SK Telecom Co Ltd (SKM) 2020 Q2 法說會逐字稿

[Interpreted] 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 2020 Second Quarter Earnings by SK Telecom. This conference will start with the presentation followed by a divisional Q&A session. (Operator Instructions) Now we shall commence the presentation by SK Telecom.

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 Q2 of 2020 and the future management plans and strategic direction by Poong-Young Yoon, CFO and Head of Corporate Center 1; and Hyung-il Ha, Head of Corporate Center 2, followed by a Q&A session.

Under the dual operating system, the achievements and strategic plans for MNO will be provided by Poong-Young Yoon, Head of Corporate Center 1. And Hyung-il Ha, Head of Corporate Center 2 will discuss that of the new business division.

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 situations.

Let me now present our CFO.

Good afternoon. This is Poong-Young Yoon, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights for Q2 of 2020.

Consolidated revenue for Q2 2020 recorded KRW 4,602.8 billion. The even growth of MNO, Media, Security and Commerce as well as the effect of the acquisition of t-broad led to a 3.7% year-on-year and 3.4% quarter-on-quarter growth. Consolidated operating income recorded KRW 359.5 billion. Thanks to efficient marketing and company-wide cost cutting efforts, it grew by 11.4% year-on-year and 19.0% quarter-on-quarter. Net income recorded KRW 432.2 billion, growing by 66.8% year-on-year and 40.8% quarter-on-quarter, thanks to higher equity method income on SK Hynix.

Let me now discuss major business achievements and strategic plans for each business division. Nonconsolidated MNO revenue for Q2 recorded KRW 2,939.8 billion. A growing 5G subscriber base led to a 3.2% year-on-year increase and 0.6% increase quarter-on-quarter. MNO operating income recorded KRW 270.3 billion. While marketing costs and depreciation and amortization costs increased compared to the previous year, our revenue growth overcame the gap allowing us to maintain a similar income level to that of last year. On a quarter-on-quarter basis, lower marketing and other major costs led to a 4.8% decrease.

As of the end of June, our 5G subscriber count recorded 3.35 million, meaning that we welcomed 700,000 new 5G subscribers during the quarter. Despite COVID shrinking the market overall, our differentiated efforts, including widened contactless sales points and launching 5G smartphones with quantum enhanced cryptography, have accelerated 5G subscriber net adds.

We've also recently announced the official launch of the Xbox cloud gaming service, which SKT and Microsoft cooperated on. Among the 22 countries where the service will be launching, Korea is the only country in Asia. As an exclusive operating partner, SK Telecom is planning to provide a monthly fee-based service through which users can enjoy over 100 games on the cloud. We will do everything in our power to bring a completely new 5G experience to our users.

Media business, based on consolidated revenue of SK Broadband, recorded KRW 918.4 billion. With the acquisition of t-broad, which was completed on April 30, taking effect as well as continued IPTV subscriber growth, it increased by 16.2% year-on-year and by 11.5% quarter-on-quarter. Operating income recorded KRW 60.8 billion. Through enhanced cost efficiency on top of the acquisition effect, it grew by 44.8% year-on-year and by 62.6% quarter-on-quarter.

Security revenue recorded KRW 323 billion. With ADT Caps seeing stable subscriber net adds and new business growth as well as SK Infosec recording higher solution revenue, the number grew by 8.7% year-on-year and by 10.8% quarter-on-quarter. Although operating income fell by 12% year-on-year due to cost related to COVID-19 response measures, it increased by 17.2% quarter-on-quarter, thanks to revenue growth and new businesses gaining a firmer foothold.

Commerce business recorded KRW 192.6 billion in revenue. Thanks to 11ST and SK Stoa's significant GMV growth, it increased by 8.5% year-on-year and 1.2% quarter-on-quarter. Operating income recorded a KRW 2 billion surplus. While 11ST recorded a deficit similar to that of the previous quarter due to increased marketing, SK Stoa's larger surplus allowed us to maintain the BEP.

