Sk Telecom Co Ltd Q4 FY2021 Earnings Call

Good afternoon. I am the Investor Relations Officer of SK Telecom. Thank you for taking the time out of your busy schedule to attend SK Telecom’s CEO Investor Day. 2022 marks a new beginning for SK Telecom. Today, the Senior Management of SK Telecom, led by Mr. Young Sang, the company’s CEO, will share the vision and strategy of SK 2.0 with analysts and investors. First, Mr. Ryu will present SK Telecom’s new vision and its details, followed by a Q&A session. Simultaneous interpretation will be provided for the CEO's presentation, and consecutive interpretation will be available during the Q&A. Now, I will turn it over to Mr. Ryu, CEO of SK Telecom.

Hello, everyone. We had the spin-off in November last year, and this is my first time meeting with investors. We had intended to arrange this meeting earlier, but due to a COVID situation, we're holding it online today. I appreciate your understanding. Today marks 101 days since the spin-off, and in my role as CEO of SK Telecom 2.0, I have had many reflections that I would like to share with you. We've been attentive to the expectations and ideas from our shareholders regarding SKT after the spin-off. Many investors are looking for stable dividend income driven by earnings growth, while others seek new growth opportunities. As the CEO of SK Telecom 2.0, I want to pursue both stability and growth simultaneously. To achieve this, we have reorganized our businesses and resource operations. SK Telecom will continue to generate stable income from our mobile network operator, mobile, and fixed-line businesses, which are at the core of our operations, while also pursuing growth in media, enterprise, AIVERSE, and Connected Intelligence. In the following sections, I will share some specific strategies. The rationale for this reorganization is to overcome the limitations of operating with a binary focus between our existing and growth businesses. This approach allows us to harness all our resources while pursuing growth in five business segments, ensuring that there is no loss following the spin-off. We will focus on three management pillars: customer, services, and technology, directing our manpower and resources accordingly, specifically through our 553 Matrix. Currently, mobile and fixed revenues account for 82% with a growth rate of 3%, while our growth businesses make up 80% of revenue and have a growth rate of 15%. The reorganization into five business groups stems from the observation that companies with high shares of existing businesses are valued with an existing business multiple, which does not adequately reflect the growth potential of our emerging segments. Our media and enterprise divisions need distinct multiples and valuation methods compared to our core mobile and fixed operations. Moreover, our subscription metaverse and AI agent-based AIVERSE services require a separate approach to valuation. We are committed to regularly sharing specific indicators and progress of our five business groups to ensure that the market properly recognizes the corporate value of our growth businesses. Now, I'll outline specific strategies for each of the five business groups. Starting with the mobile and fixed business, a key driver for MNO business is 5G. As of January, we reached 10 million 5G subscribers, and we project an additional 8 million by 2025, which will support a continuing increase in wireless ARPU and a sustained growth trend in MNO revenue. Additionally, we are collaborating with the other two telecommunications companies to build 5G networks, allowing us to save on CapEx and expand coverage ahead of schedule. Our competition will focus on providing value to customers rather than merely capturing market share, and overall market stability has been preserved. We aim to enhance operational excellence by optimizing network efficiency and online distribution. In the fixed-line sector, we anticipate steady subscriber growth driven by the rise in single households and demand for second TVs. Our collaboration with SK Broadband through a one team system will help us maintain the leading market share in net subscriber additions, leading to record revenue growth for our fixed-line business. By creating and offering new customer experiences, we aim to ensure long-term retention of our customers. Turning to the media business, we currently have over 10 million Pay TV subscribers and more than 25 million mobile subscribers. By leveraging this subscriber base, we plan to expand into content commerce and advertising. In the content area, we will continue enhancing our original content offerings by collaborating with wavve, BTV, and Channel S. We secured over 1,000 titles of original content last year and are expanding our channel offerings. The recently launched Playz is a significant innovation as it combines wireless and fixed content with entertainment, marking a transformative change in the media landscape. Moving on to SK Stoa, we achieved a GMV of KRW 1.3 trillion in just two years, establishing ourselves as the leading domestic T-commerce player. Currently, we are partnering with T-deals, which have a GMV of about KRW 100 billion, and we intend to develop growth strategies moving forward. We will leverage payment POCs, achieving over 100 million views for wireless PV and over 60 million views for fixed PV at SK Telecom. Our goal is to build an advertising business based on our new AI-driven services. Now regarding the enterprise segment, the data center business presents huge growth potential due to increasing demand and supply shortages. We will not only increase our capacity but also develop