate offering of data analysis based personalization and services and a larger handset subscriber base.

(foreign language) SK Broadband's revenue recorded KRW 730.1 billion, up 1.9% year-on-year. In the IPTV business, UHD set-top subscribers exceeded 1.5 million. And paid content consumption continued to grow, leading to a 23% revenue growth year-on-year. Thanks to such qualitative growth of the IPTV business, SK Broadband's operating income rose to a record high of KRW 31.6 billion.

(foreign language) SK Planet recorded a revenue of KRW 274 billion, up 5.4% year-on-year while managing to decrease its marketing cost. And operating loss recorded KRW 71.6 billion, a KRW 35.1 billion improvement year-on-year. This was mainly achieved by efficient cost management, including offering of customized coupons based on customer analysis as well as liquidating some O2O platform assets under the selection and concentration principle.

(foreign language) With that, I will now move on to the strategic direction and major business achievements. (foreign language) SK Telecom has made clear its vision to become the leading new ICT company with MNO as the base and media and IoT as the 2 main axis. And strengthening the competitiveness of our core infrastructure is a crucial factor in achieving this goal. (foreign language) The AI platform serves as core infrastructure that organically connects the company's MNO, media, IoT and commerce businesses. By connecting our AI platform to T Map, the nation's #1 navigation, our unique strength and innovative capacity will be further strengthened. The integration of AI and T Map will not only lead to new opportunities, such as car life services, but also allow a differentiated level of data asset accumulation that is unseen in any other player. Through such data assets, our company will come to understand our customers better than anyone else in the industry.

(foreign language) Along with AI technology, the communication network is a core infrastructure that serves as the very foundation for leading the new ICT era, especially the 5G network competitiveness is an important basis for future industries, including IoT and media. As a first in Korea, SK Telecom succeeded in demonstrating 5G communication on the 3.5 gigahertz frequency bandwidth, and was awarded the Best Innovation for LTE to 5G Evolution as a recognition of our achievements for 5G based connected car development, which attests to the company's position as a leader in future network evolution.

(foreign language) Through the recent strategic partnership with SM Entertainment, we have also set the steppingstones for business opportunities in Japan, China and Southeast Asian countries by combining our AI and media platform with SM's [standard] and content. We also expect our advertising business to stretch beyond the limits of captive advertising to create a new innovative model that will induce clients' participation and content investment from the planning stage, thereby enhancing its marketability. Going forward, we will continue to create win-win models with our partners by leveraging our assets in the new ICT area. (foreign language) We ask for continued support from our analysts and investors so that we may overcome that challenging environment the telecom business faces today and reap the fruits of growth. Thank you.

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(foreign language) (Operator Instructions) (foreign language) The first question will be provided by Mr. Hoi Jae Kim from Daishin Securities.

(foreign language) I have 2 questions. The first question has to do with the current administration's announcement that took place on June 22 regarding the State Affairs Planning Committee's measures to reduce household communications expenses. I would like to hear the company's stance and how you plan to respond to this. My second question has to do with SK Planet. We'd like to know what the current status is in terms of funding for SK Planet, and also there has been talk about splitting 11th Street off. So I'd like to hear about your thoughts on that issue as well.

(foreign language) Thank you, Mr. Kim, for your question. (foreign language) Let me first address your question regarding the State Affairs Committee's measures to reduce household communication expenses. (foreign language) We believe that when you look at the current measures set forth by the State of Affairs Planning Committee, it can greatly deteriorate or damage the company's profitability, thereby impacting greatly the fundamentals of the companies which is crucial to investing in future growth businesses as well as 5G network investment. And we believe that it will also have a negative impact in the nation's competitiveness for -- in future industries. (foreign language) We also believe that it will have a negative impact on the overall ICT industry ecosystem's competitiveness, which include the distribution network, the equipment companies and content and platform players, which will ultimately lead to a poorer mobile voice call quality and poorer services. So we believe that there are various side effects entailed in this issue, which will lead to damaged consumer welfare. (foreign language) And so when it comes to this issue, we believe that we will need to continue our efforts to meet at a junction with the government through continued discussion. And we are open to all options, which include legal responses and also restructuring of certain institutions, which include the supplying of the supply system of handset devices. (foreign language) Moving on to your second question regarding funding for SK Planet. (foreign language) First of all, SK Planet does not have any immediate issues regarding liquidity. However, in order to secure the necessary resources and partners in order for the company to secure its leadership in the e-commerce field, we are looking at a variety of strategic options. (foreign language) These options include funding, of course as well as certain strategic partnerships with various companies. However, when it comes to the actual timeline, the size and conditions for funding, nothing has been decided as of yet. So we will be sure to communicate that with the market when it becomes more concrete.

