SK Telecom Co., Ltd. (A017670) Earnings Call Transcript & Summary

[Interpreted] Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference for the fiscal year 2022 first quarter earnings results by SK Telecom. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2022 first quarter earnings results by SK Telecom.

[Interpreted] This is Jeong Choi, IRO of SK Telecom. Today's conference call will consist of the presentation on the earnings results for Q1 of 2022 and the future management plans and strategic direction by Jinwon Kim, CFO and Head of Corporate Planning, followed by a Q&A session. Today's conference call will provide consecutive interpretation, and we have 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.

[Interpreted] Good afternoon. This is Jinwon Kim, CFO of SK Telecom. Last year, SK Telecom successfully completed a spin-off to maximize shareholder value, and announced the launch of SKT 2.0, where we redefined our business centered on 5 business groups. SK Telecom works to maximize total corporate value by developing and implementing strategies optimized for each business group to achieve growth of their respective businesses. We ask investors and analysts for your continued support and interest for our efforts. Now let me report on the consolidated financial results of Q1 of 2022. Consolidated revenue reported KRW 4.2772 trillion. It decreased by 0.5% Q-on-Q due to the base effect from seasonal sales in Q4. On a Y-o-Y basis, it increased by 4%. Operating income posted KRW 432.4 billion, up 15.5% year-on-year and 90.7% Q-on-Q. Solid earnings growth was driven by multiple factors, including the expanded share of 5G, revenue growth supported by growing IPTV and broadband subscribers, impact of stable market competition and base effect from seasonal costs recognized in Q4. Net income recorded KRW 220.3 billion, posting a 61.5% decline year-on-year and a 30% decline Q-on-Q, mainly due to the exclusion of equity message gains from SK Hynix, and base effect where gains of the sale of SK Wyverns were recognized in Q1 of 2021. On a nonconsolidated basis, revenue grew 3.2% year-on-year and 0.1% Q-on-Q to post KRW 3.0774 trillion. Operating income and net income reported KRW 356.9 billion and KRW 252 billion, respectively. Having reported the financial highlights of Q1 of 2022, let me now move on to major achievements and strategic directions for each business group. First, both revenue and profitability of fixed and mobile business group continued to improve on the back of 5G and IPTV competitiveness. As of the end of Q1 2022, we have 10.88 million 5G subscribers, which represents an increase of 1 million from the previous quarter. Given the current trend, we expect the 5G subscriber base to exceed our target of $13 million by the end of the year. The 5G penetration rate is likely to surpass 50% of the total handset subscribers during this year. Against this backdrop, we will launch various price plans and services to meet the circumstance of 5G becoming mainstream and customer needs becoming more diversified. As this year marks the fourth year of 5G launch, market stability trend is expected to continue. SK Telecom aims to maintain efficient market operation while refraining from unhealthy marketing competition. The number of pay TV subscribers of SK Broadband stands at 9.1 billion as of the end of Q1. The pay TV subscriber base growth has been driven by sustained increase in IPTV subscriber net adds, the large pay TV subscriber base leads to better bargaining power with business partners and improved profitability because of economies of scale. Media and Enterprise businesses continue to enjoy top line growth. Established by SK Broadband is a multiple program provider in January last year, Media has celebrated the first anniversary of regular broadcasting in April. On Channel S, 70% of the total programs are exclusive content through partnerships with Kakao Entertainment and S.M.C&C. Channel S is strengthening the value chain of media business that includes content, channel and platform. As Korea's #1 e-commerce company in terms of revenue, SK Stoa reported sustained growth with Q1 revenue of KRW 89.5 billion. It will develop growth strategies in cooperation with SK ICT family companies to reinforce its market leadership. Advertising business is centered on diverse and fixed line and wireless media with a combined pass rate of 160 million daily views. We plan to apply our sophisticated AI-based targeting capability to the advertising business and diversify types of media, including tPhone app, MPP platform and addressable TV to pursue an annual growth rate of 40% for the next 4 years. Moving on to Enterprise business. New data centers in Kosan and [ Shiksha ] were opened in July last year, and they have already secured customer contracts, thereby expecting sustained revenue growth. We're also preparing to open other data centers in areas such as the solar metropolitan area to meet the exclusive growth in demand for data centers. Cloud business has also been growing, thanks to traffic-linked revenue growth and increasing customer orders as the scope of cloud business continues to expand. In addition, to promote AI robot-based logistics business in March, SK Telecom signed a business cooperation agreement with CMES, an AI robot software company, which includes an equity investment in CMES. We will work with CMES to develop logistics AI robot business. For AIVERSE business, we continue to make efforts to strengthen core capabilities necessary to produce tangible results. Our subscription service, T Universe, has recently produced meaningful results with a number of users reaching 1 million, and GMV exceeding KRW 130 billion in Q1. We will keep strengthening key benefits through expanding the number of items for overseas that are purchased on the 11th Street, launch breakthrough subscription products through collaboration with popular brands, and offer personalized subscription products by utilizing AI-targeting capability. These are part of our efforts to ensure that subscription services become a major source of income for SK Telecom. Ifland, our Metaverse platform achieved a fivefold growth from July last year, the month of launch, with MAU reaching 1.35 million in March. At MWC in February, Ifland was recognized as a successful 5G use-case for a telecom company. Since then, we have been receiving inquiries from various global companies for partnership, and we plan to expand globally this year by offering our service in nearly 80 countries. In April, we made an equity investment in Morph Interactive, a Metaverse platform developer in Korea, to secure core technologies and development capability for Metaverse and beef up our service competitiveness. We also plan to launch an open-data service for AI agent, which is a character-based agent that shares daily life with customers. It is going to be a B2C AI service that uses deep learning technology to continue to become personalized based on customer usage. We will share more details with the market when the service is launched. Finally, let me discuss our shareholder return policy. SK Telecom currently pays dividend quarterly, and the total dividend size will be determined within 30% to 40% of EBITDA minus CapEx, as was announced before. The Board determined the first quarter DPS to be KRW 830. According to the National Customer Satisfaction Index released in April 2022, SK Telecom was ranked first for mobile phone service for 25 consecutive years. Since the launch of NCSI in 1998 across all business categories, SK Telecom is the first -- the only company that has been ranked first for 25 consecutive years. SK Broadband has been ranked first for broadband Internet and IPTV service for 12 consecutive years. SK Telecom is making tireless efforts to create meaningful growth in new businesses based on unrivaled competitiveness of the fixed and mobile business. Within the framework of SKT 2.0, we will improve financial performance and create meaningful results for new businesses to enhance corporate value with the goal of maximizing shareholder value. Once again, we ask for your continued support and interest. Thank you.

