SK Telecom Co Ltd (SKM) 2017 Q3 法說會逐字稿

(foreign language) Good afternoon. First of all, thank you all for joining this conference call. And now we'll begin the conference call by the Fiscal Year 2017 Third 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) 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 Q3 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 forward-looking statements are subject to change, depending on the macroeconomic and market situations.

Let me now present Mr. Young Sang Ryu.

(foreign language) Good afternoon. This is Ryu Young Sang, CFO and Executive Vice President of the Strategy and Planning Division at SK Telecom.

(foreign language) SK Telecom was ranked first place yet again for 20 consecutive years in the Korea Customer Satisfaction Index Survey conducted by the Korean Management Association last month. We continue to maintain our title as the longest-standing, grand-slam winner of the 3 major customer satisfaction surveys, with 20 years as #1 in Korea Productivity Center's National Customer Satisfaction Index as well as 18 years in first place in the Korean Standards Association survey. This is a result of our efforts to create the highest customer value, and we vow to continue to meet our customers' expectations with a differentiated level of services in all of our businesses.

(foreign language) Let me now discuss the consolidated earnings highlights for Q3 of 2017.

(foreign language) Revenue recorded KRW 4,442.7 billion, up 4.7% year-on-year and 2.2% quarter-on-quarter. Top line growth was led by the continued growth of major subsidiaries, such as SK Broadband and SK Planet, as well as the MNO revenue growth. Due to increased costs related to market competition during the third quarter, operating income fell by 7.5% year-on-year and 3 -- 7.3% quarter-on-quarter to KRW 392.4 billion. Net income recorded KRW 793 billion, up 146.2% year-on-year and 27.8% quarter-on-quarter due to increased equity method income on SK Hynix, thanks to the boom in the semiconductor industry.

(foreign language) MNO revenue growth continued on from the previous quarter. With our efforts to acquire more handset subscribers taking effect, MNO revenue grew by 1.7% year-on-year and 0.7% quarter-on-quarter to record KRW 2,741.3 billion. Due to stronger efforts to respond to competition, as was previously mentioned, nonconsolidated operating income recorded KRW 420.7 billion, down 11.8% year-on-year and 9.0% quarter-on-quarter.

(foreign language) SK Broadband's revenue recorded KRW 760.2 billion. With its market share per subscriber net adds in IPTV growing again and record high-pay content sales, revenue increased by 17.5% compared to the previous year. As the portion of Giga Internet subscribers increased in the broadband Internet business, SK Broadband's operating income recorded KRW 29.8 billion, similar to its record-high earnings in Q2.

(foreign language) Oksusu gained 630,000 new subscribers during the quarter, reaching 8.11 million subscribers in total with 5.41 million unique visitors. In September, the company enhanced its media competitiveness once again by providing a PC version of the app and maximizing customer convenience.

(foreign language) SK Planet's growth also remains strong. Revenue recorded KRW 285.1 billion, up 5.8% year-on-year, while managing to cut marketing costs. 11th Street sales grew by 26% year-on-year, leading the overall top line growth. Operating loss improved by KRW 41.4 billion year-on-year and by KRW 16.4 billion quarter-on-quarter at KRW 55.2 billion. This was the result of maintaining its position as the nation's top commerce platform through selection and concentration of resource utilization.

(foreign language) With that, I will now move on to the strategic direction and major achievements.

(foreign language) First, the next-generation network infrastructure which will serve as the foundation for the fourth industrial revolution. SK Telecom has extended the application of the AI network management solution, which allows self-diagnosis, restoration and optimization of the network's problems, to its wireless network following the fixed-line network. This technology, which is globally recognized to be crucial to the 5G era, will be exported to India's Bharti Airtel, 1 of the top 3 telecom companies in the world. Also, our network slicing technology and virtualization technology winning global awards are continuing to solidify our position as an undisputed leader in 5G standardization.

(foreign language) Efforts to expand the ICT ecosystem with partners from at home and abroad continue. (foreign language) Meaningful progress has been made in joint development efforts with partners, including NVIDIA, such as the successful test drive of our self-driving vehicle on the Gyeongbu Expressway.

(foreign language) Meanwhile, in the Smart Home arena, we are seeing more and more interested partners with 349 electronic devices from across 70 manufacturers now connected. Apartment complexes with built-in Smart Home systems are becoming the new standard, with the number of Smart Home apartment units exceeding 10,000 this past August and reaching 14,000 as of now. By further strengthening the IoT ecosystem, we will continue to create promising business models going forward.