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

(foreign language) I have the following 2 questions. The first has to do with the separate disclosure of subsidies that is set forth in the Handset Distribution Reform Act. And I also would like to hear your comments on the difference between the government's and the company's stance when it comes to the self-supply system for handsets. And my second question is, these days we are seeing a stronger regulatory pressure on tariffs. And there are concerns regarding how it may interfere with your investment plans for 5G as well as efforts to create new businesses in -- within the fourth industrial revolution. We'd like to hear your comments on what you have planned for 5G investment and whether this kind of regulatory pressure will alter that plan.

(foreign language) Thank you, Mr. Yang, for your questions. (foreign language) You asked 2 questions. Let me address your second question and then I will toss the first question over to Mr. Lee Sang-Heon, Head of CR Strategy. (foreign language) So to respond to your first question. (foreign language) As I mentioned previously, if the measures to reduce the household telecommunication fees is adopted, we believe that a certain level of damage in management environment for the operators is inevitable. (foreign language) And we are indeed concerned that it will negatively impact our investment plans in 5G network. (foreign language) However, because our investment in the 5G network and growth that will come from it is very crucial to the mobile operator's mid- to long-term plans, we will do our best to make sure that everything happens in an efficient and rational manner. (foreign language) However, I do regret to tell you that as of the details, it is not the right time for us to tell you that. (foreign language) I will now have Mr. Lee Sang-Heon answer your first question regarding regulation.

(foreign language) Hello, this is Lee Sang-Heon, Head of CR Strategy. The separate disclosure of subsidies is something that has been discussed from the very initial stages of the adoption of the Handset Distribution Reform Act. And now that the Handset Act has changed the market structure today, I think it has a different meaning in today's context. Unlike the image that the term separate disclosure of subsidies has, it can entail a great deal of side effects. So we do believe that a cautious approach is crucial. (foreign language) Under the separate disclosure structure, if that were to happen, there is a high possibility that the manufacturers will shift their focus from the disclosed subsidies to directly providing subsidies to the distribution networks. And this can damage consumer benefit. So we need to take a very cautious manner. (foreign language) We believe that adopting the separate disclosure system must be preceded with necessary measures that can help prevent the rising of consumer costs in terms of the handset devices as well as measures to resolve market confusion. (foreign language) Next, moving on to your question regarding the self-supply system for handsets. (foreign language) Currently, the challenge that mobile operators are faced with today is the fact that we are under constant pressure to lower tariffs while at the same time having to share the burden of providing subsidies for handsets. (foreign language) And we believe that under this kind of structure, it will be very difficult for us to maintain our business fundamentals, which are crucial to achieving the important future task, namely leading the fifth generation network and the fourth industrial revolution. (foreign language) And so in the context that certain -- that such a distorted structure must be improved, the reviewing of the handset self-supply system can be an option. However, at this time, nothing has been made certain yet. (foreign language) If we believe that adopting a complete handset self-supply system must be preceded with discussions regarding the overall regulatory frame transition for the telecom market which include the Handset Distribution Reform Act, and we believe that a detailed review on how it will impact the various stakeholders within the overall ICT industry's ecosystem is needed. (foreign language) Thank you.

(foreign language) The next question will be presented by Mr. Stanley Yang from JPMorgan.

(foreign language) I have 2 questions. The first has to do with SK Hynix. It's been doing very well in terms of its share price for the past few months, and as a result, of course, its equity value has risen quite a bit. Do you believe that it has been fully reflected in SK Telecom's corporate value? And if not, what are your strategies to make that happen? My second question has to do with 11th Street. I'd like to know the GMV for last year as well as your GMV growth outlook for this year. We are seeing that marketing costs are being -- are normalizing and we do have concerns that it can lead to a slower GMV growth.