Now the Head of Corporate Center 2, Mr. Ha, will walk you through the achievements and plans for the new businesses.

Good afternoon. I am Hyung-il Ha, Head of Corporate Center 2. Let me now discuss the achievements and strategies for the new business division for Q2 of 2020.

First, the Media business. With the acquisition of t-broad bringing in over KRW 95 billion in revenue for the effective 2 months, SK Broadband not only grew significantly but also saw a meaningful improvement in its operating margin from 4.5% in the previous quarter to 6.6% for Q2. The company also recorded 8.4 million pay TV subscribers, with 3 million cable TV users coming in.

In B2B, our preemptive investments to respond to the growing online education demand led to revenue growth, and we expect continued growth in the future.

Going forward, SK Broadband will continue to strengthen its competitiveness through stronger bundled products and content, synergies between distribution channels and enhanced investment efficiency.

Next, I'd like to discuss the achievements of the Security business. ADT Caps saw continued revenue growth despite the challenging environment due to COVID-19 by effectively responding to the situation. Increase in CMS service subscribers and growth of new businesses such as home security led to the revenue growth. Going forward, ADT Caps will enter the technology-based new security service market in full force. It will strengthen its new ICT-based businesses such as smart thermal cameras, various home security products and walk-through security solutions. Three years from now, we expect these new businesses to represent over 10% of the company's total business.

SK Infosec is solidifying its leadership position in the information security industry based on the growth of its consulting/solution and control service businesses. We are also going to strengthen growth businesses such as cloud and conversion security.

Moving on to Commerce business. 11ST saw a stronger growth trend, recording a 19% growth in GMV for the second quarter on year, higher than the market average. Going forward, we will maintain the current cost efficiency, aggressively adapt to the contactless consumption trend and expand external partnerships, thereby continuing the growth momentum.

SK Stoa, our T-commerce arm, recorded a 64% year-on-year increase in GMV in Q2 through optimized product offering, diversified sales channels and stronger sourcing capabilities. It has also seen a significant operating income growth, nearing its goal of becoming the leading T-commerce company within the year. We expect SK Stoa to continue the high-growth trend.

And lastly, I'd like to discuss the achievements of our app market subsidiary, ONE store. With strong price competitiveness, ONE store recorded growth for 8 consecutive quarters. Games in particular have seen a significant market growth, recording a 39% year-on-year increase in transaction volume. Profit wise, ONE store's operating income turned to black for the first half of the year. It is currently preparing to enter the Southeast Asia market as well through a game platform joint venture with Singtel and AIS, #1 telcos in Singapore and Thailand, respectively. SK Telecom will continue to achieve meaningful results in the new ICT field.

I will now hand it back to the CFO. Thank you.

The interim dividend for 2020 has been decided at KRW 1,000 by the Board of Directors meeting held in July. While the amounts remain the same, the amount was decided as a way of sharing a part of our dividends collected from listed subsidiaries with our shareholders. This year's amount was decided based on the dividend payout -- paid out by SK Hynix in late April. And we will be maintaining the shareholder return policy of reflecting dividends collected from stable listed subsidiaries going forward.

With masks and contactless environment now the norm, the government, society and citizens are overcoming these challenges together. Connection and communication through MNO, entertainment and comfort through Media, safety and trust through Security and convenience and diversity through Commerce have become more important than ever. And we will do our utmost to strengthen these values and achieve change and growth with a heavy sense of responsibility.

We ask for the continued interest and support from our investors and analysts. Thank you.

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

The first question is regarding your shareholder return policy. In the past, you've talked about various options, including DPS payout and share buyback. Have any of them become more developed? So I'd like to hear about more details regarding your shareholder return policy.

The second question is regarding the schedule and plans that you have for the IPOs of your subsidiaries. I'd like to hear about what candidates you may have, when you are thinking of in the IPOs, and also, what are your priorities?