[Interpreted] We will now begin the Q&A session.

[Interpreted] [Operator Instructions] The first question will be presented by Soyun Shin from Credit Suisse.

[Interpreted] This is Shin Soyun from Credit Suisse. I would like to ask 2 questions. The first question is that given your good performance in the first quarter and the competitive landscape in the industry, we expect that there will be better business performance improvement on a nonconsolidated basis. So I was wondering if there will be any possibility of increasing dividend for 2022? The second question is that now your 5G subscriber base is expanding, and you're doing well in your industry. So when do you think -- by when do you think this medium- and long-term ARPU growth trend will sustain? Any guidance on this topic will be very helpful.

[Interpreted] Thank you very much for the questions. As I mentioned in my presentation, our dividend size is determined within 30% to 40% of EBITDA minus CapEx. When we look at the growth trend of EBITDA, which is a source for dividend payout, we will continue to increase our 5G competitiveness in the MNO business, and we will add more value coming from new businesses. We will also continue to make efforts for cost efficiency, including distribution innovation centered on AI and digital. Therefore, we believe that our EBITDA size will continue to grow. We still need to make essential investments to expand 5G coverage and maintain 5G network quality, but we will execute CapEx efficiently through efforts such as joint rollout of 5G networks. Therefore, we expect to maintain the growth trend of EBITDA minus CapEx, which is the reference point for this year's dividend. The annual dividend size will be determined in consideration of various factors, including business performance and cash flow, but we will do our best to make sure that this year's dividend payout will be at least similar to the level of last year. Regarding your question on the ARPU growth trend based on the 5G subscriber growth, Mr. Kim Ji Hong, Head of Integrated Marketing Strategy Office will address this question.