higher value-added business models like the HTC and MMR platforms based on 5G. We aim to partner with global CSPs to explore international growth opportunities, targeting data center revenue of over KRW 1 trillion by 2025. The cloud market continues to grow, and we are seeking new opportunities in 5G MEC and MSP sectors. In 2021, we reported cloud revenue of KRW 64 billion, with over 30 use cases in AR and VR generated from our 5G MEC in collaboration with AWS. We will further explore global expansion opportunities through our investment in Global. The era of 5G combined with AI and IoT is presenting us with new business opportunities. The integration of Vision AI, Language AI, data analytics platforms, and 5G IoT Networks will lead to vertical expansions in sectors like smart factories, finance, security, and healthcare services. Now, I'll discuss our service business, which is AIVERSE. We launched T Universe last September, and it has been well received in the market, with our GMV surpassing KRW 350 billion last year and the eleventh consecutive overseas direct purchase GMV exceeding KRW 100 billion. We observe higher contributions from customers aged 20 to 40, with increased subscriptions via contactless methods. This year, we focus on expanding the product portfolio for Amazon Global Store, enhancing subscription partnerships and packages, and improving user convenience to yield tangible results in our subscription business. We have set a GMV target of KRW 8 trillion for 2025. As the metaverse is still in its infancy, we will prioritize growing our subscription base. Last July, we recorded over 1.13 million MAU with an average duration of around 61 minutes, which are promising indicators. We've also received more than 1,500 partnership requests, reflecting our metaverse's recognition as a new communication platform. This year, we plan to establish an open content platform, create an economic ecosystem that includes NFTs, and venture into global markets, targeting over 30 million global MAU by 2025. Regarding the AI agent, we aim to create innovative services centered around characters and conversational AI. We plan to launch new services in Q2 of this year, and we are in the process of product development and testing. Lastly, I'll outline our strategy for developing growth engines for the coming decade. The telecommunications sector is continually evolving, and advancements in technologies like AI and mobile systems will result in a greater diversity of devices. We need to assess what devices will emerge beyond smartphones. SKT will concentrate on providing additional services beyond connectivity. We believe that Connected Intelligence is integral to our mission, as it adds intelligent capabilities to our current strengths. One of our initiatives is UAM, a new urban air mobility service. While there are uncertainties regarding demand, regulations, and technology, we foresee visibility for business licensing and commercialization by 2025 in Korea. We are collaborating with Hanwha Systems, Korea Airport Corporation, and have recently partnered with Joby to provide UAM services and position ourselves as a comprehensive service provider in this domain. We will explore other growth engines for the next decade in which SKT can capitalize on its core strengths outside of UAM. Next, I will discuss our shareholder return policy. In 2021, we executed the spin-off and retired KRW 2 trillion of treasury stock. We introduced quarterly dividends and implemented a 5:2:1 stock split. We have consistently followed shareholder-friendly policies, which will continue this year. We intend to uphold our total dividend levels from before the spin-off in 2022 and maintain our announced dividend guidelines. Finally, I will discuss the vision for SK Telecom's future. We believe that the robust growth across our five business groups will enable us to achieve KRW 23 trillion in revenue by 2025, up from the current KRW 16.7 trillion. The growth businesses are expected to contribute 36% in 2025, an increase from the current 18%. SKT is evolving from merely connecting people to expanding the time and space for our customers, leveraging technologies like AI, the metaverse, and other universes. We are transitioning from distance to dimension. We will continuously seek new business opportunities that enhance value for our customers and shareholders. By harnessing our core strengths, we aim to achieve both stability and growth. Thank you. This concludes our presentation, and we will now move to the Q&A session.

Now our Q&A session will begin. The first question will be presented by Hoi Jae Kim from Daishin Securities. Please go ahead with your question.

Hello, I am Kim Hoi Jae from Daishin Securities. Thank you for this opportunity. I would like to know more about the reasons behind SK Telecom’s decision to reorganize its business into five groups. While competitors KT and LG U+ operate their mobile and fixed businesses under a single legal entity, SK Telecom has a separation between SKT and SK Broadband. As you proceed with the reorganization, does this indicate a potential further restructuring or merger with SK Broadband that could lead to a change in governance? My second question pertains to the expected growth of the five business groups. I understand that the company has high expectations for the growth potential of areas outside of mobile and fixed, including media, enterprise, and AIVERSE, which encompass various sub-sectors. In the short term, which specific business groups should we focus on? In other words, which business groups would you, as CEO, want to highlight to shareholders and investors?

