Sk Telecom Co Ltd Q3 FY2022 Earnings Call

Good afternoon, I'm Hee June Chung, IRO of SK Telecom. Thank you for joining SK Telecom's earnings conference call. We are providing interpretation for the call, which will consist of a presentation on Q3 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 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 celebrated the first anniversary of the spin-off on November 1. With the launch of SKT 2.0, we redefined our business into five groups to ensure that each group within the telecom business receives fair recognition of its market value. Despite the ongoing challenges in our business environment, we have achieved significant results in our telecom-based new ventures, supported by stable Fixed and Mobile business performance. While our previous strategy focused on expanding into new business areas, SK Telecom's growth narrative for the next decade centers on AI transformation. In this new era, customer engagement is crucial, and AI has the potential to revolutionize every industry. To this end, we have been dedicated to developing AI capabilities over the past few years. Moving forward, we aim to enhance our earnings through innovative business models powered by AI transformation that will also increase our corporate value. SK Telecom aspires to become a distinguished AI company. We will convert our core businesses into AI-driven operations to identify new growth opportunities, deliver AI services to strengthen customer relationships, and implement the AIX strategy to extend our AI and digital transformation capabilities into other sectors. Now, let me share the consolidated financial results for the third quarter of 2022. Consolidated revenue reached KRW 4,343.4 billion, an increase of 3.0% year-over-year and 1.2% compared to the previous quarter. Operating income stood at KRW 465.6 billion, climbing 18.5% year-over-year due to ongoing market stabilization, and also up 1.3% quarter-on-quarter, primarily driven by revenue growth from increasing 5G subscribers. Net income was KRW 245.6 billion, a decrease of 66.7% year-over-year and 4.9% quarter-on-quarter, influenced by the recognition of disposal losses from Hana Card equity. On a non-consolidated basis, revenue grew 3.1% year-over-year and 0.1% quarter-on-quarter to reach KRW 3,122.6 billion. Operating income and net income were reported at KRW 388.7 billion and KRW 305.1 billion respectively. Now, having discussed the financial highlights of Q3 2022, I will move on to significant achievements and strategic directions. We ranked #1 in the National Customer Satisfaction Index and the Korean Standard Service Quality Index, and achieved the top position again in the Korean Customer Satisfaction Index in October, marking a Grand Slam across three major customer satisfaction surveys in the Mobile Communication sector for 23 consecutive years. Due to strong customer support, 5G subscribers grew to 12.47 million by the end of Q3, putting us on track to meet our annual target of 13 million. The pay TV subscribers of SK Broadband reached 9.25 million at the end of Q3. Content sales showed a recovery trend, fueled by the solid growth of the pay TV subscriber base and new movie releases following the transition to endemic conditions. We anticipate this growth trend will continue with our diverse content offerings. Additionally, TEAM Studio, our LED wall-based media content production studio that opened in June, is actively expanding the media ecosystem through hyper collaboration by forming a consortium with major virtual production companies in Korea. SK Telecom is set to lead the evolution of media content production by leveraging TEAM Studio. Moving forward, TEAM Studio will develop intellectual property, VFX, and XR related platforms to pave the way for the future digital content industry using SK Telecom’s ICT capabilities such as 5G, AI, and Cloud technologies. Regarding our Data Center business, which has gained much attention recently, we are seeing growth in revenue and utilization rates for the Gasan and Siksa Data Centers. We are also preparing to open additional data centers in regions like the Seoul Metropolitan Area and Busan while effectively managing both internal and external circumstances. As the cloud market undergoes restructuring focused on hyperscalers, we are concentrating on the MSP business to quickly broaden scale through collaborative efforts with global CSPs, along with the edge cloud business that offers comprehensive packages including MEC infrastructure and various solutions. Launched as an open beta, the AI service named A. is enhancing its service quality through ongoing improvements. We are committed to developing 'A.' into a daily digital companion for customers by creating a comprehensive service package that integrates various everyday services. Celebrating its first anniversary in August, T universe has emerged as a leading subscription service in Korea with over 1.4 million MAUs, offering a variety of services and perks that align with customers’ lifestyles, including online and offline shopping, food and beverages, and digital services. In the future, T universe aims to evolve into a subscription commerce platform by broadening its product offerings and partnerships while improving customer convenience. Ifland reached 12.86 million cumulative downloads by the end of Q3. It introduced the ifland Point Program to establish a foundation for an economic system and opened ifland Studio, allowing users to create avatar costumes and expand production capabilities for lenses and items in the future. We plan to enable transactions using ifland points. Furthermore, in September, SK Telecom signed an MOU with e&, the leading telecom company in the UAE, marking the start of ifland's global expansion with a goal to launch metaverse services in 48 countries by the end of this year. Our Connected Intelligence business, which includes Urban Air Mobility, is being pursued with a commitment to the future of society and humanity. We believe UAM will be transformative, delivering innovative services that promote customer growth, create value for investors, and provide convenient mobility solutions for society. Lastly, regarding shareholder returns, the Board has set the EPS for the third quarter to be the same as Q1 and Q2 at KRW 831. SK Telecom will expedite its transformation into an AI company through active partnerships and investments in technology firms, such as our equity investment in Konan Technology to secure essential AI technologies and talent. In this endeavor, we will strive for improved financial performance and new business growth to maximize both corporate and shareholder value. We appreciate your continued support and encouragement. Thank you.

Now the Q&A session will begin. The first question will be from Seyon Park at Morgan Stanley. Please go ahead with your question.