[Interpreted] I am Kim Ji Hong, Head of Integrated Marketing Strategy Office. Let me answer your question. Currently, it is not easy to make predictions on this trend because of multiple variables such as the pandemic situation and the percentage of IoT accounts. But reflecting on 2011, when LTE was launched, even though we introduced selective discount options in the middle, we were able to enjoy the ARPU growth trend for up to 5 years since the launch. As for 5G, we expect that the 5G usage period is going to be longer than that of LTE, which means that we can expand the ARPU growth trend for longer than 5 years. Actually, the handset ARPU has been on the rise since 5G launch. However, the ARPU figures that we share with the market include low ARPU accounts such as IoT lines and second devices. Furthermore, acceleration of digitalization in all areas is leading to increasing IoT lines. So I hope that you will consider this aspect and be mindful of that when you look at our ARPU numbers. Thank you.

[Interpreted] Next question will be presented by Kim Hoi Jae Daishin Securities.

[Interpreted] I'm Kim Hoi Jae from Daishin Securities. I would like to ask 2 questions. The first question is about your annual outlook or target for your 5G subscriber base. I was wondering if you're going to maintain this annual target of 13 million by the end of the year, as you mentioned in your presentation. But I've been -- we can see that there has been some slowdown in the growth trend of 5G subscribers, and there may be some issues with price plans. So given these circumstances, do you think that you can maintain, or you will maintain this annual target of 13 million? And what is your outlook on MNO revenue? The second question is about the MNO business growth strategies, and also your strategies in responding to the recent decline in the MNO handset volume?

[Interpreted] Thank you for your questions. As of the end of Q1, 5G subscribers grew by more than 1 million from the previous quarter to reach 10.88 million. We communicated that our annual 5G subscriber target is 13 million, given the current trend, even though there are some macroeconomic uncertainties, we believe that we can achieve this target. The Q1 MNO revenue did not grow as much as last quarter due to market operation focused on selective discount options with the launch of flagship devices, high demand with the beginning of the school year and then seasonal base effects, but you can see that the Q1 MNO revenue grew on a year-over basis by 2.2%, and we expect that our revenue growth trend will continue. Concerning your question on our subscriber growth trend outlook and the situation with respect to MVNO, Mr. Kim Ji Hong, Head of Integrated Marketing Strategy Office, will address the question.

[Interpreted] Let me address this question. Out of the total handset subscribers, the share of 5G subscribers was 41.6% at the end of last year, but the figure increased to 45.9% at the end of first quarter. Given this current trend, we expect that the share of 5G subscribers of the total handset subscribers is going to reach about 58% by the end of the year. Our 5G net adds market share exceeded 50%, thanks to effective market responses, and we were able to further solidify our 5G market leadership. Currently, we're expanding our 5G subscriber base and market share effectively, and strengthening the subscriber retention efforts. And there's also expectation for roaming revenue grounded that there will be easing of quarantine guidelines. So we expect a stable growth trend of our MNO business. Let me now move on to answer your question regarding our position with respect to MVNO. We have been working hard and considering various strategies and measures to find the right balance between cost prosperity with small MVNOs and our MNO business growth. As a mandatory wholesale network provider, SK Telecom will continue to follow government policies and help develop the MVNO market. But at the same time, SK Telecom will focus on MNO subscriber retention by offering differentiated customer experiences, including additional benefits on SK Telecom's subscription services as well as trendy membership partnerships and customer centers that provide tailored and professional consulting. These are not available from MVNO players. And by making these efforts, we will continue to retain our MNO subscribers.

[Interpreted] The next question will be presented by Etong Min from ETREND.

[Interpreted] I am Etong Min from a YouTube channel called ETREND. I would like to ask you a couple of more practical questions that have been raised by individual investors in the market. The first is about the possibility of SK Telecom being removed from MSCI. And I was wondering if the company could provide some more color on the current situation if this is going to happen? And if that is going to be the case, what will be the impact on your business? The second question is related to price plans. Recently, the presidential transition committee made proposals regarding telecom business, which one of them was an introduction of middle-end price plans. And there are some concerns in the market that this would signal a strengthening of regulations for telecom businesses. So what is your position on this? And what do you think will be the potential impact of this on your business?