I'd like to begin by thanking Mr. Kim for your questions. Let me address the first question. The reasoning behind the reorganization of SK Telecom into five business groups, as highlighted in the presentation, is to enhance corporate value for each group. Different valuation metrics are required for the mobile and fixed line sectors compared to media, enterprise, and AIVERSE. In the past, we've noticed instances where the strong growth potential of our businesses was not accurately reflected in the telecom company's valuation. Therefore, we decided to separate our businesses into distinct groups to effectively communicate our strategies to the market. Regarding any governance changes, although mobile and fixed line businesses are in the same group, SK Telecom and SK Broadband have been functioning as a cohesive entity, creating significant synergies. Thus, we currently do not have any plans for governance changes. Now, moving on to the second question. Beyond our mobile and fixed business group, we have high expectations for the other four business groups. Let me highlight some key areas of focus. First is advertising. Historically, SK Telecom has excelled in subscription services. Considering both our wireless and wired operations and the current active user levels across our services, we see significant potential for additional sales. We plan to leverage SK Telecom's strengths and offer an integrated advertising platform that encompasses SKT and SKB, positioning advertising as a new growth driver for us. The second highlight is the data center business. The data center market is experiencing high demand while facing supply shortages. We can also provide high-value-added services such as HDC. For now, we will focus on organic growth in the domestic data center market, but we believe that we can pursue global inorganic growth opportunities in the future. The third highlight is our subscription business. It's been five months since we launched our new subscription service, and we have received very positive customer feedback and brand recognition. We’ve gained valuable insights during this period, and this year we plan to expand the Amazon global store lineup, enhance our product offerings, and provide more convenient services to achieve tangible results in subscription products. Finally, I want to touch on the metaverse business. Many companies are discussing the metaverse, and in Korea, we are the second company to enter this market. We intend to act swiftly and continue to evolve our strategies, adding more intellectual property resources to generate new growth momentum. Thank you.

Next question please.

The next question will be presented by someone from Citigroup. Please go ahead with your question.

I am from Citigroup. Thank you for this opportunity. I have two questions. The first question is about your dividend policy. You mentioned the dividend policy in your presentation, but I would like to know if the dividend level for 2022 will be similar to last year. Specifically, will the dividend amount of KRW 717 billion from last year be maintained for 2022? Additionally, I would like to learn more about the medium and long-term dividend policy after 2023. My second question concerns your M&A investment plans. After the spin-off last year, you transitioned to a pure telecom company. Do you have any specific M&A plans for pursuing growth, and if so, in what areas and for what reasons are you looking to pursue M&A?

Mr. Lee from Citigroup, thank you for your questions. Let me first address your first question. For 2022, as mentioned in the presentation, we will maintain a dividend amount similar to what we had before the spin-off. Regarding the medium and long-term dividend guidance, it will be based on EBITDA and CapEx. We anticipate our EBITDA earnings will continue to grow in the medium to long term, while CapEx levels will either decline or stabilize. Thus, we believe there is potential for dividend growth in the medium to long term. As for our medium to long-term dividend policy, we will communicate specific decisions and guidelines with the market as soon as they are made. Now, let’s address your second question. I understand there is significant interest in whether SK Telecom, after the spin-off, will pursue M&A opportunities. I want to make it clear that SK Telecom is looking to pursue strategic M&A opportunities. There are three main directions for this: acquiring technology companies in areas like AI and the metaverse; acquiring talent, as it can be challenging to find skilled developers; and pursuing global M&As as we become proficient in these growth sectors to expand into the global market. Regarding these M&As, our intention is not to IPO subsidiaries after acquisitions, but rather to integrate these companies into our existing businesses at SK Telecom. Thank you.

The next question will be presented by an indiscernible speaker. Please go ahead with your question.

I am from Hana Asset Management. Thank you for your presentation and for the opportunity to ask questions. I have two questions. The first question concerns potential regulatory risks arising from the presidential election. The second question relates to SK Telecom's position regarding additional frequency allocation.

