SK Telecom Co Ltd (SKM) 2024 Q2 法說會逐字稿

Good afternoon. I am Hee Jun Chung, IRO of SK Telecom. Thank you for joining SK Telecom's earnings conference call. Today, we will first deliver a presentation on major events, 2024-Q2 earnings highlights and business performances, which will be followed by a Q&A session. The call is attended by our executives from relevant business divisions, including Yang Seob Kim, CFO of SK Telecom. And we're providing consecutive interpretation for the call.

As you may know, I would like to remind you that all forward-looking statements are subject to change depending on various factors such as market and macro situation.

Let me now present our CFO.

Good afternoon. This is Yang Seob Kim, CFO of SK Telecom. We are already in the second half of 2024, which marks the 40th anniversary of SK Telecom. Under the vision of becoming a global AI company, we have been mobilizing enterprise resources to implement the AI pyramid strategy. We have been especially focusing on expanding partnerships and investments with leading global AI companies to strengthen our global AI capabilities.

This last year, SK Telecom has invested more than $300 million in AI, including a $10 million investment in June in Perplexity, a leader in next-generation AI search engine; and a $200 million investment in July in SGH or SMART Global Holdings, a global leading provider of AI data center solutions.

We have been carrying out these investments and alliances in a strategic and organized manner according to the AI pyramid strategy. In order to expand the AI business, we will continue to pursue investments and partnerships actively to strengthen competitiveness and leverage global demand for AI services together with members of the Global Telecom AI Alliance or GTAA.

Let me now report on the consolidated financial results for the second quarter of 2024. Consolidated revenue reported KRW4.4224 trillion, up 2.7% year over year, driven by the stable growth of MNO business and major subsidiaries.

Operating income posted KRW537.5 billion, up 16% year over year, thanks to the stabilization of costs such as marketing and depreciation costs as well as recognition of one-off profits. The operation improvement initiative has contributed to improved business fundamentals, and the AI pyramid strategy has produced tangible results in the respective domains. Net income posted KRW350.2 billion.

On a non-consolidated basis, revenue posted KRW3.1915 trillion, up 2.3% year over year. Operating income and net income reported KRW450.4 billion and KRW280.3 billion, respectively.

Let me now turn to business highlights for 2024 second quarter and strategic directions in accordance with the AI pyramid strategy. First, in the AI infrastructure domain, data center revenue grew 20.5% year on year, thanks to AI-driven demand growth for data center and higher utilization rates of the data centers. As was reported earlier with our investment in SGH, we have secure differentiated capabilities in the AI data center market, which is expected to boost our AI data center business and improve operational efficiency.

SGH is a leader in data center solutions. They developed ultra large AI clusters with 16,000 GPUs for Meta in 2023 and were selected in 2024 as an AI cluster operator of the Voltage Park with 24,000 GPUs. We plan to combine SGH's capabilities to build and operate AI clusters with SK Telecom solutions such as data center management system and liquid immersion cooling to target the global AI data center market aggressively.

We will also actively leverage SGH's capabilities for Edge AI, which belongs to the AI infrastructure domain. SGH owns edge solutions specialized for industrial applications. The two companies will cooperate to develop telecom Edge AI solutions by combining AI with telecom infrastructure. Partnership activities are also taking place actively regarding LLM.

At an event organized by the TM Forum, a Global Alliance of Telco and Tech Companies held in Copenhagen in June, the second Global Telco Alliance Roundtable was held, where the five founding members of the GTAA signed an agreement to establish a joint venture for telco LLM, thereby establishing a forward base for AI ecosystem expansion. With the establishment of the joint venture, SK Telecom aims to be a game changer that leads the global AI market with domestic and foreign AI players.

Next is the AIX domain. The MNO business recorded 16.23 million 5G subscribers as of the end of June 2024, accounting for more than 70% of the total subscriber base. SK Broadband's pay TV subscribers and broadband subscribers reached 9.6 million and 7.05 million, respectively, as of the end of June.

While the fixed and mobile market is maturing, our activities to sell high ARPU price plans and attract high-tier subscribers continue to improve profitability. We're also committed to innovating business fundamentals of the fixed and mobile business through OpEx and CapEx efficiency improvement using AI.