(foreign language) Thank you, Mr. Yang of JPMorgan for your questions. (foreign language) I will answer the first question regarding SK Hynix's value, and I will toss the mic over to Mr. Park Young-Gyu, Head of Financial Management at SK Planet, regarding your question on 11th Street. (foreign language) So to move on to your first question. (foreign language) First of all, thanks to the bullish semiconductor industry as well as strong numbers, our equity value of SK Hynix has exceeded KRW 10 trillion. So taking that into consideration, I do not think that it is fully reflected in corporate value of SK Telecom. (foreign language) And I fully understand that when it comes to SK Hynix, the market's demand in terms of higher business synergies between the 2 companies and the connection between the 2 companies' dividends as well as a restructuring in terms of governance structure is something that is out there. And I fully understand that. (foreign language) I cannot announce any concrete details as of yet, but going forward, including SK Hynix, we will review various options when -- in order for us to connect our subsidiary values (inaudible) on enhancing our own corporate value. (foreign language) And I will have Mr. Park Young-Gyu for your second question.

(foreign language) Hello, I am Park Young-Gyu, Head of Financial Management at SK Planet. (foreign language) So when it comes to the GMV targets, I have to ask for your understanding that we cannot reveal detailed numbers due to competition-related issues. However, what I do -- what I can say is that when it comes to the second half of this year, traditionally due to the seasonality of the fourth quarter, you tend to see a higher level of competition in the fourth quarter, especially when compared to the first and -- first, second and third quarters. (foreign language) However, and I want to emphasize that this is my personal outlook, but when you consider the current financial status of the market, I don't think that we have to anticipate a very overheated competition in the market. We will continue to stand by our goals to achieve healthy growth as well as efficient marketing. And we will maintain these principles in the future. So although it is true that compared to other industries we will continue to see a relatively high growth going forward, but compared to the previous year, growth rate wise, I think that it can slightly fall. (foreign language) And if I may add on to that, when you look at the market, it is growing greatly through mobile sales. Now we see 60% of total GMV on mobile. And when it comes to mobile unique visitors, we are an unmatched #1. So when it comes to the growth rate for 11th Street, I do believe that it will outperform the market growth rate.

(foreign language) If I may ask you one more question regarding how you said you could outperform the market's growth rate. When you look at the official statistics from January to May this year, online GMV grew by 20%, the industry's online GMV. Does that mean that 11th Street can do better than that, so over 20%?

(foreign language) I think you have to look at the online market and the e-commerce market differently, separated. When you talk about the 20%, it's talking about the total online market. So while there are going to be differences in the 2 markets, I, again, have to ask for your understanding that I am not able to give you detailed numbers at this time.

(foreign language) The next question will be presented by Mr. Hongsik Kim from Hana Financial Investment.

(foreign language) I have 2 questions. My first question has to do with the growing pressure on the telcos to lower their tariffs. I think that, overall, the telecommunication companies are not seen in a positive light these days. And I think that, that does have certain -- that, that is related to how the regulatory trends are changing. And so a lot of the most -- the majority of the population thinks that we are paying too much for telecommunication fees. And this is something that I have, in the past, brought up quite a few times but I think that there is a side effect in the integrated billing system, which is the case as of now because people feel -- people cannot but feel that they are paying too much for their telecommunication fees. So my question is do you have any plans to improve that? Some examples of that could be separate billing to separate the billing for handsets from your actual service fees. Or you can make some changes to your distribution channels or you could think about partnerships with financial companies. And my second question has to do with your relationship to the current administration and when it comes to sharing the burden of these policies that are being talked about in order to reduce telecommunication fees. Do you have any plans to approach the government with that issue?