(foreign language) Next, about our AI platform, SKT's AI strategy is not limited to the proliferation of its voice recognition device. The key factor of AI competition is data quality. We are focusing our efforts in accumulating practical customer data, while inducing steadier usage of the voice recognition function; and to do so, linking it to our unmatched core competitiveness is crucial. In this context, the linkage between the nation's #1 navigation, T Map and NUGU, was a very meaningful approach.

(foreign language) Since linking T Map with NUGU, total daily voice recognition service usages, including NUGU and T Map, recorded 1.9 million at its peak. In the process of gathering data resources and enhancing customer insight as such, more O2O services and logistics companies are reaching out to us with partnership proposals. We plan to create various mutually beneficial business models with competitive partners in the future.

(foreign language) I would like to take this opportunity to thank the analysts and investors once again for your continued encouragement and support toward SK Telecom's efforts to achieve growth.

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

(foreign language) (Operator Instructions) (foreign language) The first question will be provided by Yang Jong In from Korea Investment & Securities.

(foreign language) I have the following 2 questions. My first question has to do with your net add subscribers. We saw that your marketing costs for Q3 slightly increased quarter-on-quarter, but your net adds fell slightly. Does this mean that the marketing focus has shifted from handset net adds to IoT or low-end smartphones? And my second question has to do with the separation of mobile handset sales and service contracts. How likely do you see this actually being adopted? And also, in the case of an adoption of this act, what will the impact be in terms of its impact on the telcos' profit and gain?

(foreign language) Thank you for your question. (foreign language) Let me first address your first question. (foreign language) Yes, it is true that during the third quarter, a slight -- there was a slight increase in marketing costs due to the process of responding to the high demand for flagship devices. However, we are seeing that the handset subscriber base is continuing to expand, which has been our focus beginning this year. (foreign language) Internally, we manage our subscriber numbers, excluding that of prepaid phones and IoT accounts, and focus only on the pure handset accounts. And from this standard, actually, in Q3, we have achieved a higher number of net additions compared to the first and second quarters. (foreign language) And such efforts to strengthen our handset subscriber base has led to a higher ARPU during the third quarter, continuing on from the second quarter, as well as growth in MNO revenue. (foreign language) And going forward, we will not be caught up in the total subscriber market share. But through systematic segment marketing, we continue to stand by our principle that we want to focus on strengthening our handset subscriber base. And we will also focus on efficient cost management so that we can create a stable profit structure. (foreign language) Next, moving on to your question regarding the separation of handset sales and service contracts. (foreign language) If this current act of -- the current bill of separating handset sales and mobile service contracts were to take effect, we do believe that we will be able to see an improvement in the customer's misunderstanding of thinking of the high device prices as part of the telecom service fees. And we also think that the overall competition structure can be formed, centered on the core competitiveness of actual telecommunications service itself rather than handset subsidies. (foreign language) And by doing so, we believe that we can expect the telcos focusing more on strengthening their core competitiveness, namely their products and services, rather than being caught up in wasteful competition. (foreign language) However, it has been quite a long time that the devices and mobile services have been provided to our customers together. And the current distribution structure and competition structure revolves around this current model. And there are many stakeholders that are -- that have interest in this overall structure. So I think that it is difficult for us to be quite detailed in anticipating what kind of impact it will have on the telcos because it is such a drastic change. (foreign language) And we expect, regarding this issue, there will be a series of thorough discussions of various stakeholders through social discussion organizations.

(foreign language) The next question will be presented by Chung In Young from Goldman Sachs.

(foreign language) I have 2 questions. My first question has to do with your wireless ARPU. Looking at your trend for wireless ARPU during the third quarter, you can see that it was quite flat year-on-year, but grew slightly quarter-on-quarter. You said that it was a result of focusing on handset subscriber base expansion, but the market is taking a close look at how more your competitors are seeing a downside to their ARPU due to the larger portion of subscribers opting for the selected discount plans. Why then did SK Telecom see ARPU growth despite that? And what is your outlook for your next year's wireless ARPU? My second question has to do with SK Broadband. Compared to its competitors who have seen a growth in both IPTV and broadband Internet, it seems that SK Broadband's growth in IPTV is quite strong, but it's not as such in its broadband Internet business. It's rather flat compared to the previous year. And recently, we are -- the market is -- we are expecting quite a positive trend of your fixed-line services -- businesses growing due to the growth of IPTV and broadband Internet. So when can we expect SK Broadband to catch up to its competitors? And if that wasn't the case, then why do you think that is? I would also like to know your outlook for SK Broadband's performance next year.

