SK Telecom Co Ltd (SKM) 2018 Q1 法說會逐字稿

(foreign language) Good afternoon. First of all, thank you all for joining this conference call. And now we will begin the conference call by the fiscal year 2018 first 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 Q1 of 2018 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. We also have here with us executives from relevant business divisions to help deepen your understanding.

(foreign language) From Q1 of 2018, we have adopted a new accounting standard, IFRS 15, and our operating results from this conference call and onward will be according to the new standard. As a supplemental discussion of our Q1 operating results, we will provide unaudited results under the comparative historical accounting method prior to our adoption of IFRS 15.

(foreign language) 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 afternoon. This is Ryu Young-Sang, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights of Q1 2018 under IFRS 15.

(foreign language) Consolidated operating revenue for Q1 2018 under IFRS 15 recorded KRW 4,181.5 billion. Under former accounting standards, the number recorded KRW 4,220.7 billion, down 0.3% year-on-year and 6.2% quarter-on-quarter. While MNO revenue decreased, growth of our subsidiaries, including SK Broadband, contributed to maintaining the revenue similar to that of last year.

(foreign language) Consolidated operating income under IFRS 15 recorded KRW 325.5 billion. Under former accounting standards, the number recorded KRW 359.5 billion, down 12.4% year-on-year and up 15.8% quarter-on-quarter. Considering the one-off item early last year, operating income grew year-on-year. This was mainly due to strong business results of subsidiaries as well as reduced marketing costs of SK Telecom.

(foreign language) Net income under IFRS 15 recorded KRW 693.4 billion. Under former accounting standards, the number reported KRW 716.6 billion, up 22.8% year-on-year and up 8.5% quarter-on-quarter due to SK Hynix's results in a strong semiconductor market.

(foreign language) For the rest of the year, we will improve our consolidated earnings through balanced growth of SK Telecom and our subsidiaries. I will now discuss our major business achievements.

(foreign language) First, our MNO business. Through value-innovating programs that contribute to actual customer benefits, as was announced early this year, we led market stabilization and reduced marketing costs. We also focused our efforts on regaining the trust of our customers by eliminating inconveniences in areas such as cancellation fees and roaming price plans, which led to the lowest churn rate of 1.3% since the introduction of MNP.

(foreign language) Also, as a result of scientific target marketing based on customer data, the number of handset subscribers increased by 110,000, while marketing costs were reduced by KRW 43.7 billion year-on-year. We believe that such efforts as a game changer will help create a market environment in which competition centers on fundamental capabilities.

(foreign language) Our Media business is smooth sailing toward our target of becoming the #1 fixed mobile media platform. IPTV revenue grew by 22% year-on-year, thanks to more subscribers on higher-price plans and greater paid content consumption. oksusu also solidified its position as one of the nation's top mobile platforms with a growing number of subscribers and unique visitors by strengthening its original content offering and providing users with content that meet their individual needs.

(foreign language) Moving on to our artificial intelligence platform. NUGU solidified its reputation as the #1 player and pioneer of the domestic AI market, with the number of monthly active users exceeding 3 million. The virtuous cycle of wider areas of AI applications, such as T Map, Kids Phones and set-top boxes, bringing in more active users and the collected data contributing to sophistication of services and greater usage volume became even stronger. We plan to reach 5 million in MAU by the end of the year, and we'll further strengthen the AI business environment that encompasses home, mobile and car, among others.

(foreign language) Let me now discuss our achievements regarding our efforts to strengthen our technology competitiveness. For the development of quantum cryptography technology, which is known as the ultimate security technology, SK Telecom has accumulated related technologies since 2011 when it became the first Korean conglomerate to establish a quantum technology lab. Early this year, we acquired the Swiss company IDQ, the world's leading player in the field of quantum technology. Through these efforts, we expect the safety of our network, which is the core network management competitiveness, to become even stronger in the 5G era of hyper-connectivity.

(foreign language) Moving on to our commerce business. 11th Street's solid growth continues. Through efficient cost management, 11th Street significantly narrowed its operating loss to less than half of that of the previous quarter while still growing the GMV. Going forward, we will do our best to achieve our target of reaching the BEP in 2019 through continued efforts to improve our profit and loss.