(foreign language) Thank you, Mr. Kim, for your questions. (foreign language) I will be answering your first discussion, and your second question will be answered by Mr. Lee, Head of CR strategy. (foreign language) First of all, we do think that there is a possibility that if we were to separate the handset billing with our actual service billing, our consumers can directly see that the actual level of what they're paying for telecommunication fees. (foreign language) However, when it comes to separate billing, first of all, it is always -- it is still going to be us who are billing the both -- both bills to our customers. So we believe that the impact is going to be limited. And also there is an issue with convenience because they will be charged twice instead of once. And so while we are reviewing various options, including separate billing, I have to ask for your understanding that I cannot give you a detailed answer in this issue. (foreign language) And when it comes to the household telecommunication expenses, we do understand the -- not only the economic side of it but also the psychological side of it and that our consumers feel that they are paying too much. So we will do everything we can in order to resolve this issue by reviewing various measures. (foreign language) And now moving on to your second question.

(foreign language) Hi, this is Sang-Heon Lee of the CR Strategy Office. We fully agree with the intentions of the government's moves to reduce the household telecommunication fees. However, when it comes to the methodology, I think there is room for discussion. (foreign language) For example, when it comes to providing rate discounts for the vulnerable groups of society, we are actually already providing about KRW 500 billion per year in rate discounts for the vulnerable groups. However, we are also considering other measures to extend that benefit. However, one issue is that because this is a welfare-related issue, I think there is room for further discussion whether this should be completely -- this burden should fall completely on the shoulders of the companies or it can be shared with the government. This is something that we need further discussion on, and we do have plans to approach the government with that. (foreign language) And while taking that approach, we plan to consider the fact that when it comes to the telecommunication fee reduction, it needs to have a balance with other public utility services, including electricity, gas and water.

(foreign language) The next question will be presented by Mr. Nam-kon Choi from Yuanta Securities.

(foreign language) I want to add on to what Mr. Yang asked you a while back. I believe that the reason SK Hynix's stock prices are not connected to SK Telecom's corporate value is because of 2 issues. The first is that the market does not fully understand why it is good for SK Hynix's stock prices to do well when it doesn't really benefit the shareholders of SK Telecom. For example, I personally think that if SK Hynix's dividend is raised, then it should at least be paid out in some way, maybe in as a special dividend or another, to SK Telecom's shareholders. If you are considering any other M&As in the future and if you expect your shareholders to agree to that deal, I believe that such measures are necessary. So I'd like to hear your thoughts on that. And my second question has to do with the revision in the Fair Trade Act in that holding companies now have to hold at least 30% of their subsidiaries. And if that is the case, then when it comes to SK Hynix, we are going to be needing around about KRW 5 trillion in order for us to meet that condition. So that's going to be quite a burden on our hands. What is your response to that?

(foreign language) Thank you, Mr. Choi, for your questions. (foreign language) Let me first address your question regarding SK Hynix. (foreign language) Now when it comes to the -- this year's annual dividend for SK Hynix, it is something for SK Hynix's Board of Directors to decide. (foreign language) And so as for the size or whether the payout ratio will change, it has not been decided yet. (foreign language) And when it comes to SK Telecom, in order to achieve our goal of transitioning into a new ICT company, we are pursuing both stable dividend and growth. (foreign language) And so for the time being, our gains -- our dividend gains on SK Hynix will be used in investing in future growth industries to achieve the next -- to secure the next growth engine. And we believe that, that will ultimately lead to greater value of our enterprise value and ultimately, of course, enhance the shareholder value. (foreign language) And now to answer your second question regarding the revisions in the Fair Trade Act. (foreign language) Now when it comes to the actual equity holding conditions for subsidiaries, because the relevant laws and institutions have not been set in place yet there -- what we can give you is quite limited. (foreign language) Going forward, when the legal -- when the relevant laws and institutions are set in place regarding the conditions and details for this revision, we will be sure to review the most reasonable and rational options. (foreign language) Thank you.

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(foreign language) The next question will be presented by Mr. Dan Kong from Deutsche Securities.