And I just want to ask one more question. So SK Broadband has reported a historic income now. And so aside from the acquisition effect of t-broad and aside from IPTV, have you seen any significant improvements or achievements in its B2B business?

Thank you, Mr. Kim, for your questions. I'll be answering your first question regarding the shareholder return policy, and then I'm going to hand it over to Mr. Ha to answer the rest of your questions.

So the basic guideline or a direction that we want to aim our shareholder return policy towards is considering the profitability of MNO as well as sharing the achievements that we have generated from our new businesses with our shareholders. And as a way to do that, we decided to reflect the regular dividends collected from our listed subsidiaries.

And so based on those principles, this year's interim dividend was decided based on about 50% of the regular dividends paid out by our listed subsidiary, SK Hynix. And currently, while SK Hynix is the only listed subsidiary that pays out regular dividends, we are planning IPOs of SK Broadband and ADT Caps and other subsidiaries. So once these subsidiaries are listed and they pay out a regular dividend, then we believe SK Telecom shareholder volume will be increased accordingly.

As for the year-end dividend, this will be linked to our MNO achievements to go about in a stable manner, and we will do our best to maintain the level to that of what we have currently.

And unrelated to such changes, if we believe that our stock price continues to be undervalued, we will review options for a share buyback.

I will now have Mr. Ha answer your question regarding IPO.

The new ICT subsidiaries of SK Telecom are not only creating value in their own respective areas of business, but they're also growing through the synergies that are created between businesses. So as for the IPOs of our subsidiaries, we are going to take into consideration the earnings of each respective company as well as the financial market environment, and we are going to review it in a manner that can be beneficial to all of the company's shareholders. So with ONE store and ADT Caps on the lead, we are also considering IPOs of Wavve, SK Broadband and 11ST.

Currently, the IPO plans are being strategized per each invested company, and we will push forth with the schedule with the companies that become fully prepared.

Let me now address your additional question regarding the other new businesses achievements aside from IPTV. SK Broadband has actually continued for quite some time to see its B2B business grow for quite some time. And with the growing online education demand as well as more people working from home, we are seeing more revenue increase on IDC and Solutions side. Currently, SK Broadband is carrying out enhancing and expanding its IDC, and we are hoping to launch that by next year. And so once that is completed, we believe that there will be significant improvement in IDC-related revenue.

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

My first question is regarding how much t-broad contributed to your earnings for this quarter. You did briefly mention how much it did, but I'd like to hear about the breakdown between revenue and operating income and also what kind of synergies you expect during the second half of the year as well as your marketing strategy.

And the second question is, we saw the -- Note 20 was disclosed to the world yesterday, and consumers will now be able to book their -- make reservations to get their Note 20 beginning tonight. So in the second half of the year, there will be quite a number of devices newly launching and including your 5G devices, what will the marketing situation be in the second half of the year?

First, thank you, Mr. Ahn, for your question. Let me first answer your question regarding t-broad. With the merger of t-broad being complete during Q2, 2 months' worth of t-broad's earnings were reflected on that of SK Broadband. And so through the M&A, in terms of revenue, it was a KRW 95 billion plus. And we believe that from the second half of the year, when t-broad earnings will be coming in full scale and when we will be able to see the merger synergy take effect, we strongly believe that SK Broadband's earnings will continue -- will grow even further.

And so our current outlook is that based on the M&A with t-broad, it will be representing over 10% of revenue of SK Broadband and over 20% in terms of operating income for SK Broadband during the second half of this year.

And going forward, we will be utilizing the widened or expanded distribution channel and be utilizing cross-selling as well as the fixed mobile integrated services for the -- that take into account the cable users as well. We expect this to lead to greater marketing efficiency. And we will be also expecting greater increase in revenue through efforts, including IPTV and cable TV integrated ad sales as well as stronger digital cable TV content. Alongside with that, we -- being able to share our network infrastructure will lead to enhanced investment efficiency. And there will also be a very efficient resource management due to integrated operation of our IT systems as well. And we believe these will all lead to greater profitability.