The enterprise business has maintained a growth trend of approximately 10% year over year, along with stable lease line revenue. The IoT business posted a revenue growth of 29% year on year. The cloud business also saw their revenue grow 28% YoY, excluding one-off factors. It is worth noting that we successfully won the first order for AI cloud business in the second quarter, thereby confirming market demand. We will pursue business scale up going forward.

Next, AI services. A dot started to offer the call recording and summary service and real-time calling interpretation service for Android handsets in the second quarter. As of the end of June, the cumulative downloads exceeded 4.55 million. In the second half of the year, we will upgrade UX to make it more user-friendly and introduce a generative AI search feature of Perplexity. We're working on improving convenience and accuracy of A dot to make it a super personal AI assistant.

T Universe achieved MAU of more than $2.7 million as of the end of the second-quarter 2024. Following the YouTube premium package that has enjoyed popularity, we launched the Universe Pass Netflix in late June, which is also receiving a positive response in the market. We will continue to expand partnerships with streaming platforms to spread a new culture where people subscribe to T Universe to use streaming services, including Wavve.

Finally, let me turn to shareholder returns. The DPS for the second quarter was determined at KRW830, the same as Q1 2023. The company will strive to reinforce strong earnings from the fixed and mobile business and improved profitability and efficiency while producing tangible results from the AI company initiatives. Furthermore, we will do our best to achieve optimal balance among investments for growth, financial structure improvement and shareholder returns, thereby maximizing corporate value and shareholder value.

We ask for your continued support and encouragement. Thank you. We will now begin the Q&A session.

Jae-min Ahn, NH Investment & Securities.

I'm Ahn Jae-min from NH Investment & Securities. First of all, I'd like to congratulate you on very good results despite a challenging market environment. I'd like to ask you a couple of questions regarding your second-quarter results. First of all, can you elaborate more on the factors behind your good results for the second quarter, in particular, related to the one-off profit you recognized related to your patent pool and also your outlook on the bottom line trend in the second half of the year?

My second question has to do with the competitive landscape in the second quarter, which is also related to my previous question. And going down the road in the second half, we're expecting a new iPhone release. And so, can you comment on your projections on the overall handset-related competition landscape?

I am CFO, Kim Yang-Seob of SK Telecom. I'd like to first take your first question on the second-quarter results. We believe that there were several reasons behind the good results for the second quarter. First of all, because the 5G subscriber base and the pay TV market continued to grow and also because AI and new growth businesses, including AI data center, are producing good results.

Secondly, we have been striving to improve the overall business fundamentals across the company and have been promoting efficiency in terms of our profit structure, balance sheet and cash flow. And I believe these efforts have led to better results for the second quarter as well.

And thirdly, as you mentioned, we recognized patent-related profit all at once, and this one-off gain also added to better earnings for the quarter. To elaborate more on this one-off gain from our patent pool, based on our diverse R&D results, we have been utilizing monetization from the IP pools based on our patents. So basically, the structure is that we receive royalty fees on our patent pools and the agency that is in charge of this business will allocate such income in proportion to our stake. And then, we will recognize some expenses, including the fees that we pay to the agency as well as fees related to joint R&D.

Furthermore, we benefited from Y-o-Y and Q-o-Q base effects. To be more specific, in the second quarter of last year, we saw a temporary decline in MNO revenue due to stronger competition in the MVNO market. And on a Q-on-Q basis, in the previous quarter, we recognized incentives for employees and executives.

SK Telecom continues to evolve as a global AI company, a certain level of investments and resources will be required going forward. But we will do our best to ensure that these investments produce tangible results, and there will be growth in all domains of the AI Pyramid while continuing to improve the bottom line through efforts to improve the overall business fundamentals and AI transformation.

Now, on your second question on the competitive landscape, our marketing strategy team will respond.

I am Park Kyung-Il from the Marketing Strategy team. Due to regulatory changes and increasing public interest regarding handset subsidy and marketing expenses, including discussions on the abolition of the enforcement decree of the mobile device Distribution Improvement Act and introduction of mobile number transfer support, we saw a slight increase in the number of transfers on a year-over-year basis.

But while number transfers increased for all three telcos, it has had little impact on the market size or profitability. And we believe that it will take some time before we can determine whether such a trend is temporarily driven by changes in subsidy rules. As the 5G market continues to mature, we believe that the telcos are no longer competing on subsidy, but rather competing on price plans and differentiated benefits and services.