Ms. [indiscernible] from Hana Asset Management, thank you for your questions. Let me first comment on the impact of the presidential election on SK Telecom. I believe we are currently in the digital era, and there are many aspects of Korean citizens' lives where we need to highlight the role of telecommunications, as well as platforms and other elements. As a result, I feel that communication-related costs have been reduced due to the growth in the MB&O business and improved regulations regarding tariffs and pricing plans. Overall, our telecommunications policies are concentrating on the early rollout of 5G nationwide and enhancing data center capacity, which will strengthen the national infrastructure. Following these policy directions, telecom operators, including SK Telecom, are working to expand 5G coverage across the country and invest in digital initiatives. Regarding your second question about frequency acquisition, I think the same approach can apply. While SK Telecom is not in a position to accelerate frequency allocation, we believe that prioritizing fairness in the market and considering benefits for citizens is essential. Rather than aiming for a 20 megahertz allocation as it stands, it’s more beneficial to distribute three levels of frequencies, each with 20 megahertz, for the citizens' advantage. Thank you.

The next question will be presented by someone from Korea. Please go ahead with your question.

I am from CLSA. Thank you for this opportunity. I have two questions. The first question is about your capital expenditures. I understand that the level of capital expenditures last year didn't change much. Do you anticipate this trend will continue? As the initial 5G investments are wrapping up, do you expect capital expenditures to stabilize or decline? The second question is regarding the joint 5G network construction with telecom companies. Can you provide an update on this, and do you think it will positively affect your capital expenditures?

I am Kim Junmo, Head of Corporate Planning. Let me answer the first question regarding CapEx. When you look at the CapEx level of last year for SK Telecom, it was KRW 2.18 trillion, and for SK Broadband, it was KRW 820. In total, it was about KRW 3 trillion. The CapEx level for this year is going to be similar to that of last year. For SK Telecom, first of all, the top priority for CapEx is increasing 5G customers, telecommunications quality, and expanding the coverage and network quality for our customers. And for SK Broadband, they will continue to make investments for IPTV and broadband businesses, as well as making investments for content and enterprise business. Moving on to medium-to-long-term CapEx projections, we have been making constant investments for 5G; as a result, the coverage based on population has improved dramatically and we have – we're going to utilize the joint 5G networks together with the other telco companies. Overall, I can say that in the medium term, the CapEx level is going to be stabilizing downward.

I am Kang Jong-ryeol, the Head of ICT Infrastructure at SK Telecom. Let me answer your question regarding the 5G joint network. Last year, the three telecom companies in Korea successfully piloted commercialization of 5G in 12 areas. Continuing along with this initiative, the three companies will expand the commercialization to the first level areas. Down the road, it is our target for the three companies to divide and conquer 131 rural areas for 5G coverage by the end of the first half of 2024. Because of this joint construction of the 5G network, there is definitely a medium-to-long term positive impact on CapEx saving. But as Mr. Kim mentioned, our 5G subscribers are demanding rapid expansion of the 5G coverage. So, we're going to continue making relevant investments. Therefore, the CapEx level for 2022 is going to be similar to that of last year. Thank you.

The next question will be presented by Investment and Securities. Please go ahead with your question.

Thank you for this opportunity. My first question is about the performance of your MNO business this year. Your revenue guidance for the mobile and fixed business is KRW 17.4 trillion. Can you compare this revenue guidance with previous years? Additionally, what trends are you expecting for wireless ARPU and marketing expenses this year from the MNO business? Moving on to my second question regarding IPTV; last year, the number of IPTV subscribers reached 9 million, which is impressive. What is your outlook for subscriber growth this year, and what is your overall strategy for IPTV?