[Interpreted] Etong Min from ETREND, thank you for your questions. As of the end of April, foreign ownership of SK Telecom exceeded the threshold of 47.16% of MSCI removal criteria. So SK Telecom may be removed from the index at the end of May when rebalancing happens. But such decision is not -- is based on multiple factors, including qualitative elements. So we will need to wait for the MSCI report to be released on May 13. If SK Telecom is removed from MSCI in May during rebalancing, some passive funds that follow -- that are linked to MSCI will be outflowed. But at the end of August last year, our weight was already adjusted. So SK Telecom's weight is currently only 25%. And so market experts predict that the signs or the impact of outflow of passive capital would be around KRW 100 billion. And at the end of -- at the time of rebalancing last year, the outflow was estimated to be about KRW 900 billion. So compared to that, the impact for this time around is going to be much smaller. So compared to the MSCI adjustment that we went through last August, we cautiously anticipate that the impact this time around will be much smaller. I would like to also add that there are particular methodologies used by MSCI for the index operation, and passive funds that follow MSCI also have their own operational rules. Therefore, what I communicated with you is based on our best estimates, I'd like to remind you of that. Let me now move on to your question regarding medium-end price plans. SK Telecom is considering various price options and plans in consideration of customers' needs, usage patterns and 5G subscriber growth trend. We have entered the fourth year of 5G launch, and the penetration rate of 5G is already more than 40%. It really shows that 5G has become mainstream. Therefore, we believe it is a natural phenomenon for more price plans to come out in the market. Because 5G is now dominant in the market, in order to expand our customers' choices for various price plans, SK Telecom will continue to consider various price options for customers. Thank you.

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

[Interpreted] I am Kim Joonsop from KB Securities. I will like to ask 2 questions. One, regarding your IDC business and the other about your AI business. First of all, about your data center business. I understand that there is a shortage of supply for data center capacity, so I was wondering what kind of strategies you have at SK Telecom to secure additional data center capacity? Secondly, about AI business. I understand you call this AIVERSE. When do you think you will be able to have substantial revenue and operating profit coming out of this AIVERSE business? And how do you think this will contribute to strengthening the competitiveness of your MNO business?

[Interpreted] Thank you for your questions. I'm going to cover your question regarding AIVERSE. And Mr. [ Park Jong Salk ], CFO and Head of Corporate Planning of SK Broadband, is going to discuss strategies regarding data center. Since launched last year, our subscription service, T Universe, and our Metaverse platform, Ifland, has been increasing their users. And recently, the number of T Universe users has succeeded 1 million, and Metaverse has more than 1.35 million MAUs. T universe has been improving user convenience rapidly, and has been preparing for product lineups to offer more -- or more competitive product lineups. And for Ifland, we're preparing to introduce open content platform and NFT and blockchain technology based economic system. So by making these efforts, we will go beyond the market entry phase to expand these businesses in full swing. AIVERSE business group, that includes subscription and Metaverse, revenue in 2021 was about KRW 200 billion, and our goal and vision is to increase this number to KRW 2 trillion by 2025. Both subscription and Metaverse services do not require massive CapEx, but they are growth businesses that are built upon the foundation of our strong 5G infrastructure and marketing assets, including contact centers and building systems. Therefore, we believe that expanded user base will lead to better profitability. And in the long run, we expect that subscription and Metaverse businesses will become key sources of profit for SK Telecom along with fixed and mobile business. Moving on to the contribution of AIVERSE businesses to our MNO business. We are confident that utilization and growth of Ifland and T Universe are going to contribute, and strengthen our MNO business. More usage of Metaverse features and functions will increase demand for more stable and faster networks and demand for data. And so these will facilitate the expansion of 5G services, and this will also provide an opportunity for more attention to be given to our excellent quality 5G services. Furthermore, subscription services will offer differentiated experiences for our MNO customers through synergies with team membership. By having these representative services, we believe that our MNO service will become even more competitive. And concerning your question regarding our IDC business, Mr. [ Park Jong Salk ], CFO of SK Broadband will address the question.

[Interpreted] I am [ Park Jong Salk ], CFO of SK Broadband. Let me provide you with some information on our current status and strategy. As there is increasing demand for traffic and also usage of public cloud, we expect that demand for our data center capacity will continue to increase. Therefore, we are planning to increase our size and also competitiveness. Currently, SK Telecom is operating 5 data centers in the Solan surrounding metropolitan area. And additionally, we are planning to expand the data center capacities in the metropolitan area as well as in the Pusan area, thereby securing more than about 200 megawatts of IT power. So in Q1, we are already in the process of developing a data center in the Solan surrounding metropolitan area, which will be the size of 80 megawatts, which are scheduled to be operating in 2026. In addition, we are pursuing data center capacity in the Pusan area by utilizing SK Telecom submarine cable and in connection with Asia hub data center.

