Sk Telecom Co Ltd Q2 FY2022 Earnings Call

First of all, thank you all for joining this conference call. And now, we will begin the conference of the Fiscal Year 2022 Second Quarter Earnings Results by SK Telecom. This conference will start with a presentation followed by a divisional Q&A session. Now, we shall commence the presentation on the fiscal year 2022 second quarter earnings results by SK Telecom.

Good afternoon, I'm Jeong Hwan Choi, IRO of SK Telecom. Thank you for joining SK Telecom's earnings conference call. We are providing consecutive interpretation for the call, which will consist of a presentation on Q2 earnings highlights, future business plans, and strategic directions, as well as a Q&A session. The call is attended by our executives from relevant business divisions including Jin-won Kim, CFO and Head of Corporate Planning Team, of SK Telecom. Before we begin, I would like to remind you that all forward-looking statements are subject to change depending on market situations. Let me now present our CFO.

Good afternoon. This is Jin-won Kim, CFO of SK Telecom. SK Telecom signed a stock swap deal with Hana Financial Group in July to exchange shares worth over KRW 400 billion and formed a strategic partnership. The partnership is significant as it marks the beginning of hyper collaboration between SK ICT family companies and Hana Financial Group in a wide range of areas, including ICT and finance under the framework of SKT 2.0. We will pursue strategic cooperation with Hana Financial Group in six areas, including digital transformation of finance and development of new business models utilizing telecom and finance data. We aim to innovate value for customers through convergence among various services. Now, let me report on the consolidated financial results for second quarter of 2022. Consolidated revenue reported KRW 4,289.9 billion, up 4.0% year-over-year and 0.3% Q-on-Q. Operating income posted KRW 459.6 billion, up 16.1% year-over-year, primarily driven by the end of the accounting recognition of marketing expenses incurred at the beginning of 5G roll-out. It grew by 6.3% Q-on-Q mainly because of eliminating one-off labor costs related to stock bonuses. Net income came in at KRW 258.1 billion, posting a 67.6% decline year-over-year, mainly due to the base effect of excluding equity method gains from SK Hynix, but it grew by 17.2% Q-on-Q. On a non-consolidated basis, revenue grew 3.2% year-over-year and 1.3% Q-on-Q to post KRW 3,118.2 billion. Operating income and net income reported KRW 380.9 billion and KRW 224.5 billion, respectively. Having reported on the financial highlights of the second quarter of 2022, let me now move on to major business achievements and strategic directions. As 5G became the major network in the industry with a 5G penetration rate reaching 50%, we made a preemptive move of introducing five new 5G price plans on August 5 to offer more choices to customers. As of the end of Q2, our 5G subscribers stand at 11.68 million. As more customers can enjoy 5G services with the new price plans, we believe that we can reach our goal of 13 million 5G subscribers by the end of the year. The pay TV subscribers of SK Broadband reached 9.17 million as of the end of Q2. Going forward, we expect content sales to recover as the pay TV subscriber base continues to expand and new movies are being released with the easing of COVID-19 related restrictions. Utilization rate growth is on track for the new Data Centers that opened in Gasan and Siksa in July last year, which is expected to bring about sustained revenue growth. Preparations to open additional Data Centers in areas such as the Seoul Metropolitan Area and Busan are well underway. As for our Cloud business, we focus on MSP services that offer specialized solutions primarily based on our network competitiveness and capabilities on MEC, AI, and Big Data. The strategic partnership with Hana Financial Group is expected to accelerate mutual cooperation in areas, including digital transformation of finance. A new growing AI service named A. was launched in May as an open beta version. It aims to be a daily digital mate that can have human-like conversation with customers. In addition to the media and daily information services already available, A.tv and A.game were recently launched with many more useful services to be released going forward. Especially A. will evolve as a service that offers more valuable experiences in terms of communication, which is the killer feature of mobile and the foundation of SK Telecom services. Moving on to T Universe, Universe Pass Life focused on daily benefits and Universe Pass Slim centered on online shopping benefits were launched in late June and July, respectively. In the second half of this year, new functions such as sharing and gifting will also be added as part of our efforts to expand the subscription product lineup and customer convenience. By enhancing the usage value of customers going forward, T Universe will reinforce its position as a subscription commerce platform focused on four pillars of action, namely product diversification, customer experience innovation, marketing based on AI and DT, and business model expansion. Celebrating the first anniversary in July, Ifland recorded 8.7 million cumulative downloads at the end of Q2. The platform is attracting millennials and Gen Z by connecting offline and metaverse exhibitions to maximize customers’ viewing experiences and by making various attempts like piloting innovative concert models. We are also working for gradual expansion into the global market in the second half of the year through close cooperation with leading telecom companies in major regions, including Europe, North America, the Middle East, and Asia. Finally, for shareholder returns, the Board determined the second quarter DPS to be the same as Q1 at KRW 830. We are doing our best to improve financial performance and produce results from new businesses by building diverse partnerships under the framework of SKT 2.0. We will make sure that these efforts result in maximizing corporate and shareholder value. We ask for your continued support and encouragement. Thank you.

