Sk Telecom Co Ltd Q3 FY2020 Earnings Call

Good afternoon. First of all, thank you all for joining this conference call. And now we'll begin the conference call by the Fiscal Year 2020 Third Quarter Earnings Results of SK Telecom. This conference will start with a presentation, followed by a divisional Q&A session. 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 Q3 of 2020 and the future management plans and strategic direction. We will also have executives from relevant business divisions to help deepen your understanding. Before we begin, we want to remind you that all forward-looking statements are subject to change, depending on the macroeconomic and market situation. Let me now present our CFO.

Good afternoon. This is Poong-Young Yoon, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights for Q3 of 2020. Consolidated revenue for Q3 2020 recorded KRW 4,730.8 trillion. Continuing from last quarter, all business divisions achieved even growth, with Media, Security, and Commerce recording two-digit growth in particular, leading to a 3.7% year-on-year and 2.8% quarter-on-quarter increase. Consolidated operating income increased by 19.7% year-on-year and 0.6% quarter-on-quarter to record KRW 361.5 billion. Q3 saw meaningful achievements, including MNO’s operating income rebound year-on-year and the operating income of Media, Security, and Commerce businesses exceeding KRW 100 billion for the first time. Net income recorded KRW 395.7 billion, which increased by 44.2% year-on-year due to equity method income on SK Hynix and decreased by 8.4% quarter-on-quarter. Let me now discuss major achievements and strategic direction for each business division. Non-consolidated MNO revenue for Q3 recorded KRW 2,940.6 trillion. While the 2G shutdown had a negative impact on revenue, continued 5G subscriber growth led to a 1.0% increase year-on-year. MNO operating income recorded KRW 264.1 billion, rising by 4.5% year-on-year, thanks to revenue growth and market stabilization. The 5G subscriber count for Q3 increased by 920,000, recording 4.26 million as of the end of September. Increased coverage, stronger non-face-to-face channels, and various 5G experiences have led to accelerated quarterly subscriber growth. Meanwhile, during this quarter, we shut down our 2G service nationwide, which we have provided for the past 25 years. We are providing support for former 2G subscribers to assist their migration process. We will ensure that the 2G shutdown will make way for a virtuous cycle that leads to improved services, including more advanced IT services. We will continue to maintain the current stable market trends and aim to increase the 5G subscriber base with enhanced service quality, as we continue to strengthen the 5G network quality and launch more specialized products. In September, we launched a new 5G subscription service called V Coloring, the nation’s first short-form video-based ringback tone service, which saw 400,000 subscribers within just one month of its launch and has also been well received globally, garnering attention from major global MNO companies from Hong Kong and Australia. While it started out as a B2C service, we plan to expand our subscriber base by launching B2B and B2G services in the future. We will grow it into one of the company's key subscription services, along with the music platforms flow and video platform way. In Media, SK Broadband’s consolidated revenue recorded KRW 966.8 billion, with strong earnings from Pay TV, including IPTV and Cable TV. It rose by 20.3% year-on-year and by 5.3% quarter-on-quarter. Operating income increased by 78.8% year-on-year and 6.7% quarter-on-quarter, recording KRW 64.9 billion, thanks to the revenue growth. The Security business recorded KRW 353.3 billion in revenue, with the growing new security service and higher convergence security solution sales increasing by 15.5% year-on-year and 9.4% quarter-on-quarter. Operating Income recorded KRW 40.1 billion. Increased costs related to responding to the re-spreading of COVID-19 and costs related to expanding new businesses brought the numbers down by 3.1% year-on-year, but it increased by 9.6% quarter-on-quarter, thanks to the revenue growth. Commerce revenue recorded KRW 206.6 billion, with GMV continuing its growth trend. It rose by 18.7% year-on-year and 7.3% quarter-on-quarter. Operating income recorded KRW 6.1 billion, and the total operating income for the Commerce business achieved four-fold growth on a year-over-year basis and three-fold growth quarter-on-quarter. Now, the Head of Corporate Center II, Mr. Ha, will walk you through their achievements and plans for the new ICT businesses.

