SK Telecom Co Ltd (SKM) 2017 Q4 法說會逐字稿

(foreign language) Good morning. First of all, thank you all for joining this conference call. And now we will begin the conference call for the fiscal year 2017 fourth quarter earning results by SK Telecom. This conference will start with a presentation, followed by a divisional Q&A session. (Operator Instructions) We shall now commence the presentation by SK Telecom.

(foreign language) Good morning. 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 and annual results of 2017 and the future management plans and strategic direction by Young Sang Ryu, CFO and Executive Vice President of the Corporate Center, followed by a Q&A session.

(foreign language) Today's conference call will provide consecutive interpretation, and we also have here with us executives from relevant business divisions to help deepen your understanding.

Before we begin, we want to remind you that all forward-looking statements are subject to change, depending on the macroeconomic and market situation. Let me now present our CFO.

(foreign language) Good morning. This is Ryu Young Sang, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights for Q4 and 2017. (foreign language) Last year's pressure to cut tariffs, which led to higher monthly discount rates, put a burden on our efforts to achieve our management objectives. Despite such difficult circumstances, the MNO revenue rebound and growth in media and commerce businesses allowed us to turn our consolidated revenue around for the first time in 3 years and recorded KRW 17,520,000,000,000, up 2.5% year-on-year.

(foreign language) Operating income and EBITDA for 2017 recorded KRW 1,536,600,000,000, up 0.1% year-on-year, and KRW 4,783,600,000,000, up 3.9% year-on-year, respectively, as a result of the growth in media business as well as improved profitability of 11th Street.

(foreign language) Annual net income for 2017 recorded KRW 2,657.6 billion, up 60.1% year-on-year due to improved earnings of SK Hynix, thanks to the strong semiconductor market. (foreign language) As for Q4 2017, the seasonality of higher CapEx and the impact of tariff cuts resulted in decreased operating income quarter-on-quarter. Despite these factors continuing in 2018, we will continue the balanced growth of SK Telecom and our subsidiaries, thereby, improving the quality of consolidated earnings results.

(foreign language) Moving on to the strategic direction of 2018. Last year, under the objective of becoming Korea's leading new ICT company, we have further solidified our leadership in the MNO business and set media and IoT as the 2 axes of our growth business portfolio. Also, our unique AI platform and network infrastructure have been established as the source of our competitiveness that enhances the synergy between each business area.

(foreign language) However, uncertainties of the management environment continue. Competition in the ICT industry will become even fiercer, and customer needs will become just as diverse and unconventional as the rapidly changing environment. With the momentum of 5G ahead of us, we are met with the challenge of achieving both short-term results as well as strengthening long-term competitiveness. We plan to prepare for the future with a bold approach of changing the competition landscape itself.

(foreign language) First, in MNO, we will achieve qualitatively higher results than that of last year of turning the revenue around with handset subscriber net adds, and we will start by regaining trust by innovating customer value. Mass marketing is no longer valid for our customers. SK Telecom will pursue a long-term relationship by deepening scientific understanding of each and every one of our customers. This will serve as a more fundamental revenue base than acquiring subscribers through short-term costs.

(foreign language) We expect solid growth in the media business to continue this year as well. In IPTV, we will go beyond subscriber growth and revenue increase to secure an unmatched level of competitiveness through data analysis-based personalized service offering. Furthermore, we will grow it into the #1 fixed mobile media platform through stronger content competitiveness; services linked with our mobile channel, oksusu; and a wider range of AI-based home services.

(foreign language) As for IoT, we have been concentrating our efforts on making the ecosystem and solutions led by SKT in areas such as energy management and smart home, the industry's standard, thereby allowing us to take advantage of future business opportunities in advance. This year, we will continue to leverage our IoT capabilities in areas that include security logistics management and financial solutions and utilize the high-quality data that is collected in the process to find additional business models.

(foreign language) Next, I'd like to discuss our core infrastructure. First, the AI platform. Having pioneered the domestic AI speaker market with a voice recognition device, NUGU, SK Telecom has established an unrivaled competitiveness in the car life domain with the launch of T Map NUGU last year. The number of monthly users of NUGU reached 2.11 million at the end of last year and is expected to surpass 5 million within this year.

(foreign language) With the device lineup fortified with the recent addition of the set-top box, we will further strengthen the service quality, thereby acquiring the largest customer speech data in the country and becoming an undisputed leading AI player, invigorating related businesses.

(foreign language) Moving on to 5G infrastructure. We believe that simply pursuing early commercialization is not enough as we greet the 5G era in which ICT becomes ubiquitous in the off-line world. The role of telecom operators will be to create tangible benefits for our customers.