(foreign language) Investors and analysts, we ask for your continued support for our ceaseless efforts to enhance our corporate value. Thank you.

(foreign language)

(foreign language) (Operator Instructions) The first question will be provided by Jee-Hyun Moon from Mirae Asset Daewoo.

(foreign language) I have the following 2 questions. My first question is, yesterday, the government announced certain plans and details regarding the 5G spectrum auction, and most of the conditions were set forth, so I'd like to hear what SK Telecom's strategies are. My second question has to do with your acquisition of ADT Caps. From what we understand, the deal is -- that the decision to make the deal will be completed by next week. I'd like to hear about the background in terms of how you came about to review this deal, any kind of potential synergy that you expect and also as regarding what you think about of the acquisition costs in -- especially in comparison to the listed company as well.

(foreign language) I first want to thank you for your question. (foreign language) Let me first address your question regarding our strategy in terms of the 5G spectrum auction. (foreign language) As you know, after the announcement of the allocation plans on May 4, the government will be accepting bids until June 4. And then after going through a screening process, the auction will take place on June 15. (foreign language) And as far as we understand regarding the government's plans to allocate the spectrum, in an effort to induce fair competition, the government has established plans to allocate the spectrum bandwidth in an equal manner. (foreign language) Realistically speaking, because of the many -- the larger subscriber base that SK Telecom has, we do have certain feelings regarding the government's decision to limit the total amount to 100. However, we are expecting for additional allocation of the spectrum band. (foreign language) However, under the set-forth conditions, we will do our best to execute the optimal strategy. (foreign language) However, realistically speaking, if all of the carriers were allocated an equal amount, then considering our accumulated know-how in terms of network establishment and accommodating data traffic and also how we were able to efficiently operate our spectrum bands until now, we believe that we have a relatively upper hand in terms of recouping our investment. (foreign language) At SK Telecom, along with deciding on the actual economic value of what the plans for the auction that was set forth by the government as well as the minimum competitive price and also the obligation of network rollouts, we will also be taking into consideration various factors, including the 5G business model, our infrastructure competitiveness and the efficient management of the frequency resource as well as the impact the overall auction will have on our finances in executing our frequency strategy. (foreign language) Let me now move on to answer your second question regarding the background and any kind of synergies that we expect through the ADT Caps deal. (foreign language) I first want to begin by saying that because the deal has not -- the decision has not been made completely, I hope that you can understand that we cannot give you very -- details regarding the deal. (foreign language) However, what we can tell you is that the security market is continuing to yield an 8% level growth. And also, considering the growing number of single households as well as elderly households and also the comparatively low penetration rate in comparison to the global market, it is truly a market with great growth potential. (foreign language) And we also believe that the security business will play an important role in expanding our overall home service in connection with NUGU, the Smart Home service or IPTV. (foreign language) And going forward, if we were to utilize our network infrastructure as well as new ICT capabilities, we will be able to provide a more differentiated level of service and business model, which will then allow us to provide an upgraded level of security business. (foreign language) In fact, these were the same grounds on which we decided on the acquisition of NSOK. However, in terms of the size, and also, we wanted to generate a more meaningful result, which is why we began reviewing the ADT Caps deal. (foreign language) And especially, ADT Caps has about a 25% market share. And as for its profit margin, it's at about 25 -- 20%, so it -- you can say that it is almost the leader or, if not, the second in terms of profitability within its industry. (foreign language) So we believe that if we were to go through with the deal, the company that we acquire will be able to continue to contribute to our profit as well. (foreign language) And also, we want to remind you that through NSOK, we have a complete understanding -- or enough understanding of the security industry, and we have also internalized related business capabilities. And also, we have experience in related security solution businesses, including T view and smart video analysis. (foreign language) And on top of that, we have, of course, new ICT capabilities, in other words, artificial intelligence, IoT and big data, that will help us lead the next-generation security industry. And we believe that these will help us come up with a differentiated level of innovative security services that will allow for a system-based prevention. (foreign language) However, again, we regret to inform you that because nothing has been made final yet, we cannot give you any color as to what we think about the valuation or the acquisition price. (foreign language) However, when you look at the major companies within the markets in Korea, they are traded at about 10x to 12x in terms of the trading multiple. (foreign language) As for the detailed amount, because the current -- currently it is undergoing a discussion process, we cannot give you any details, but we can say that we will not be paying excessive premium. (foreign language) Thank you.