So we will continue to focus on strengthening our own competitive edge based on differentiated services regardless of regulatory changes. We will utilize our AI capabilities for sophisticated target marketing and strengthen online distribution channel competitiveness and utilize AI customer centers for more effective marketing and cost efficiency.

Aram Kim, Shinhan Securities.

I'm Kim Aram from Shinhan Investment and Securities. We can expect good results for the third quarter and the fourth quarter as well, thanks to your continued efforts to improve the bottom line. So when you have these additional resources available from these improved earnings, I'd like to understand how you're going to utilize them, especially when it comes to striking a balance between reducing the liabilities, which is an initiative that has been led by the SK Group as a whole and shareholder returns and investments for your AI business.

And secondly, there has been many reports in the media about your data center business as well as your new AI initiatives. So can you comment on which AI businesses you believe are going to be most profitable? And can you also elaborate on your Edge AI plans?

Thank you for your questions. I'm CFO. Let me comment on your question regarding our resource allocation plan. On a consolidated basis, our EBITDA is approximately KRW5 trillion to KRW5.5 trillion, and when we spend about KRW3 trillion for CapEx and KRW1 trillion to KRW1.5 trillion for recurring expenses, including payments for frequencies and interests, then we're left with about KRW1 trillion of free cash flow. This year, we are carefully examining our earnings and debt structure and cash flow to figure out where we can generate additional cash flow.

And based on our initial analysis in the next three to five years, although I cannot suggest any concrete numbers at this point in time, the company is expected to generate additional resources. As you may know, the company may utilize these excess cash flow in three major ways. We first need to consider investments for future growth and also need to consider to increase shareholder returns when we see significant improvements in our earnings. And at the same time, it is crucial to boost financial stability as well.

First, to give you more elaboration on our investment plans. Our investments will continue to be strictly guided by our AI Pyramid Strategy and will be made in areas that can generate profit in the future. For the past two years, we have invested in Anthropic, Lambda, and SGH for businesses such as LLM, AI data center and PAA, and these are the areas where we can monetize based on AI. And this year, our AI-related equity investments are going to be around KRW300 billion, including a $200 million investment in SGH.

Doing AI business requires an astronomical amount of investment and AI is advancing so rapidly. And we've decided to choose the path of partnering with leading AI companies in Korea and abroad, and we have been making small-scale investments to secure capabilities that we need.

We often receive questions on why SK Telecom and not SK Square is making these investments after the spinoff. But I'd like to reiterate that we are executing these investments under the AI Pyramid Strategy with the clearer goals of dramatically strengthening our core competitiveness as a telco, creating new sources of profit and improving earnings.

Next, in terms of shareholder returns, we believe that our shareholder returns are in line with global standards in terms of size and methods. Our dividend payout ratio is higher than 78%, and our dividend yield is at 7% level, and we also carried out large-scale share buybacks and cancellations in 2021 and 2023. However, it is also true that these efforts and a high level of shareholder returns have not been properly reflected in our corporate valuation in the stock market. And honestly, this is something that concerns me as a CFO.

So in principle, in terms of total shareholder return, I believe we need to return to shareholders more than the cost of equity through business growth and higher earnings. We will continue to maintain a stable dividend level, conduct share buybacks and cancellations when the timing is appropriate. And in the medium to long term, we will consider increasing shareholder returns in proportion to significant earnings improvements.

Finally, to comment on borrowings. We are confident that SK Telecom's balance sheet is very strong, as is demonstrated by the very high credit ratings that we've been maintaining in Korea and abroad for a long time. Nevertheless, to expand room for future investments and shareholder returns in the long run, it is also necessary to reduce borrowings to a more comfortable level. Rather than mentioning any artificial target as to how much to reduce by when, what I can say now is that some portion of additional cash flow generated from improved business performance will be used to improve the financial structure in a flexible manner.

So to sum up, we will improve our business fundamentals in all areas of business to generate meaningful additional resources, which will be used for investments for growth, shareholder returns and balance sheet improvement in a balanced manner.

Regarding your question on Edge AI, the infrastructure engineering office will take that question.

I'm Keun-joo Hwang from the infrastructure engineering office. As you may know very well, AI services demand AI computing power for large-scale AI learning and inference and AI computing has been provided by centralized AI data centers. Recently, we also see a growing demand for distributed AI computing such as on-device AI, but on-demand AI has limitations in terms of battery life and performance. And here, Edge AI has emerged as an alternative solution, and we believe that Edge AI can offer new opportunities for telcos.