(foreign language) I have 2 questions. The first has to do with your subsidiaries, namely SK Broadband and SK Planet. First, for SK Broadband. Initially at the beginning of the year, you talked about how you can -- you anticipate a narrower margin due to investment in content. However, actually, we are seeing improved margins. So I'd like to know your margin outlook for the second half of the year. And for SK Planet, rather than detailed numbers and whatnot, I think that there are certain expectations in terms of how we are no longer seeing a [chicken] gain in the industry. What are some of your competitive factors or some of the things that you believe contribute to your competitive upper hand for SK Planet? And what is your strategy? I'd like to hear about your big picture in the industry. My second question has to do with the regulatory environment. There has been announcements of increased investments in the fifth generation network, and I don't know if regulatory trends are -- have reflected this or not. But there has been a lot of talk, including issues regarding net neutrality that seem favorable for the telcos. So I'd like to hear your thoughts on that. And also there has been talks about a universal tariff plan. And I think that I heard that it will go hand-in-hand with abolishing the tariff plan approval system, which is currently the case for SK Telecom. So will this ultimately affect SK Telecom positively? I'd like to hear your opinions on that issue.

(foreign language) Thank you, Mr. Kong, for your questions. (foreign language) I will have your first question answered by Mr. (inaudible), Head of SK Broadband Management Strategy Planning.

(foreign language) Thank you for your question on SK Broadband. I am (inaudible), as was introduced. (foreign language) Let me answer your question on the SK Broadband's strategies and gains and loss outlook for the second half. (foreign language) At SK Broadband, our mid- to long-term goal is to become the next leader in the future industry based on our next generation media services, our AI-based Btv evolution and improved home services. (foreign language) So in the second half, especially for IPTV business, our goal is to acquire a high quality subscriber base based on sophisticated services and content competitiveness. We are also looking to improve our profitability model, and looking for further opportunities to connect -- in connection with mobile media to strengthen our competitiveness. (foreign language) And when it comes to broadband Internet, through higher giga Internet coverage, we will secure higher-quality subscribers. And also, through high end services, we will continue our efforts to improve our profitability. (foreign language) And in this process, we will seek opportunities for mutual growth with our various partners through openness and sharing. (foreign language) So one of the reasons that we showed quite relatively strong numbers in the second quarter had to do with certain delays in a part of our business plans that were set forth in the beginning of the year. And so that led to changes in our expenditure, which led to realization of profit. When it comes to profit and loss outlook for the second half, I think it will be managed similar to that of the first half of this year but this is subject to change according to the actual implementation of our business plan. Thank you.

(foreign language) And I will have Mr. Park answer your question on SK Planet briefly.

(foreign language) If I may briefly touch upon the overall strategic picture for SK Planet, as I mentioned before, our #1 goal is to strengthen our mobile competitiveness and by leading the market growth -- in order to lead the market growth, or as I answered before, our goal is to outperform the market. (foreign language) And secondly, our target is to strengthen our non-pricing factor, namely our suggestion functions or search functions or conversational commerce functions. (foreign language) And lastly, aside from 11th Street, we also have a lot of competitive O2Os, including OCPs, Syrup and Gifticon. And so we plan to carry out specific strategies in close relation to these assets that we have.

(foreign language) I will have Mr. Lee of CR Strategy answer your last question.

(foreign language) Yes, this is Lee Sang-Heon as was introduced. First of all, when it comes to net neutrality, recently, as you all may know, there has been a lot of talk about 0 rating. Now if 0 rating were to be extended, it will play a large role in reducing household telecommunication expenses. And for the telecommunication companies, it will allow us to improve our profitability by allowing us to create various platform-based services. (foreign language) Next, moving on to universal tariff plans. (foreign language) According to what was announced by the government, what will happen is that the government will now have the right to create a new tariff plan in the KRW 20,000 to KRW 30,000 range. And for the rest of the tariff plans, it will no longer need approval from the government. And that was the overall outline of what was announced. (foreign language) And this is something that I brought up at a recent public hearing with the government. But what the telcos are concerned about is that if the government were to come up with a new tariff plan, the remaining tariff plans that we currently have will inevitably have to be restructured in line with what the government has set forth. And that ultimately means that we will no longer have -- we will no longer have -- be able to make our own decisions when it comes to our own tariff plan. (foreign language) And regarding this issue, we will continue to put in efforts in our discussions related to the revision of the relevant act, so that we can come to a reasonable agreement. Thank you.

(foreign language) Last participant canceled his question request. So currently there is no participants with questions.

(foreign language) This concludes the earnings conference call for Q2 2017. Thank you.