(foreign language)

(foreign language) I have the following 2 questions. First, regarding your 11th Street numbers, we are seeing an improvement in its earnings. And recently, with Shinsegae deciding to invest in e-commerce, I think we can agree that there can be an overheated competition in the market. So first, I'd like to hear about your strategy to differentiate your service from the rest and also, secondly, regarding the funding. My second question has to do with SK Hynix's dividend. I know that SK Hynix has been continuing to do very well. And if they were to make any kind of changes in terms of their dividend payout, would -- how would that be linked to SK Telecom's dividend?

(foreign language) Thank you for your questions. (foreign language) Let me first answer your question on 11th Street. (foreign language) This year, I think we can expect a stronger e-commerce industry due to the existing distribution players and also demand for a wholesome shopping experience that encompasses both on and offline. In other words, we will see certain changes in the competitive environment. (foreign language) And currently, we are taking a very careful look into the various distribution players' changes in terms of their strategies going forward. And also, we are reviewing various options to strengthen the high-growth-potential categories within the e-commerce market, which includes fresh foods, groceries and fashion. (foreign language) And also, we want to maintain our principle of refraining from price competition, so we will utilize the accumulated data that we have collected throughout SK's ICT services and also the analysis technology so that we can better enhance the competitiveness of our platform. (foreign language) To give you a little bit more detail, through data analysis, we want to provide a more personalized or individually tailored shopping experience throughout the overall purchasing process, which include searching suggestions for products and then purchasing and then delivery. And we also plan to provide the most optimal discounts that is based on customer data that we have accumulated so that we can minimize the customers' costs. (foreign language) Also, going forward, 11th Street is looking at various industry players for potential partnerships, and these various options that we are reviewing include funding. (foreign language) Once any kind of details are made concrete in terms of partnerships or funding, we will be sure to communicate it to the market. (foreign language) Let me now move on to answer your question regarding SK Hynix's dividend and SK Telecom's dividend. (foreign language) If SK Hynix continues their strong earnings, and we see there the -- and SK Hynix decides to increase their dividend payout, then we will be reviewing this in a positive manner, and this by -- I mean that linking SK Hynix's dividend increase to SK Telecom. (foreign language) However, in the context of SK Telecom being recognized as an MNO company, we cannot avoid any kind of possibility of a negative public opinion forming when we decide on a dividend increase. (foreign language) Although nothing has been decided yet along with restructuring, once we achieve the target of becoming a leading ICT company, then we believe that, along with corporate value increase, we could link that to a dividend increase. (foreign language) Until now, SK Telecom has done its best to maintain a stable dividend amount -- dividend level, and we plan to stand by this principle going forward. (foreign language) Considering 5G investments and also maybe unfavorable regulatory environment, including tariff cut pressures, there could be some negative impact on our side. However, as of now, we believe that the current we -- we believe that our dividend level will be maintained at the similar level to that of 2017. (foreign language) However, again, I want to reemphasize that if SK Hynix's dividend were to increase, then we will positively review an option to link that to our dividend payout. (foreign language) Thank you.

(foreign language) The next question will be presented by Ahn Jae-min from NH Investment & Securities.

(foreign language) I have 2 questions. The first question is you slightly touched upon restructuring of your government structure just before when you answered the last question. And in the market, there has been various talks about how you will go about this. So I'd like to hear about what SK Telecom thinks in terms of maybe a spinoff or a split-off or what kind of plans do you have in terms of restructuring your governance structure. And my second question is there is a lot of concern regarding the MNO revenue decline. It seems that taking into consideration various factors, including tariff cuts, that growth this year doesn't seem like -- seems to be very likely, and so I'd like to hear about your strategy to overcome that.