(foreign language) First, thank you for your question. (foreign language) I will be addressing your first question regarding ARPU. And as for your second question regarding SK Broadband's outlook, I will hand the mic over to Mr. Heon Sang Lee of SK Broadband. (foreign language) First, addressing your first question. (foreign language) This year, it is true that, as you mentioned, we have focused our efforts in expanding our handset subscriber base, which tends to contribute to revenue growth quite heavily. And in the second and third quarter, the ARPU did see growth. However, due to recent haircut measures such as the higher selective discount price plans, we do think that it will be difficult for our ARPU to take a blow. (foreign language) Going forward, in line with the growing customer needs for data, we will continue to provide competitive services such as content-specialized price plans and segment price plans, in other words, prices -- price plans and services that are optimized for our customers' usage patterns. And we also plan to strengthen additional customer benefits, including handset insurances for those that are subscribed to unlimited price plans. So in other words, we will do our best to minimize the negative impact of the recent regulatory environment.

(foreign language) I want to thank you for the question regarding SK Broadband. I am Heon Sang Lee, the Head of Strategy Management at SK Broadband. (foreign language) Let me briefly tell you the current growth trend of SK Broadband as well as our outlook for the next year. (foreign language) At SK Broadband focusing on IPTV business, we are generating visual -- visible results in the fixed-line business. And our operating profit, for example, compared to the previous year, has also grown. (foreign language) And as for broadband Internet, we are seeing growth quarter-on-quarter and year-on-year. And the Giga Internet services, which is the higher-tier subscribers, is also on the rise. (foreign language) And we believe that broadband Internet business will see a growth shortly due to a stable subscriber growth as well as higher portion of Giga Internet users. (foreign language) And going on to 2018, we plan to strengthen our distribution competitiveness and also continue to launch various competitive products and services, thereby increasing our subscriber growth. And we will also focus our efforts in strengthening the top line growth and profitability growth by increasing the portion of subscribers subscribed to Giga Internet, UHD and other high-tier services. (foreign language) I do want to ask for your understanding that because we are in the process of devising our business plans for the next year, the detailed outlook, as of now, it's not something that I can give you as of now. (foreign language) Thank you.

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

(foreign language) I have 2 questions. My first question has to do with the adoption of the IFRS 15. We think that mostly for your company, the biggest change is going to have to do with your mobile service profit as well as your marketing costs. And so what are some of the detailed impacts that will have on your financial statement? And I also want to ask if it's difficult for you to give us the details as of now, then when do you think you will be able to communicate with us regarding this issue? My second question has to do with 11th Street. I'd like to know the 11th Street's earnings outlook for Q4 and the next year. And I'd also like to know the impact of the current event that is going on. And also, thirdly, I'd like to ask, as you know, there are movements by the FTC of wanting to disclose the sales commissions. So what would that have and how would that impact 11th Street?

(foreign language) First, I want to thank you for your question. (foreign language) Let me address your first question regarding the adoption of IFRS 15. And as for your second question regarding SK Planet, I will hand the mic over to Mr. [Park Heung Soo], Head of the Finance Management Department at SK Planet. (foreign language) Addressing your first question. (foreign language) First, IFRS 15 is a new accounting guideline regarding revenue from contract with customers and will take effect January 1, 2018, which means that the new financial statement following those rules will be disclosed from the first quarter of 2018. (foreign language) One of the major changes that we expect on our side is the fact that out of our marketing costs, the customer acquisition cost will be mandatorily booked as assets first and then depreciated. And because this guideline will be retrospectively reflected, we do not think that the impact it will have on our gains and losses will be sizable. (foreign language) As for the balance sheet, due to reading the customer acquisition cost as assets, it will see an increase in our assets and surplus. (foreign language) And as for the changes that will take place to the accounting of device product profit, because our company's current distribution structure is different from that of our competitors, the impact it will have on our revenue or profit and losses will be very minimal. (foreign language) We are currently undergoing the process of reviewing the overall process and impact of these changes into our accounting structure. So after things have been -- become more concrete, we will be sure to communicate that with the market.

(foreign language) Hello, this is a [Park Heung Soo], Head of the Finance Management Department at SK Planet. So let me first address your question regarding FTC's move to disclose sales commissions. (foreign language) First of all, as far as we understand, among the various distribution players in Korea, the larger distribution companies and offline companies, they have been set as the target of disclosing sales commissions by the Fair Trade Commission. However, for open market companies, we -- I believe that the FTC will further review whether or not they want to apply that rule to the open market players. (foreign language) And as for open markets, it is not a separate contract that we sign with every particular seller. In fact, when we go to the seller's page, the sales commission is actually already open on there, so I don't think that the changes to FTC having open markets disclose commissions for sales is going to be practical or effective. And even if it were to happen, we believe that the impact it will have on our business will be minimal. (foreign language) And now moving on to the outlook for our performance in Q4 and 2018, first of all, in the fourth quarter, due to the seasonality of the fourth quarter, we will see a growth in GMV. However, the competition tends to be a lot more fierce than the first quarter. But still, of course, we will stand by our principle that we want to maintain healthy competition.