We will now begin the Q&A session.

The first question will be provided by Sean Lee from Citigroup. Please go ahead with your question.

I'm Sean Lee from Citigroup. Thank you for taking my questions. I have two questions. The first question is related to your new 5G price plans. Can you provide us with some more information about the background behind introducing these new price plans? And what is your estimation of the impact of such new price plans on your revenue? The second question is about the outlook for the second half of the year. So, what is your understanding of the marketing landscape of the industry going forward? And what is your plan for expense management? Thank you.

Thank you for the question. Before I address your questions, I'd like to remind you that we have executives from the relevant business divisions, including subscription, Metaverse, MNO and integrated marketing. We also have CFO of SK Broadband and other executives from their relevant divisions. So, if deemed necessary, I'm going to hand over to these executives for the answers. Regarding the new 5G price plans on August 5, we launched five new 5G price plans that include two on-tech plans. Whenever we have new network rollout as the number of subscribers increases, it is very natural that we offer more diverse price plans. As I mentioned in the beginning of my presentation, the 5G market is becoming more mature with 5G subscribers taking up more than 50% of the total handset subscribers. As a result, we concluded that there should be more diverse price plans that can cater to different data usages and customer preferences. As a result, we introduced diverse price plans, including low, medium, and high-end price plans and online only plans in order to offer more choices for our customers. Now, I would like to hand over to Mr. Kim Ji Hyeon, Head of Integrated Marketing Strategy Office, who will discuss the details and expected benefits.

Hello, I'm Kim Ji Hyeon, Head of Integrated Marketing Strategy Officer. First of all, as for the regular 5G plans, we have 49 price plans that offer 8 gigabytes of data and 59 price plans that offer 24 gigabytes of data and 99 price plans that offer daily essential service benefits and unlimited data. So, as a result, we have a 5G price plan lineup that covers the price range of KRW 40,000 all the way to KRW 100,000 with the interval of KRW 10,000. The two new online only or on-tech price plans include on-tech 34 that offers 8 gigabytes of data and on-tech 42 that offers 24 gigabytes of data. With these new 5G price plans, we expect that now customers can enjoy more diverse and economic plan choices in terms of price data and benefits. As a result, we expect that the 5G subscriber base will continue to grow.

I understand that there was a question about the potential impact of price plans on ARPU. So, can you elaborate more on that?

So, as you can see, we now have more price plans for low and medium end, compared to before. As a consequence, some customers may downgrade their price plans depending on their data usage and other customers may upgrade their price plans depending on the increased trend of data usage. What is even more important is that we expect 5G migration to be accelerated as now LTE users can choose more price plans. But as for their impact on our revenue trends, all five price plans were launched all at once, we believe that we can share with you more details after we get more data from actual customer feedback and usage patterns. Based on the new 5G price plans that offer more choices for our customers, we will continue to expand our 5G network, improve our services, and offer more convenient and useful services. As a result, we will continue to make sure that 5G becomes mainstream and sustain our MNO growth. Now, moving on to the second question regarding our marketing expenses in the overall landscape. For the second quarter, marketing expenses grew slightly quarter-over-quarter due to the increase in ad expenses, but as we previously communicated with respect to the MNO market operation, the MNO related marketing fees have been declining since the third quarter of last year. Moving on to the second half of this year, we will continue to maintain the trend of market stabilization and cost reduction. As for the second half of this year, we will continue the trend of market stabilization and cost reduction and we will reinforce the downward trend of marketing expenses through efficient market operation focused on profitability.

Let me comment on the overall marketing landscape. Recently the market landscape has been pretty stable. In addition, the total number of 5G subscribers has reached 24 million in Korea and the 5G market is becoming more mature. As a result, we see that there is very low likelihood of competition heating up again to attract 5G subscribers. Earlier this year, there was a flagship handset launch and the market was quite stable. Along the same line, there is another flagship handset launch expected in mid-August, and we do not expect the market to heat up once again. Recently, SK Telecom has been focusing on strengthening the competitiveness of our products and services that cater to our customers' needs. One example is launching these new 5G price plans. Likewise, we will continue to maintain our position to lead the 5G market.

The following question will be presented by Joonsop Kim from KB Securities. Please go ahead with your question.