(foreign language) Thank you, Mr. Ahn, for your questions. (foreign language) I'd like to answer the first question regarding our restructuring of governance. (foreign language) The reason we are reviewing various options for restructuring is to find new growth momentum and to generate better results in terms of corporate value. (foreign language) And in the context of operating our businesses, we want to make sure that our ICT companies have a separate company structure that best befits their each respective business areas and also to have a adequate decision-making process so that all of them can unlock their competitiveness. And we also -- and that is why we are reviewing various structures so that we can harness all of these ICT capabilities in the most efficient way as possible. (foreign language)

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of high growth potential and who have very strong competitiveness in the ICT arena, we believe that they are not adequately reflected in our corporate value, so we are reviewing ways to fix that problem. (foreign language) As for the specific methodology, nothing has been decided yet. It could be we are -- we want to be open to the most number of options as possible, including a split-off or a spinoff. And so I just want to reassure you that we are reviewing various options to set on the most optimal option. (foreign language) However, within the Fourth Industrial Revolution and the very rapidly changing ICT environment, we want to seek a structure that will allow us to harness our ICT capabilities and also promote partnerships and cooperations with various external players and do that in the most efficient way as possible. And we also will review a structure that will help us adequately reflect our ICT capabilities on our corporate value. (foreign language) And going forward, we will open our ears to listen to as many various opinions as possible from our shareholders and make sure that we come up with the most adequate and optimal method. (foreign language) Let me now move on to answer your question regarding our strategy to overcome MNO revenue decline. (foreign language) With a higher discount rate being provided on the selective monthly tariff discounts and also providing free-of-charge services to low-income users, we believe that a MNO revenue decline will continue -- will cannot but continue in 2018 as well. However, we will do our best to minimize that decline based on growing our handset subscribers through reasonable tariff plan suggestions. (foreign language) First of all, in order for more users that are subscribed to SK Telecom's services to be able to reasonably use the needed data amount, we will continue to sophisticate our optimal tariff plan suggestion system that is based on an analysis of our users' usage patterns. And we are hoping that this will allow for all of our customers to be able to select and take full advantage of an optimal tariff plan. (foreign language) And in terms of a subscriber base, we plan to continue to discover new demand, including more segmented populations, such as foreigners. And we plan to continue to grow our handset subscriber net adds, of course, while refraining from anything that could overheat the market. (foreign language) And going forward, rather than focusing on an external expansion, we will focus more on recovering customer value in a genuine manner and hope that these changes will allow us to minimize customer mobility and also help us maintain a healthy profit structure along with mid- to long-term revenue growth. (foreign language) Thank you.

(foreign language) The next question will be presented by Yoo Jay from Merrill Lynch.

(foreign language) My question is we have heard from LG U+ recently regarding their partnership with Netflix. And also, KT is amping up their music media-related business as well. In other words, I think we can all agree that there -- we are sensing quite a change in the industry. So I'd like to hear about SK Telecom's strategy. And also regarding this, what would some areas that SK Telecom has an upper hand be regarding your media and content business?

(foreign language) Thank you, Mr. Yoo, for your question. (foreign language) So to address your first question. (foreign language) First of all, the basic direction of our strategy is to create our media platform, oksusu, to that comparable to Netflix, in other words, a global top player, through a stronger content offering and a suggestion offering technology as well as a more sophisticated UI and UX. (foreign language) And to achieve this goal to expand our partnership with various players at home and abroad that have the necessary content or technology competitiveness, we are continuing to discuss various options. (foreign language) And as for any possibility of SK Telecom pursuing a partnership with Netflix in the future, we believe we are open to reviewing that option as well in the context that it will allow for new contents and services for our customers. (foreign language) And coming from an MNO carrier perspective, the data traffic increase as a result of high-quality video content consumption is quite productive in the sense that it can enhance the value of our mobile network. (foreign language) And also, if a partnership with any other player will allow us to provide our subscribers with actual customer value and benefits, then we are open to all -- to review all options with other players, including HOOQ and Tving. (foreign language) However, in the context of maintaining fairness with other service or content operators, we believe that when it comes to discussing any kind of potential partnerships with Netflix, we have to first discuss various topics, including the adequate net usage fee as well as profit sharing. And also, we believe that we must take into consideration what such actions will -- what kind of influence such actions will have in the existing domestic media industry ecosystem. (foreign language) And regarding music-related businesses, as you know, we have recently entered the music business in partnership with iRiver. (foreign language) We believe that the industry environment -- the market environment is rapidly changing and so are our customers' needs. So if we are able to provide any kind of innovative music services, then we are open to various options. (foreign language) Thank you.

(foreign language) This concludes the earnings conference call for Q1 2018. Thank you.