To give you more details, Edge AI is about delivering AI computing and communication services using telcos assets and equipment. AI learning requires large data centers, AI data centers, but AI inference can be handled by Edge AI. Edge AI is superior to AI data centers in terms of response time and information security while providing stronger AI computing compared to on-demand, on-device AI, and it is an area where telcos can excel.

For that, we are working with global big tech companies and telcos to develop ways to provide efficient AI computing by placing AI service in some telco base stations. We will continue with technology standardization related activities and develop into an AI-RAN in the future where one equipment can provide both AI and telecom services.

If Edge AI infrastructure is well established, then we can increase AI revenue and expand AI business in a cost-efficient manner, utilizing our existing telecom assets and equipment. And this will result in top line growth as well as creating an opportunity for our telco infrastructure to be revalued. Thank you.

Joon-Sop Kim, KB Securities.

I am Kim Joon-Sop from KB Securities. I'd like to ask two questions related to your AI business. First of all, when are you expecting more materialization of results coming from your AI businesses? Recently, SK Telecom has been exhibiting good growth in terms of AI business, and I'd like to understand when these initiatives will actually translate into more visible earnings?

Secondly, this is related to the first question. What is your expectation for your investment, $10 million investment in Perplexity, and what has been going on regarding this? Thank you.

Thank you for your questions. I will first take your first question on the time line regarding AI businesses. It's been three years since SK Telecom pursued AI in earnest, and we see now visible ways to monetize AI. SK Telecom aims to generate profit in three main areas of AI data center, AI B2B and AI B2C business. AI data center is the first area that we can pursue right away.

Typically, traditional data centers start to generate revenue three years after construction, but AI data centers can post sales right away. We will move away from the conventional co-location type data centers, but offer GPU as a service at energy solutions and pursue global expansion.

In the AI B2B market, there has been a shift from cloud to AI, and this is where we are cooperating with tech companies such as Anthropic and OpenAI. And our in-house developed A.X is becoming important in this market as well in terms of security and cost. So for enterprise business, we will cooperate with SK Group companies to meet AI needs of customers and affiliates and pursue global expansion as well. In the short term, our revenue target for this year is more than KRW60 billion by providing generative AI, AICC and AI data ad solutions to the public financial and the manufacturing sectors.

Finally, on the AI B2C business, we were actually the first company to enter this market with A dot, and we are working on service upgrade to strengthen personal assistant features and considering various ways to generate profit using A dot this year. Monetization through subscription is becoming a common business model for global AI services and SK Telecom can be competitive in operating this type of subscription business model. We also aim to conduct global market tests this year for global PAA. We're planning to add multi LLM model, including A.X, Anthropic and OpenAI, and we're considering diverse services such as AI search in cooperation with Perplexity and productivity services.

Now, regarding your second question, the Head of AI Growth Strategy will address this question.

I'm SG Chung, Head of AI Growth Strategy. To respond to your second question, in June, SK Telecom made an equity investment of $10 million in Perplexity, an AI search engine company. Perplexity specialized in generative AI search, and they launched an AI search service with higher accuracy and reduced hallucination through search engine optimization and retrievable augmented generation, and their corporate value has exceeded $3 billion in just two years after start up.

Based on generative AI search technology of Perplexity, we will develop user-friendly AI agents, and the two companies have agreed to cooperate on AI technology expansion, including inference software. In particular, the two companies have agreed to develop Korean enhanced AI search, which will be optimized for Korean Internet search environment and search culture.

SK Telecom and Perplexity will combine their technological capabilities to offer the most optimized AI search experience for our customers. Perplexity will be added to the upgraded A dot as part of multi LLM agent together with ChatGPT, Anthropic and Claude in late August.

And also, SK Telecom will be the only telco in Korea to offer the Pro model of Perplexity, which will be available exclusively for our customers free of charge for one year from September. In addition, Perplexity engine will be added to the global personal AI assistant project that we're currently working on as a default AI search engine, which will offer convenient AI search experiences that reduce hallucination and increase accuracy.

This concludes the earnings conference call for 2024 second quarter. If you need further explanations or have additional questions, please contact IR at any time. Thank you.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.