Good afternoon, I am Hyung-il Ha, Head of Corporate Center II. Q3 of 2020 was a meaningful period for new ICT businesses. Our new ICT businesses have surpassed the KRW 100 billion mark in operating profit. Through this meaningful achievement, we expect new ICT businesses to be recognized for their value as a key business division that leads SK Telecom's growth. Allow me to discuss the achievements and strategies for the new ICT business division. First, the Media business. SK Broadband revenue in Q3 grew by over 20% year-on-year, based on the growth of the Pay TV business arm, including IPTV and Cable TV. Profitability also improved, recording an operating margin of 6.7%, a 2.2 percentage point increase year-on-year. Net subscriber additions for IPTV reached 129,000 in Q3, the highest in four years, allowing SK Broadband to acquire over 8.5 million paying subscribers. Monthly active users for Wavve in August exceeded 3.8 million, the highest we've seen this year. With over 2 million paying subscribers and successful original content, including drama series and entertainment shows starring K-Pop idols, its growth momentum is becoming stronger once again. Moving on to the Security business. Despite constraints due to the re-spreading of COVID-19, ADT Caps revenue continued to grow, thanks to an increase in CMS service subscribers and new non-face-to-face services. From home security and unmanned parking to new services responding to non-face-to-face service demand. ADT Caps is introducing new services in a timely manner, thereby expanding its business spectrum. This increased demand from corporate clients and new business growth, including cloud and convergence security, has allowed SK Infosec to continue seeing its revenue grow. As a result, the Security business achieved two-digit revenue growth and the highest-ever quarterly revenue. Despite the challenging environment due to COVID-19, the Security business will achieve the annual revenue target of KRW 1.3 trillion, led by aggressive new business development efforts and generating a stable income going forward. Moving on to the Commerce business. Despite intensified competition, 11th Street and SK Stoa exceeded KRW 200 billion in quarterly revenue while also achieving income growth by strategically responding to the market. In particular, 11th Street executed a sales strategy in line with market trends and an efficient marketing strategy, thereby achieving both revenue growth and operating surplus for the first time and confirming the validity of its growth strategy. 11th Street will continue to execute strategies that take both growth and profit into consideration. Lastly, I will discuss the achievements of our app market subsidiary, ONE Store, and the spin-off of our Mobility business division. ONE Store recorded continued growth for nine consecutive quarters. This past September, we've completed the selection of book runners and aim to complete the IPO process in 2021. Thanks to a growing number of available applications and users, revenue in Q3 increased by 26% year-on-year, recording the highest-ever quarterly revenue. Recently, through the split-off of our Mobility business division, we are on our way to establish a new mobility company, which has been recognized as a KRW 1 trillion business. Furthermore, we've formed a strategic partnership with Uber to create synergies through hyper-collaboration. The newly established mobility company will attract investment from Uber to provide innovative services and establish a taxi joint venture with Uber. We ask for your continued interest and support for our Mobility business, which will grow into SK Telecom’s business arms, with T Map, the nation's number one mobility platform, combined with Uber's taxi e-hailing expertise. We will continue to present you with greater achievements in the new ICT area in the future. I will now hand it back to the CFO. Thank you.

During the conference calls at the beginning of the year, I told you that we would make this year the starting point of our company being rightly recognized for our enterprise value. To realize the inherent corporate value, we announced a new dividend policy linked to the performance of new ICT businesses and shared plans for our subsidiaries' IPOs beginning with ONE Store over the past 10 months. We are buying back our own currently undervalued shares and establishing a new mobility company to enhance our enterprise value. On top of such efforts to pave the way for enterprise value growth during this year, we've been rewarded with the MNO earnings turning around and new ICT businesses reaching KRW 1 billion in operating income. Based on even stronger earnings going forward, we will meet our goals for this year and achieve enterprise value growth in full force beginning from next year. We ask for the continued support and encouragement from our investors and analysts. Thank you.