I'm Kim Joonsop from KB Securities. I have two questions. The first question is related to the monetization of Ifland. The second question is related to your partnership with Hana Financial Group. So, regarding the first question, in June, SK Telecom communicated with the market, specific monetization models for Ifland. So, I wonder if there has been any change in terms of the priorities of such monetization models? And if you are planning to work on any new monetization models or business models? The second question is regarding your partnership with Hana Financial Group. In the presentation, the CFO mentioned that there are six particular areas where the two parties will cooperate. So, I'd like to learn more about the specific plans for cooperation that will help me better understand this partnership? Thank you.

Regarding your first question about Ifland, I'd like to hand over to Mr. Yang Maeng-seok, Head of Metaverse Company for answers. And then I'm going to cover the second question.

Hello, I am Yang Maeng-seok, Head of Metaverse Company. Up to this point, our priority for Ifland has been expanding the user base. Now, we will soon enter the stage of monetization by utilizing the user base. In some B2B areas, we have been generating income by holding corporate events and creating avatars and spaces. Going forward, we are going to plan for monetization through various functions, including sponsoring creators that host meetings, a function of trading avatars and creating spaces, and in-service advertising. One example, in the third quarter of this year, we're going to offer points to sponsors and participants as bonuses, and these points can later be used for Ifland services. Additionally, we're going to add more elements to the Ifland economic system. Also, in order to link virtual goods inside Ifland with real-world value, we are planning to introduce a crypto economic system in connection with SK coin and we will provide support so that Ifland can become an important service that helps to develop the ecosystem of SK coin. This critical economic system will be one element of many parts of the Ifland economic system, and we're going to continue to closely monitor the market because we want to launch the crypto-economic system at the optimal time when the effect of introducing Ifland crypto system can be maximized. Thank you.

Now, I would like to discuss the background behind establishing a strategic partnership with Hana Financial Group and our future plans. SK Telecom has been collaborating with Hana Financial Group in many areas, starting with the Hana Card joint venture in 2010 and including various partnership cards and business developments. We were able to produce good results. But at the same time, as you may know very well, the telecommunications industry and the financial industry have been going through many changes. In particular, for the telecommunications market, we have new players competing with us. In the financial sector, there is an urgent need and challenge for digital transformation. Against this background, there was a common recognition between SK Telecom and Hana Financial Group for a need to form a new partnership. This strategic partnership is very meaningful as it goes beyond the scope of cooperating just for credit card business, but rather to create a framework that allows us to cooperate in a wide range of areas that enable comprehensive cooperation between SK ICT family companies and Hana Financial Group. We see that there are many areas for cooperation. First of all, we can build financial services based on AI and Cloud to accelerate digital transformation of finance. Secondly, we can develop new business models by combining telecom and finance data. As you may know, data is becoming more important and there are many data-driven services, so this is an area that we can cooperate in. In addition, we can integrate products and services to learn for customers of SK Telecom and Hana Financial Group and utilize the infrastructure jointly. We can conduct joint marketing based on digital technology and pursue cooperation for ESG management. We will not just remain as strategic partners on paper. We're going to strengthen mutual engagement to produce tangible results. For that, we are going to form and operate a synergy consultative party that is attended by key executives from both parties and we are going to come up with concrete plans for cooperation. On our part, SK Telecom will actively utilize this strategic partnership with Hana Financial Group so that we can strengthen the growth momentum of the five business groups that we defined earlier this year. Thank you.

The following question will be presented by Hoi Jae Kim from Daishin Securities. Please go ahead with your question.

I'm Hoi Jae Kim from Daishin Securities. I would like to ask two questions. The first question is related to your key universe business and I'd like to get some more updates. When I look at the presentation material, it only gives us numbers about MAU and GMV, so, can you share with us your revenue projection and the current revenue trend? The second question is related to your dividend payout. Your DPS has been set at 831 for the first quarter, as well as the second quarter, and this is the same level as last year. And this is what we consider the minimum guaranteed dividend that we expect from SK Telecom, but as we see this upside potential for your earnings and also if you take into account the dividend income coming from Hana Financial Group, I believe that there is an upside potential for dividend payout. Can you give us the overall guidance for the annual dividend payout? Thank you.

Thank you for the questions. The first question regarding T Universe will be addressed by Mr. Yoon Jae Seung, Head of Subscription Service Marketing Office. And then I will cover the second question.