And as for your second question, I will hand it over to the CFO.

Since the fourth quarter of 2019, we have seen a much alleviated market competition that has continued into Q2, and we will do our best to maintain the current stabilizing trend. At the very early stages of 5G commercial launch, one of the major factors of excessive competition was the market share, but this has now become a lot more stable. And also, the government is very committed to stabilizing the market. So we believe that there is very low possibility of marketing competition becoming like that of last year.

In the second half, there will indeed be launches of new 5G devices, and that will strengthen our handset device lineup, and the 5G market will take more -- become more energized. However, we will continue to launch 5G exclusive services and also provide unique experiences to our users, thereby leading the way to a healthy and constructive competition that focuses not on price but on service.

So as you mentioned, for example, we now have the Galaxy Note 20 now being launched. But as we mentioned before, we have many external partners such as being an exclusive operating partner with -- in xCloud with Microsoft. So utilizing these strong partnerships, we want to maximize our marketing synergy while at the same time making sure we cut costs.

The next question will be presented by Min Jun Jang from Kiwoom Securities.

I have the following 2 questions. My first question has to do with 5G Phase 2. So we're seeing a lot more stable marketing costs as well as CapEx -- on the CapEx side as well. So when will we be able to see the 5G profit turn around? So I'd like to hear about your outlook in terms of the income for the second half.

And the second question is, you recently announced the launch of the xCloud gaming services with Microsoft. Can we get a rough subscriber target that you are looking forward to?

Thank you, Mr. Jang for your question. Let me first address your first question regarding the profit growth for the second half. During Q2, when you look at the MNO operating income, it recorded a 5% increase quarter-on-quarter. And as for year-on-year, we maintained about the same level of that of the previous year. While the 5G subscriber increase was weaker than what we had originally expected due to the effects of COVID-19, you can see that the current telecommunication market is seeing a very stable market without any excessive competition. And I believe this is a result that also was due to our company's cost-cutting efforts as well.

So after -- so into the third quarter, we believe that the market will continue to be at the current stable state, and we expect revenue growth to continue as well as a result of growing 5G subscriber base. This quarter, as you know, on a consolidated basis, we did see the profit turnaround year-on-year. So we will do our best to make sure that MNO will also be able to record a profit turnaround on a year-on-year basis. Alongside the profit growth for MNO that we have in plan, we will also be sure to accelerate the new ICT portfolio growth so that we can widen the increase gap of the consolidated operating income.

Let me now move on to answer the question regarding our xCloud Gaming Service launch. Beginning from October of 2019, we have been running xCloud Gaming Service trial. And compared to the United States or the U.K., we have seen about 2 to 3x more in terms of the hours of usage as well as rate of returning users. So it was very well received. The Xbox Cloud Gaming Services is not only for our SK Telecom, other -- subscribers of other telcos can also use this service. And through the Game Pass Ultimate, we will be providing over 100 games at the fixed monthly price of KRW 16,700.

And as the exclusive operating partner of Microsoft, we have an exclusive partnership with them for the Korean market. And so through hyper-collaboration, including Microsoft content, SK Telecom, top-notch networking and marketing as well as customer care capabilities and also with the device Galaxy Note 20, we are planning to lead the domestic cloud gaming market. And through these cloud gaming services, we expect to acquire about at least 1 million new subscription-based users by the year 2023.

The next question will be presented by Joonsop Kim from KB Securities.

I have 2 questions about -- the first about B2B and the second about OTT. So my first question is there seemed to be a lot of interest in SK Telecom's B2B businesses recently. So I'd like to hear about your outlook for the business as well as any major milestones that you could share with us.