The first question will be provided by Ethan from Hana Investment and Securities. Please go ahead.

Thank you for the opportunity. I have two questions. My first question is, recently your competitor has launched a lower-end 5G price plan. Does SK Telecom have any plans for a low-end 5G price plan? What kind of effect would that have on your 5G ARPU as well as revenue? My second question is regarding the OTT service. With the spin-off of Tving by CJ E&M, we expect a very heated competition in the OTT market domestically. There’s talk of Disney Plus entering Korea as well. You mentioned that users of Wavve compared to the end of last year rose by 30%. I would like to hear about your strategic direction for Wavve?

Thank you for your questions. I will be taking the first one and then Mr. Ha will answer your second question. Currently at SK Telecom, we are taking into consideration the overall competitive environment as well as the subscriber growth trend. We are reorganizing our 5G price plans to one that is more customer-oriented and friendly. We expect to launch these either at the end of this year or early next year. We believe that when these new price plans are launched, we expect the 5G subscriber base growth rate to accelerate. While the acquisition ARPU may be slightly lower due to an invigorated 5G subscriber base growth, we believe it will have a positive impact on MNO revenue increase. I will now move on to answer the question regarding our strategies for Wavve. In Q3, Wavve recorded its highest-ever number of users in August and September, thanks to a stronger original content strategy, which included original content with very high viewership, such as titles like Alice and Lie After Lie. We are also continuing to see a growing number of paying subscribers, and this number surpassed the 2 million mark in Q3. As we have announced in the past, we still aim for 5 million paying subscribers by the year 2023 and a revenue target of KRW 500 billion. Going forward, Wavve will continue to enhance its core competitiveness, including stronger content. One example of this is our recent announcement of a strategic partnership plan with Astory, a highly capable content production company that has proven its capabilities recently in the global market. With Astory, we will jointly invest in drama series, collaborate on casting endeavors, and work together on sales in both domestic and overseas markets. We believe that the increasing competition in the OTT market is a natural phenomenon in the process of market expansion. Wavve aims to be an open platform through which we can work together with different players, and through collaboration with players from home and abroad, we also want to contribute to the K-content ecosystem.

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

Thank you for the opportunity. I have two questions regarding your new businesses, namely ONE Store and T Map Mobility. My first question is about the IPO process for ONE Store and the expected corporate value. My second question pertains to your competitive edge in the T Map Mobility market compared to competitors.

Thank you for your question. I will be taking your first question regarding ONE Store. ONE Store selected its IPO book runners this past September. Beginning with the due diligence process for ONE Store in October, we have begun preparing for the IPO with our underwriters. After we go through all the processes, including applying for the preliminary IPO review during the first half of 2021, we are planning to list the company in the latter half of 2021. As we look closely at the overall environment and the performance of our subsidiaries, we plan for IPOs for companies like ADT Caps, Wavve, 11th Street, SK Broadband, and in the mid to longer term, T Map Mobility. We believe that once these IPO plans are complete, we will communicate them clearly to the market. ONE Store has attracted financial investment in 2019 and was valued at KRW 500 billion. Since then, its growth rate has accelerated. With additional applications joining and a more diverse application platform, as well as a growing user base, its revenue grew by 23% in 2019 and has increased by 27% year-on-year through the third quarter this year. We look forward to welcoming powerful game titles in the future, which will lead to accelerated growth in 2021. We expect ONE Store to be valued at a much higher price than at the time of funding in 2019. We will communicate more detailed outlooks on ONE Store and our future plans when the IPO preparation is set in place.