(foreign language) It is also important to promote data traffic increase through immersive content, such as VR and AR, and advance the arrival of the IoT era in full scale, which includes autonomous driving and smart city. To accelerate the development of search services, we are concentrating our internal capabilities through the largest-ever 5G task force that encompasses business divisions and R&D organizations, and we'll discover various new business models, including B2B, in the future.

(foreign language) Now let us move on to the management objectives of 2018. First, our target consolidated revenue is set at KRW 17,500,000,000,000. While there are negative factors on revenue growth, including tariff cut pressures, we will [break] through them by achieving growth in media, IoT and commerce businesses.

(foreign language) Last year, we met our nonconsolidated CapEx guidance of KRW 2 trillion provided early in the year. This year, we expect a slightly higher CapEx of KRW 2.1 trillion. While efforts to find new business models in preparation of 5G commercialization and R&D activities are anticipated, we will do our best to stabilize costs.

(foreign language) The annual dividend for 2017 was determined at KRW 10,000, including the paid-out KRW 1,000 interim dividend at the meeting of the Board of Directors, and it will be declared final after the approval of the annual general shareholders' meeting in March. We will continue to maintain the balance between a stable shareholder return and growth.

(foreign language) The new year demands that we do not be complacent with our old way of doing business. Stakeholders are voicing their needs for greater social value, including responding to the environment and responsible investment. We ask for the continued support of our investors and analysts so that SK Telecom may seize this golden time and use it to prepare a solid foundation for long-term sustainable growth. Thank you. (foreign language)

(foreign language) (Operator Instructions) (foreign language) The first question will be provided by Jae-min Ahn from NH Investment & Securities.

(foreign language) I have the following 2 questions. My first question has to do with the CEO is entering his second year. What would his focus be in terms of his personal objectives for the company in the year 2018? And my second question has to do with funding for 11th Street. There has been talks about a very highly likely partner to participate in the funding for that, but that has been canceled. So what are some of the details that you can share with us regarding this issue?

(foreign language) First, I want to thank you for your question. (foreign language) Let me first answer your question on the CEO's second year and his focus in terms of the company's objectives this year. (foreign language) Last year, the company announced its plans to create a new ecosystem through openness and cooperation with various players as well as generating innovative customer value, thereby growing ourselves into a new ICT-leading company. (foreign language) And as we enter into the second year, this year will be one where we crystallize and realize our plans that have been set forth. (foreign language) And to do so, this year, we will focus on a early securing of the core competitive capabilities for new ICT, namely AI and infrastructure, and we will also promote internal innovation based on data and artificial intelligence on all of our business areas within the company, including media, IoT and platform, thereby further strengthening our core competitiveness. (foreign language) And especially in this year, we want to pursue a very fundamental and powerful change of our MNO business. We are going to be standing in the shoes of our customers and make sure that we innovate customer value delivered to them that can bring our customers tangible and actual change and benefits. (foreign language) Also, aside from our 4 main -- the rest of the main businesses of our 4 major areas, namely media, IoT and platform, we will make sure that this year becomes one when we actually can show you actual and visible results. (foreign language) And so in a nutshell, we want to promise you that 2018 is going to be the year when we begin our leap into becoming a new ICT-leading company. (foreign language) Next, let me address your second question regarding funding for 11th Street. (foreign language) Beginning last year, in the context of strengthening the competitiveness of SK Planet and especially 11th Street, we have been reviewing various options, including funding and partnerships. (foreign language) And these efforts are not just focused on merely bringing in outside capital, but we are actually looking for a genuine partner with which we can share the growth potential as well as the vision of SK Planet, which has the nation's #1 e-commerce platform and be able to create synergies. So time is not the top priority when it comes to our process of funding. (foreign language) And also, SK Planet currently has in hold about KRW 370 billion in cash, and they are continuing to solidify their fundamentals as we speak. So they are not in dire need of immediate funding. (foreign language) So regarding this issue, we will be sure to communicate it as soon as possible with the market once details become more concrete. (foreign language)

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

(foreign language) I have 2 questions. The first one has to do with your MNO business. For 2017, we saw the handset account net adds decreasing quarter-on-quarter for every quarter. And in fact, in Q4, we actually recorded negative growth. What has changed? You spoke of making fundamental changes to your MNO business, so I'd like to hear your plans and details on this matter. And my second question has to do with the rollout of the 5G network. There have been talks about sharing of core facilities. What is the background from which these talks came about? And also, has there been some kind of an agreement between the telcos?

(foreign language) Thank you for your questions. (foreign language) Among your 2 questions, the first question regarding the net adds of handset subscribers will be answered by Mr. (inaudible), Senior Vice President of the MNO Business Support Group. (foreign language) And I want to have Mr. [Ethan Hong] of the CR Strategy Office, the Senior Vice President of CR, answer your second question.