My second question is, there is a lot of interest in OTT as well, and we've seen a lot of news regarding how Wavve is looking to cooperate with other domestic OTT services. And I think there's also a lot of change, one of which include your decision to launch Ocean. So could we hear more about your strategies going forward in terms of how you plan to source further content as well as what differentiates your service against others?

Thank you, Mr. Kim, for your question. I will first address your question regarding the outlook of our 5G B2B business. With the 5G integrated cloud service at the center, SK Telecom is looking to expand our B2B business. In order to do so, we have already established a partnership system with strongest players in the cloud business at home and abroad such as best in global and Amazon Web Service.

And based on such strongly established partnerships, we are preparing to provide a 5G MEC-based cloud service for our corporate clients. This -- we will go through a trial service during the second half of the year, and we plan to commercially launch it by the year-end.

With the Korea Hydro & Nuclear Power, we have recently started building the smart plant. And to do so, we have the 5G network using quantum cryptography exclusive to corporate clients. And we are also in the process of discussing -- developing new business models with companies like Hynix, Samsung Electronics and POSCO based on -- or that also include the establishment of a corporate client exclusive 5G network.

One of the most representative use cases of 5G B2B would be the 5GX Smart Factory business, which we are currently operating. And we're also planning to provide a customized solution for our corporate clients that integrate 5G and cloud -- infrastructure such as 5G and the cloud. And so through the 5G cloud-based B2B businesses, we expect to be able to generate about KRW 200 billion worth of new business opportunities over the course of the next 3 years.

I will now have Mr. Ha take your second question regarding the OTT service.

During the first half, we did see a relatively weak subscriber or user number. However, we expect this number to increase once again through stronger content sourcing. And so by the year 2023, we stand by the target of achieving 5 million paying subscribers as well as KRW 500 billion in revenue.

In the case of original content, we have in schedule to produce new original content, the titles of which are Alice, Lies of Lies, Zombie Detective, which are all working titles. And recently, with the growing contactless demand and the nonface-to-face environment, we're also preparing concert content. And in July, Red Velvet will be the first of many new Korean K-pop idol unscripted content.

Also, we are continuing to build and expand our film library that all of our Wavve users can utilize. And we are also planning and currently carrying out marketing efforts based on the classic content coming from the 3 linear broadcasters, which is a strong point that Wavve has. On top of that, Wavve is also reviewing and seeking various measures to cooperate with global partners such as NBCUniversal. And through that, we are also reviewing options to enter the global market as well. So in this sense, as anything becomes more developed or crystallized, we will be sharing that with the market.

Moving on, I'd like to talk about any potential cooperation with domestic OTT services. So as I briefly mentioned before, we are very much convinced of the growth potential that Wavve has. However, we do feel that in order to have an upper hand in the global content market, we may need to grow in terms of economy of scale through cooperation with other so-called K-OTT players. So we will be open to various new options through which we can achieve hyper-collaboration and grow the K content ecosystem.

Lastly, regarding our recently launched Ocean service, this is a premium content that has very strong film and foreign drama series content which was intend -- which was created with the intention to enhance the convenience of our BTV monthly price plan product. And so this is a monthly price plan video on-demand service that only BTV users can subscribe to. So in its nature, it is completely different from Wavve.

SK Broadband will continue its efforts to cooperate in order to strengthen its media business competitiveness through efforts that include joint investment in content with Wavve.

The next question will be presented by Hong-sik Kim from Hana Financial Investment.

I have 3 questions. So the first is when you look at the numbers for Q2, we are not seeing a very strong ARPU. So is there -- has there been any sort of one-off items that led to that?

And my second question is just to go back to what you said earlier. So is it safe for us to say that in the second half, on a nonconsolidated basis, the company does expect the income to rebound to a plus? And I'm just asking just to make sure because there seemed to be quite a lot of concern regarding your revenue as well.