Thank you for your question. I am the Head of Corporate Strategy. Let me answer your questions. Regarding MNO revenue in 2021, driven by the increase in 5G subscribers, MNO revenue grew by 2.7% to surpass KRW 10 trillion. The number of 5G subscribers increased by 4.4 million, totaling 9.9 million at the end of last year. We expect this growth trend in 5G subscribers to continue, potentially reaching around 13 million this year. This increase in subscriber base has also led to a rise in ARPU, moving from the low-30,000 range to an upward trend. The ARPU figure shared during the presentation includes ARPU for IoT, which has lower margins. However, there is a clear growth trend in ARPU for 5G handsets, and we anticipate this trend to persist. Consequently, we expect MNO revenue to continue growing this year, leading to very positive standalone results. Regarding marketing expenses in 2021, there was a slight increase due to the expansion of the 5G market and the accounting impact of IFRS 15. However, starting in the fourth quarter of last year, the trend in marketing expenses has stabilized and begun to decline. The market consensus is that competitive cost pressures are unnecessary, and stability is needed. We believe this stability will continue this year, and by employing contactless distribution methods, we aim to improve cost efficiency. Overall, marketing expenses are projected to decline year-over-year this year. Now, moving on to the question about IPTV subscribers and our business strategy, the Pay TV market continues to expand, with subscribers reaching 9 million last year. This growth has been fueled by the rise of single-person households and a growing demand for additional TVs. We have also been providing various services and content that appeal to younger generations, including millennials and Gen Z, who have significant demands for individualized and customized content. As a result, we've been able to increase our ARPU. With the market's continued growth and the increasing demand for diverse services and content, we expect IPTV growth to persist following last year's gains. Thank you.

The next question will come from Joonsop Kim at KB Securities. Please proceed with your question.

I am Kim Joonsop from KB. I have two questions regarding your enterprise business group. First, concerning your data center business, you mentioned that there is a supply shortage of data center capacity in the market, which is favorable for suppliers. What are your priorities when making data center-related investments, and what is the planned investment size for this year? My second question pertains to your enterprise revenue highlights. In 2021, connectivity was the main revenue source for the enterprise business. What will be the key business areas for revenue generation in 2022?

I am Choi Jin-Hwan. Thank you for your questions. Let me address the first question regarding our data center strategy. As you may know, data centers require significant investments. To manage cost efficiency and financial risks, we are pursuing a combination of direct data center investments, IDC investments, and leases or total return swaps. For instance, the IDCs operated by SK Telecom were developed using collateral borrowings and equity investments from a real estate private equity firm. We have a total return swap agreement with the special purpose company that facilitated this investment, along with long-term lease agreements for these properties. This approach has allowed us to secure additional IDC capacity while mitigating potential financial risks from large investments and reducing lease costs through the TRS agreement. Beyond the construction of data centers, there may be capital expenditures related to equipment and infrastructure when customers begin using the data centers. These investments are linked to demand and new revenue. Our plan is to expand data center capacity by 50 gigawatts annually, which will require a total investment of KRW 500 billion, impacting our balance sheet by 10%, translating to KRW 50 billion. Now, regarding the second question, our enterprise business encompasses four main areas, with total revenue last year reaching KRW 1.34 trillion. Specifically, connectivity accounts for 70% of our revenue, IoT and energy solutions contribute 17%, and the data center and cloud business make up 13%. While connectivity is our primary revenue source, the other three areas are experiencing rapid growth; particularly, our data center and cloud sectors have an annual compound growth rate exceeding 30% to 50%. These sectors form part of our strategic focus. As mentioned by the CEO in his presentation, the data center market is expected to face ongoing supply shortages. After doubling our capacity last year, we aim to become the leading provider in Korea over the next five years. In the broader context, we will continue to enhance synergies with our 5G, MEC, MSP, and SaaS businesses, alongside collaborating with global cloud service providers, positioning ourselves as a key player in the cloud economy. Thank you.

We will take the final question.

The last question will be presented by the next participant. Please go ahead with your question.

I have a question regarding your UAM Initiative. You mentioned in your presentation that UAM will be a key growth driver in the future. What roles do you think SKT can play in providing UAM? What business models do you have in mind? And if you need to make investments or incur costs, how much of such investment are you anticipating?

Thank you for your question about our UAM initiative. It hasn't had a significant impact yet, but there are synergies between SKT and Joby. SKT has strengths in Communications Network Platform and Services, while Joby is focused on developing UAM devices. Additionally, Joby has acquired the UAM operational business of Uber, so we will continue to collaborate with them for future opportunities. The specific structure of the corporation is still undecided, but I believe we could be part of a consortium to obtain a business license for UAM in Korea. In the short term, we will continue to participate in the grand challenge, which is a government-led demonstration project. Thank you.

Thank you. This concludes the Q&A session.

This is the conclusion of the SK Telecom CEO Investor Day. I want to express my gratitude to the investors and analysts for your participation. As SK Telecom embarks on a new journey in 2022, I kindly request your continued support. Thank you.