Hello, Jong Ho Lee, Head of Mobility Business Division as introduced. The competitive edge that T Map Mobility has compared to its competitors is its user base, as it has the highest number of users in the nation and a large amount of data. Despite COVID-19, T-Map saw 4.54 million daily users as of the end of October, as well as 13.23 million monthly users, the highest ever. This number represents 66% of all registered cars in the nation, as well as 74% of all navigation users. Through T-Map based data analysis, we provide scores for driving patterns of our users, which leads to discount benefits for car insurance premiums. This is part of our business model. Additionally, we have T-Map based ad businesses, as well as map data businesses, which are our unique models. Notably, we are currently providing T-map based in-vehicle infotainment for names like BMW, Renault, Volvo, and Jaguar. Furthermore, we have T-Map auto business that handles IVI and provides a competitive edge compared to our competitors. The unique services we provide through our mobility and telecommunication data, along with synergies arising from utilizing SK Telecom's marketing channels, are all part of our competitive advantage.

The next question will be presented by Kim Hoi from Daishin Securities. Please go ahead.

I have two questions. The first one is regarding spectrum allocation. It seems there is quite a gap between what the government is proposing and what the operators want. Recently, we heard that you made a statement suggesting it would be better to do it in an option format. Where is this coming from, and what should we expect? My second question is about the launch of the 5G iPhone. What kind of impact do you expect this to have on the 5G ecosystem? Can you provide a detailed outlook on what we can expect in terms of 5G in 2021 and beyond?

First, thank you for your questions. I will address your first question regarding the spectrum allocation. Currently, in the pricing process for reallocation of spectrums, there is indeed a discrepancy between the operators and the government regarding whether it should reflect past auction results and to what extent. The three operators believe that reflecting past results is excessive compared to the current value of their respective spectrum. We believe that there have been no past cases like that, nor do they have legal grounds. Therefore, we expect reasonable results and pricing that takes into consideration the current state of 5G. Now let me answer your question regarding the launch of the 5G iPhones. The launch of the 5G iPhone will positively impact MNO revenue growth through 5G migration from LTE iPhone subscribers. It will invigorate current 5G services through a wider range of devices available for users. Furthermore, stronger global sales of 5G iPhones will lead to a wider variety of applications being launched for 5G, creating a virtuous cycle with powerful 5G specialized services. Regarding our outlook on 5G subscriber count: with growing 5G coverage and a better diversity of devices, including the Apple iPhone, we expect net subscriber additions to continue. We still aim for our target of between 5 million to 6 million 5G subscribers by the end of this year. In 2021, we will focus on enhancing the overall 5G experience through a wider range of devices, networks, and services. If we launch more customer-friendly 5G price plans early next year, it will lead to a faster growth rate of 5G subscribers. We predict that the number of 5G subscribers by the end of 2021 will be around 9 million.

The next question will be from Ahn Jae-min from NH Investment & Securities. Please go ahead.

Thank you. I have one question about your B2B business. I would like to hear your strategies and recent achievements in the B2B area. Additionally, compared to your competitors, it seems that your IDC and cloud-related services are a bit weaker. Are there any plans to further expand the IDCs, or can you provide any outlook regarding your cloud business?

Hello, I am Han Myung-Jin, Head of MNO Marketing Group. I will take the first part of your question and then hand it over for the second part. Our B2B business has two axes. The first is the 5G connected cloud services, which we are strengthening. We have already signed a partnership with Amazon Web Service, and we've also invested in this area. Based on these efforts, we are preparing for a 5G MEC-based cloud service, which we plan to commercial launch by the year end. As for trial services, we currently have around 20 trial service areas, including distribution and medical. The second axis is the B2B solution part, where we aim to provide our 5G-based services that can improve profitability for leaders in various industries. A representative example of our 5G B2B service would be the 5G Smart Factory.

Regarding the second part of your question about IDC, SK Broadband has been highly interested in and investing in IDC. We plan to open a large-scale IDC in the Ilsan area by July 2021. We are on track in terms of the preparation process, and once it is open, we believe the IDC business will yield significant results. Additionally, we are currently reviewing additional investment plans for IDC. Once these plans become more concrete, we will communicate them with the market. Thank you.

With that, we will conclude the conference call for Q3 of 2020. Thank you.