(foreign language) Hello, this is (inaudible), as was introduced, of the MNO Business Group. (foreign language) At SK Telecom, rather than focusing on just the size growth, focusing on the subscriber numbers only, we are focusing more on the quality of our subscribers. (foreign language) Actually, in Q4 of last year, we carried out direct canceling of fake accounts and also some -- there were some falling in terms of the prepaid phone accounts. However, internally, when we look at our numbers, you can see that, during the fourth quarter, we actually managed to acquire new net adds in terms of subscriber numbers. (foreign language) In 2017, we saw a rapid increase year-on-year of younger customers, and we believe that this allowed us to lay the foundation of high future value customers. And so going forward, we are going to again focus on acquiring a younger subscriber base. And in order to do so, we want to offer them adequate products and services, thereby strengthening our growth potential.

(foreign language) Hello, this is [Ethan Hong] of the CR Strategy Office, and let me address your second question regarding the sharing of core facilities. (foreign language) The government has actually made clear its plans to be supportive in the early and efficient establishment of the 5G network for the telcos, which is a core infrastructure for the fourth industrial revolution, in the context of pursuing with their national agenda of early 5G rollout. And following that announcement, the government is currently carrying on discussions regarding improving the related institution that can accelerate the current rolling-out process, which include co-rolling out and co-sharing of core facilities. (foreign language) And once these improvements are made through utilizing the core facilities, we are looking forward to enhancing the nation's 5G competitiveness by a efficient and fast rollout of the 5G network by the company.

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

(foreign language) I have the following 2 questions. My first question has to do with your 5G commercial service launch schedule. Then I also would like to hear about the CapEx size for the first 2 years. You mentioned that for 2018, your CapEx guidance was KRW 2.1 trillion, and I want to ask does this include all of the costs related to 5G rollout? And my second question has to do with the adoption of IFRS 15 and how it's going to impact your P&L. What is -- how is it going to affect your P&L in 2018? And how will it also affect your equity?

(foreign language) Thank you, Mr. Yang, for your questions. (foreign language) You asked about the 5G rollout schedule and regarding the commercialization. (foreign language) First of all, we are targeting to be the world's first 5G commercial service launching company. And in order to do so, we are harnessing all of our internal capabilities. (foreign language) While we cannot guarantee you a very detailed time line, we are thinking that after the spectrum auction takes place, which is expected to take place during the first half of this year, we will be able to see by the end of this year the rollout of the NSA standard-based commercial network, which links 5G and 4G. And hopefully, we are thinking that by early next year, we will be able to see the launches of 5G devices, and therefore, the first commercial service launch. (foreign language) The early launching and the invigoration of the 5G service is also an important task for the nation as well as we move on to the -- as we are in the fourth industrial revolution era. So in the process of early commercialization, we are going to work closely with the government to find solutions that will lessen the burden on the telcos. (foreign language) As for the detailed 5G-related network CapEx, it will depend on the spectrum allocation plan and the competition strategy as well as our users' data needs, so it can fluctuate, so now's not the right time to give you a set number. (foreign language) And we will be sure to communicate with the market once our detailed network CapEx plans that include all of the investment spendings that have to do with early commercialization of 5G are made concrete. And no matter what be the case, we are going to do our best to make sure that we take into consideration the company's financial condition so that we can be as efficient as possible in making our investments. (foreign language) And to answer your question, in the KRW 2.1 trillion that was guided, this does not include direct investment into the 5G network, however, it does include the investments related to our preparation for the 5G network service. (foreign language) Let me move on to answer your second question regarding IFRS 15. (foreign language) As you may know, beginning from the first quarter of 2018, we will be adopting IFRS 15 and be issuing the financial sheets that meets with the guideline. (foreign language) And along with issuing the financial sheets based on these new standards, we will be providing you the details in terms of what difference it has made. (foreign language) As for the format through -- as for the format in terms of how it will be disclosed, we will be sure to provide you more detail during the earnings conference call for the first quarter of 2018. (foreign language) One of the major changes that will occur for us is regarding the customer acquisition cost out of our marketing cost. This is now mandatorily booked as assets, first, and then depreciated. (foreign language) And as for the balance sheet, because the customer acquisition cost become an asset, you will see an increase in our asset item as well as retained earning. (foreign language) And because of this change, in 2018, even though the marketing cost spending can actually decrease, the impact it will have on our P&L can show in a more gradual or slower manner. (foreign language) As for the impact on the revenue, there are going to be changes on the accounting method of the device product profit, but this is limited to the PS&M sales, so the impact is going to be limited. (foreign language) Thank you.

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

(foreign language) I have just one question regarding the management plan -- management's plans to increase your corporate value in 2018. As you know, on a nonconsolidated basis, you saw in year-on-year decrease of your operating income, and your dividend also stayed the same as well. And last year, you have constantly spoken about your determination to respond quite aggressively to tariff cuts and whatnot, but it didn't really take place. And as a result of that, your stock price didn't do so well until fall. Regarding your comments on the 5G plans, we do agree to it somewhat, but I just really want to hear about your plans to truly increase your corporate value this year.