Hello, I am Jung Jae-Yoon, Head of Subscription Service Marketing Office. The T Universe was launched in August 2021 and in just 10 months, at the end of the second quarter, our T Universe users reached 1.2 million. As you can see, the user base growth of T Universe is the highest among all the non-telecom services that SK Telecom has launched so far. We expect significant growth going forward by enhancing usage value for customers. As for our product offerings, last month, we introduced Universe Pass Life focused on Daily Benefits and Universe Pass Slim, which is focused on online shopping. In the second half of this year, we plan to add more convenient features such as sharing and gifting, which are expected to bring about more significant growth by creating more value for customers. Moving on to the size of business, the subscription business has been producing meaningful results since its launch with the GMV surpassing KRW 260 billion in the first half of the year. As for the sales revenue, we see a 1.5-fold track of growth, and this does not include just one-off sales, but it includes mostly recurring sales, so it is quite significant. Moving on to the distribution channels, the first through online channels such as contact center, T World, T Membership and 11 Street accounts for about 42%. Customers in their 20s all the way to the 40s continue to account for more than 65%. So these figures show that young customers have been signing up for T Universe mainly through online channels. As for T Universe partnerships, the number of partners has surpassed 60, and we've been expanding the scope and breadth of benefits. Among the partners, there is very strong demand and preferences for benefits related to daily lives and media benefits. Thank you.

Now, I'd like to comment about the question regarding using dividend gains from Hana Financial Group as part of SK Telecom's dividend payout. I discussed the significance of the strategic partnership with Hana Financial Group. When we take a look at the financial impact of this deal, I can see that we used to hold shares of Hana card that do not pay dividends. But now these were exchanged with the shares of Hana Financial Group Holdings, which do pay dividends. Currently, the stock swap deal is underway, so I cannot give you the exact amount. But last year, the DPS for Hana Financial Group was 3,101 per share. Based on that, we can expect about KRW 20 billion of dividend gains from Hana Financial Group. With the increase in dividend income from Hana Financial Group, it's going to be helpful for our cash flow generation, which means that we will be capable of increasing shareholder return. However, as for the direct impact on our shareholder dividend payout, I cannot provide detailed information at this time, but I hope that you will consider this as a very important means to enhance and maximize shareholder value. Going forward, we will consider the market situations in our financial structure before we finally decide on the annual dividend size.

There is one pursuit with a question. The last question will be asked by an unidentified analyst.

I'm sorry, but I would like to ask two questions. The first question is about your capital expenditure trend. In the first half of this year, your capital expenditure was KRW 850 billion. I wonder if it will be similar in the second half of the year compared to the previous year. You're working on building joint 5G networks with other telecom companies to enhance 5G coverage, and I understand this will continue until the end of the first half of 2024. So up until that point, what do you expect your capital expenditure trend to be for next year and the year after? The second question pertains to your pay TV business. I've noticed a slowdown in the net additions of pay TV subscribers, while your IPTV subscriber growth rate is in the high single digits year-over-year. I would like to know if this trend can be maintained.

Regarding your question about the pay TV business, I would like to hand it over to the CFO of SK Broadband, and then I will address your question about CapEx.

Hello, I am the CFO of SK Broadband. The pay TV market in Korea has been experiencing significant subscriber growth, primarily due to the expansion of the IPTV sector. In 2021, we added 700,000 subscribers, bringing our total to 36 million customers in the pay TV market. Specifically, the IPTV sector has increased by over 1 million subscribers each year for the last five years, now representing more than 60% of the overall pay TV market. While the growth rate of IPTV may decelerate, we are still seeing ongoing demand from single-person households and for additional TVs. Therefore, we anticipate that the trend of growing IPTV subscribers will persist. For SK Telecom, in the first half of this year, we added over 190,000 new IPTV subscribers, maintaining our lead in net add market share. Given the continued growth of our pay TV subscriber base, we are focused on enhancing our platform's competitiveness in advertising and content to drive ARPU growth across the entire pay TV business.

I would now like to address your question regarding CapEx. For our CapEx plan, as we communicated at the annual earnings conference call, as well as for the first quarter conference call, we are planning to maintain the CapEx level to be similar to that of last year through efficient management. Our activities for nationwide 5G rollout continue, and we believe that we need to continue to invest in the network in order to improve competitiveness and quality so that we can maintain 5G market leadership. At the same time, we're going to pursue an efficient execution of CapEx, mainly by utilizing the joint network. We're going to continue to invest in growth businesses. So, we're going to make these investments efficiently in connection with and in consideration of 5G network investments. As for our CapEx trend and outlook in the medium term, our position is the same. Until the nationwide 5G network is completed, we will have to continue to invest in network expansion. At the same time, we're going to invest in growth businesses, and through efficient execution and management, we will be able to stabilize the CapEx trend in the medium term.

Thank you for joining us for SK Telecom's second quarter conference call. Thank you.