(foreign language) The next question will be presented by Kim Soo-Min from Daishin Securities.

(foreign language) I also have 2 questions. My first question has to do with your response to the pressure to lower or decrease household communication fees. During your earnings conference call for Q2, you said that you are reviewing various options to counter that. So what are your current -- what is your current stance? After that, we have seen a higher selective monthly discount rate as well as talks of extending the benefits to other populations. And also, there's now talk of the universal price plan as well. And I think it's only natural that the market is quite worried about what kind of negative impacts these will have on your numbers. So I'd like to know about your company's responses. And my second question has to do with the rapidly growing media business. I'd like to hear about your future strategy and also if you have any particular plans for partnerships, including cooperating with C&C.

(foreign language) Yes, thank you for your questions. (foreign language) Let me first address your question regarding our measures regarding the cutting of -- lowering the burden of household communication fee. (foreign language) As you mentioned, we can look at it from 3 branches: the first being higher selective discount rates; the second being it extended to other vulnerable populations; and third, the universal price plan. (foreign language) First of all, the monthly selective discount rates have been lifted up to 25%. And as such, we think that it's only inevitable that it will have a certain negative impact on our revenue -- or MNO revenue. (foreign language) Regarding this issue, however, while because our users' data needs is continuing to increase and as a result of higher selective discount rates, it means a lesser burden of telecommunication fees on our users. And so we plan to provide various practical and diverse benefits to our users so that they can opt more for the higher price plans, thereby minimizing any kind of negative impact that such a move will have. (foreign language) However, as for the very detailed financial impacts that it will have, we have -- it depends on various factors, including the speed at which customers opt for more selective discount price plans and also the overall competition environment. So we will have to wait and see. (foreign language) And moving on to the second part, which is the extending of these benefits to the vulnerable population. (foreign language) Currently, the Ministry of Science and ICT is undergoing a process of revising their ordinances and the public notice in order to extend the benefit or the discount benefits to a vulnerable population. (foreign language) While we completely agreed with the intentions of this move, as for the actual target and the level of the benefits provided, we will cooperate with the government so that we come up with the most reasonable measures before their actual revision takes place. (foreign language) And thirdly, moving on to the universal price plan. (foreign language) As for the universal price plan, this literally means that the government will be deciding the telecommunication service fees, which is a private business. And so as telcos, it's quite difficult for us to accept that. (foreign language) We believe that rather than an artificial intervention of the government, a direct intervention by the government such as the universal price plan, it is more reasonable and logical for them to induce a market-oriented rate competition. However, regarding this issue, we will continue to cooperate with the government and the national assembly. (foreign language) Moving on to your second question. (foreign language) Recently, in efforts to strengthen our media business, we have signed a contract -- a strategic contract with SM to share our assets and content. (foreign language) And through this strategic partnership, we have become the second largest shareholder of SM C&C, and SM Entertainment has become the second largest shareholder of iRiver. (foreign language) This deal was closed on October 25. And currently, we are undergoing a devising of detailed business plan. So once they become concrete, we will be sure to communicate that with the market.

(foreign language) The final question will be presented by Mr. Neale Anderson from HSBC.

I had 2 questions on the Internet of Things solutions business where I see you've posted quite good growth in the third quarter. First one was on sales. Can you give some more comment on the sales outlook for the IoT business going into 2018? And would you expect more -- well, how do you expect the split to be between domestic and overseas revenues, and between consumer and enterprise as well? And secondly, can you give some comments on how you believe the margin in this segment will evolve in the near term? (foreign language)

(foreign language) Thank you for your questions. (foreign language) The IoT revenue for third quarter recorded KRW 213.3 billion due to stronger solution and IoT sales year-on-year. (foreign language) And going forward into the next year, we will continue our efforts to bring to you tangible results through expansion of the ecosystem. (foreign language) However, as for the details that you requested regarding the split of the revenue outlook for 2018 for the B2C and B2B accounts as well as domestic and home -- domestic and abroad and its margins, because we are in the process of establishing our management plans for the next year, I regret to tell you that now is not the time for us to give you those details. But once they are set, we will be able to communicate them.

(foreign language) This concludes the earnings conference call for Q3 2017. Thank you.