(foreign language) First, thank you, Mr. Kim, for your question. (foreign language) Let me address your question regarding our plans to increase our corporate value in the new year. (foreign language) First, of course, is through our earnings results. As we said earlier in the conference call, despite the current difficult situation, we are going to achieve innovation in our MNO business and also achieve growth in our new ICT business areas, including media, IoT and platform, so that we can use this as a foundation to yield results similar to that of last year. (foreign language) And secondly, regarding our dividend. (foreign language) Our basic principle when it comes to our dividend is that we maintain a certain set level but seek a gradual increase. (foreign language) As you know, SK Hynix is doing very well. However, due to the characteristics of its industry, the earnings can -- earnings have a very high variability, so it is not an easy task to link SK Hynix' results to our dividend. (foreign language) However, once we are made sure that SK Hynix' growth is solid and once the conditions regarding our financial soundness are set, then we will do our best to increase the dividend. (foreign language) And thirdly, regarding our governance structure. (foreign language) We are aware of the fact that there are various demands regarding making changes to our governance structure from the market. And regarding that issue, we are reviewing various options. (foreign language) And once we find the optimal direction through which we can enhance SK Telecom's corporate value, we will be sure to communicate it to the market. (foreign language) Thank you.

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(foreign language) The next question will be presented by Taewon Kim from UBS.

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(foreign language) I just have one question regarding your marketing costs. Last year, when you look at your revenue-to-marketing cost ratio, it suddenly went up, and I'd like to hear about your strategies and if there's a guidance for marketing cost spending this year. Looking at it from a -- the same accounting standards as that of last year, is there a possibility that the marketing cost can increase regarding your efforts to enhance your 5G service as well as your ICT growth?

(foreign language) Thank you, Mr. Kim at UBS, for your question. (foreign language) Let me answer your question regarding the marketing cost. (foreign language) In 2018, because there are going to be more subscribers opting for the 25% discount plan, we do expect a negative impact on our revenue and profit. However, because data usage needs are continuing to grow, we are going to do our best to offer a systemized products and service lineup so that we can minimize the negative impact. (foreign language) While there can be a positive impact on the marketing costs in the sense that because more people are opting for the select discount plans, that means lower disclosed subsidy levels. However, as you may know, marketing cost size can depend on various factors, including heated competition due to launching of flagship devices and the overall competition environment. (foreign language) While we regret to inform you that we cannot give you a guidance in terms of the marketing cost, however, we can promise you that we will do our best to make sure that we be as efficient as possible in managing our profit and loss. (foreign language) Thank you.

(foreign language) The last question will be presented by [Seungwoo Yang] from JPMorgan.

(foreign language) I have 2 questions. The first has to do with your former comments on making powerful changes to your MNO strategy. I'd like to hear some details on that. I think because by saying the word powerful change, it might be misunderstood as heightening of marketing costs. So are you trying to make changes to your particular strategies? Or are you going to make significant changes to your product and service lineup? And my second question is do you have a separate target set for your nonconsolidated revenue?

(foreign language) Thank you, Mr. Yang, for your questions. (foreign language) Let me first address your question regarding the powerful change that we are planning to make in our MNO business. (foreign language) By powerful, we do not mean that we are going to be using more marketing cost, but we used the word powerful in that we are going to make a more wide and more powerful change by generating new customer value. (foreign language) And to solidify our position as an undisputed leading company that is recognized by our customers and the society alike, we plan to push forth with innovation and change that is unprecedented. (foreign language) First of all, we are going to focus on eliminating all complaint points and any kind of negative experiences that any of our customers have ever had with us. (foreign language) And based on a solid understanding of our customers that is made possible through all of the data collected through our experience of providing various services, we are going to take a very detailed and extensive approach in making sure that we provide customer value in areas that exceed our customers' expectations. (foreign language) Especially, we are going to create innovation and points of contact with our customers so that these changes and benefits can be tangible to our users. And also, we are going to make changes to the overall distribution system so that it can create more social value. (foreign language) And we are going to give you more details as we go along with these efforts in the future. (foreign language) And to address your second question regarding our nonconsolidated revenue target under current circumstances that include tariff cut pressures. (foreign language) As for the MNO revenue, due to the pressures for tariff cuts, we regret to say that it will be difficult for us to avoid a decrease this year. Although certain parts of it will be offset through growth in IoT data businesses, we believe that nonconsolidated revenue for our MNO business this year will -- cannot but decrease year-on-year. (foreign language) Despite all that, we are going to brave through the current circumstances so that we can minimize the negative impact. (foreign language) Thank you.

(foreign language) This concludes the earnings conference call for Q4 2017. Thank you for your participation.