The last question is, when we look at the CapEx for the second half, it's about KRW 900 billion. This is actually quite higher than what we had anticipated. Can you tell us exactly how much of that was network CapEx? And also, when we look at some of the media coverage recently, there is quite a lot of concerns and, in fact, complaints about the coverage of all 3 telcos. And it seems that this could even become a legal issue, maybe, looking at how some of the organizations and also the government is reacting to it. So I would like to hear about your outlook on that as well.

Thank you, Mr. Kim, for your questions. Let me take your first question regarding the ARPU. First of all, when you look at the total ARPU, because of a growing number of IoT accounts in 2020, we did see the ARPU fall slightly. However, when you look at it from a handset account -- just only for the handset accounts, we did achieve a 3% year-on-year growth. So overall, including the IoT accounts that are coming in as well as individual subscribers that are coming in, we expect the revenue growth to become more solid going forward.

And as I mentioned before, regarding your second question, on a consolidated basis, yes, it will indeed turn around. And also, we will do our best to achieve that for the nonconsolidated MNO income as well.

Let me now move on to your question regarding the network CapEx. As you well know, last year, SK Telecom spent quite a larger amount of CapEx compared to our normal -- or other years due to the commercial launch of the 5G service. And this year, we will be putting in more investments to increase and expand the 5G market.

And so as for the total CapEx, we will carry out the CapEx spending in a very efficient manner as much as possible by reducing any kind of CapEx that goes into other networks aside from 5G. So you could see the total CapEx or the portion of 5G CapEx against the total amount of CapEx will continue to increase. However, as for the detailed numbers, please ask for your understanding that we cannot disclose the numbers due to competition issues.

The next question will be presented by Seyon Park from Morgan Stanley.

My first question, I just want to ask some more about your new shareholder return policy that you mentioned. So is it safe to say that for this year, the dividend will be maintained at the former KRW 10,000? Or is it to say that from this year-end, we will be able to see sort of the upside in terms of dividend for your new business results plus the stable dividend payout based on your MNO telco business, will we be able to see the effects of that beginning from this year-end? And also, so for example, in next year, if SK Hynix does really well and if they increase their dividend payout, does that mean we can also expect our dividends to be increased?

And the second question is, you said that you -- that share buyback is a possibility. And so if that is the case, then what are the preconditions for you to carry out a share buyback? And is -- from what you said, is it safe to understand that your management currently feels that your current share price is undervalued? And so about when will the share buyback happen possibly? That's my question.

Thank you, Mr. Park, for your questions. And so I think that you had about 3 questions, but I do believe all of them relate to the dividend issue, so let me just address that as a whole.

So first of all, in terms of the interim dividend, from previously, we have paid out something close to a DPS type where we paid out KRW 1,000 for the interim dividend. However, as I mentioned, going forward, we will be linking that to the achievements, earnings or any kind of additional gains that come from our subsidiaries.

So SK Hynix has changed their share -- set out their shareholder return policy for the upcoming 3 years to KRW 1,000 in DPS [plus 5%] of their cash flow. So based on that, I think there is definitely an upside to our dividend already. And as I mentioned before, as for companies like SK Broadband and ADT Caps, I believe they all have the potential to pay out dividends in the future. And I think that these factors are definitely an upside factor to SK Telecom's interim dividend going forward.

As for the year-end dividend, again, as I mentioned, we will be taking into consideration the MNO results. And we will also be maintaining the current DPS of KRW 9,000. And so I would say that the annual dividend for 2020 compared to that of the last year, definitely has potential upside to it. And the discussions regarding share buyback is excluding these issues, so it's unrelated to our dividend.

And as for the share buyback, this is a decision that needs to be made through the meeting of the Board of Directors. However, if you look at the current share price, it's been quite stagnant at lower KRW 200,000, and so management believes that it is indeed undervalued. And so if we were to carry out a share buyback, we will do that within 2020.

This concludes the earnings conference call for Q2 of 2020. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]