[Interpreted] The next question will be presented by Neale Anderson from HSBC.

It's a similar question to the previous one on SK Broadband, please. So really, I want to ask about 2 things. The first is cost synergies following the [ T Board ] integration. Can we expect any more development there? And secondly, it's about the timing of the revenues and the cost. So you mentioned the development of the data center business. Can you talk a little bit more about the cost side of that? And whether you're seeing increasing demand for staff and other factors that might lead to cost inflation?

[Foreign Language]

[Interpreted] Thank you for your questions. For these questions, Mr. [ Park Jong Salk ], CFO of SK Broadband will address them.

[Interpreted] I am [ Park Jong Salk ], CFO of SK Broadband. Let me first elaborate more on the revenue and cost drivers for the Q1. First of all, for our business performance in the first quarter, our revenue was -- the total revenue was KRW 1.26 trillion. So it was an increase of 6.2% year-on-year because of IPTV subscriber growth and B2B business growth. However, when it comes to the operating profit, there was a slight slowdown in the growth due to the marketing costs and depreciation effect. So the operating profit was KRW 76.1 billion. When we look at the breakdown of our SK Broadband business, it has 3 components. The first was -- is B2C business, which is IPTV -- which includes IPTV, and the second is our high-speed broadband, and the fact the third is B2B business. As for the first one, B2C business, in the first quarter, the IPTV subscriber growth was about 109,000 people, which was actually #1 in terms of IPTV net adds market share. And the sales -- or revenue grew by 6.6%. And moving on to the second business line, which is broadband Internet, thanks to subscriber growth and Kika Internet-related promotion, we were able to achieve 1.4% growth of revenue year-on-year. Moving on to our final division of business, which is B2B. In addition to the growth of our dedicated line businesses and solution businesses for our business customers, there was also growth in our data center business. Therefore, the revenue from this portion of the business increased by 14% on a year-over-year basis. And as for our outlook for the entire year of 2022, based on continued IPTV subscriber growth and growth in B2B business, including data center business, we expect 5% growth of revenue on a year-over-year basis, and operating profit growth that is similar to last year. Next, I'd like to discuss the cost impact coming from data center expansion. Because data center business requires massive amounts of investment, we are pursuing efficient execution of our investments as well as hedging for financial risks. As for our data centers in Kazan and [ Pundam ], we have certain arrangements with real estate fund SPCs, and also real estate based security. Therefore, these long-term lease arrangements are in a stable manner. By utilizing these investment arrangements, we were able to reduce financial burdens on making massive amounts of investments for DC, or data center construction, and by utilizing TRC arrangement, we were able to reduce lease costs. In addition, as our financial situation is continuing to improve, we will not only continue to utilize a TRS arrangement, but also making some direct investments as well. Thank you.

[Interpreted] The last question will be presented by Hoi Jae Kim from Daishin Securities.

[Interpreted] I am Kim Hoi Jae from Daishin Securities. I would like to ask some follow-up questions, especially on Metaverse. What is your specific plan on overseas expansion of Metaverse services? What is the time line and schedule? And what will be your main business model?

[Interpreted] Thank you for your question. Here with us, we have Mr. Yang Maeng-seok, Head of Metaverse company. So he's going to provide answers to your question.

[Interpreted] First, I'd like to thank you for your questions. As for our Ifland or Metaverse business, we're trying to strengthen our core value, which is communication. So in the first quarter, we have improved meeting-related and community-related services. After the second quarter, we will add our open platform and economic system so that we can create a social Metaverse world in a real sense. So now users will be able to create their own avatars and spaces. And by utilizing cryptocurrency system, they will be able to trade and invest in content. And going forward, we're going to expand our service to more than 80 countries. Our English version of Ifland will be launched in as many countries as possible. And after this broad expansion, we're going to identify key markets, and we will work with local partners for joint marketing and localization efforts. Our short-term goal for Ifland is to increase the number of users. And in the medium to long term, we want to build and utilize our business model based on the open platform. So in the long run, by utilizing the open platform and economic system, we're going to build and implement our business model from which we'll be able to enjoy revenue generation.

[Interpreted] Thank you. With this, we would like to wrap up the Q&A portion of the earnings conference call for the first quarter of 2022 of SK Telecom. Thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]