I am Park Seyon from Morgan Stanley, and I appreciate the opportunity to ask my questions. My first question is about the outlook for the fourth quarter. In the third quarter, we've seen cumulative operating earnings increase by 17% or 18% on both a standalone and consolidated basis, indicating a strong growth trend. I'm curious if there might be any one-time factors that could affect this growth in the fourth quarter. I anticipate there will be some one-off expenses incurred in that timeframe, so could you share the estimated size of these expenses for the fourth quarter? Additionally, insights into the full-year earnings outlook would be greatly appreciated when discussing the fourth quarter. My second question concerns your roaming revenue. You've indicated that there has been an increase in roaming revenue for your wireless MNO business on a standalone basis. What is the overall trend for this revenue? How does it compare to pre-COVID-19 figures, and what level of further recovery do you anticipate?

Thank you for your questions. First, I'd like to discuss the fourth quarter and annual outlook. Many of you on this call are likely familiar with our earnings trends on a quarterly basis. I anticipate that the revenue trend from the first to the third quarter will continue into the fourth quarter. However, there are structural factors that will increase expenses in the fourth quarter compared to the first quarter. These expense categories include outsourced services, general fees and commissions, advertising, promotion costs, rents, and maintenance costs, which will be recognized in the fourth quarter as they have been in previous years. I’d also like to point out that last year's fourth quarter included a one-time labor expense due to stock options and payouts. This year, we are aware of the impact of rising inflation and the cost of living. However, we expect an improvement in our bottom line year-over-year. Although we did not provide guidance on operating income at the start of the year, our revenue growth and cost management trends are on track. Thus, we believe we will meet our internal targets for operating income. Looking ahead, we expect prices, including electricity, to continue rising due to inflation. We will strive to improve our expense and cost efficiency to minimize the impact of these price increases on our earnings. Regarding your question about our roaming revenue, this area has been severely affected by the COVID-19 pandemic since it relies on international travel. In 2021, our annual roaming revenue was only 15% of what it was in 2019. This year, with many advanced countries lifting COVID-related restrictions, we are observing a rise in business travelers and tourists, resulting in an upswing in our roaming revenue. Thanks to this recovery in the third quarter, our roaming revenue has tripled year-over-year, reaching the highest level since the first quarter of 2020 when the pandemic worsened. We have been enhancing our competitive pricing plan specifically for overseas travelers and engaging in various marketing activities, including promotions, which I believe are driving this recovery in roaming revenue. While overseas travel has not yet returned to pre-COVID levels, we have noted a 50% increase in the number of people using roaming services, leading to an increase in roaming revenue that reflects a shift from previous patterns. As we anticipate a full reopening of international travel, we will continue to enhance the customer experience with our roaming services to expand our customer base and revenue. Thank you.

The following question will be presented by Seung-woong Lee from eBest Investment & Securities. Please go ahead with your question.

I am Lee Seung-woong from eBest Investment & Securities. I have two questions. First, I would like to understand the reasoning behind your equity investment in Konan Technology. I recognize that you are transitioning to an AI company, and I believe this investment will promote greater cooperation and synergy. What do you expect from this partnership? My second question concerns your UAM business. There were news updates in October and September regarding your UAM initiative. Can you provide the current status? You mentioned that you aim to commercialize the UAM service in 2025, which is still a couple of years away. What is your overall medium and long-term roadmap? Thank you.

Thank you for your questions. First, I would like to discuss our investment in Konan Technology. After that, Mr. Cho Hwan Sang, Head of Corporate Development, will address your second question concerning our UAM business. As we announced on October 27, we acquired a 20.8% equity stake in Konan Technology, a specialized AI company in Korea. We also formed a strategic partnership that encompasses AI technology collaboration. To facilitate our transformation into an AI company, we have been promoting various AI initiatives, including ‘A.’, AI audio, text processing, and Vision AI, while enhancing our capabilities. A successful transformation requires the right skills and AI technologies. Therefore, we have been developing our internal capabilities and hiring external experts. However, acquiring qualified professionals specializing in AI has been challenging. Given this situation, we concluded that investing in Konan Technology, which possesses proprietary technology and a substantial business history, will greatly enhance our AI assets. Konan Technology, founded in 1999, is renowned for its outstanding text AI and video AI technologies, with over half of its staff being R&D professionals. Thus, our equity stake of approximately 20% is expected to yield benefits in terms of business synergy and personnel exchanges, leading us to proceed with this investment. We anticipate that this investment will fortify our core AI technologies and capabilities. Immediately following the closure of this deal, both companies initiated a joint synergy task force team, and we will implement collaborative AI projects based on professional talent exchanges. We will continue to develop specific AI synergy plans leveraging our own technologies and experiences to advance AICC, Vision AI, AI semiconductor, and digital twin businesses. Here with us is Mr. Cho Hwan Sang, Head of Corporate Strategy Office, who will provide further details about our AI strategy.

Hello, I am Cho Hwan Sang, Head of Corporate Strategy Office. Let me give you some more details about our AI strategy. As for our vision of SKT 2.0, we envision becoming an AI company that benefits customers with technology and services. To achieve this vision, we have established three strategies. The first is to redefine our core existing businesses such as Fixed, Mobile, Media, and Enterprise centered around AI, and innovate business models from the customer's perspective. Specifically, we want to ensure that SKT customers can seamlessly search for services and products, subscribe, and use them on an online platform. To do this, we will reform our processes and apply AI throughout. Our second strategy is to apply technology and content to AI-based services that we have already launched, including ‘A.’, T universe, and ifland, to transform our customer relations. For example, ‘A.’ focuses on developing and introducing teller services to drive more customer usage. We also plan to use T universe, which will have its own platform to curate the right subscription products for our customers using AI. The third strategy, called AIX, means we will identify industries where AI application or digital transformation is needed and invest in companies to apply our AI and digital transformation capabilities to expand into other industries. For instance, in manufacturing, robot and vision AI can increase productivity, and we can apply AI technologies like X Caliber, a video diagnosis solution from SK Telecom, to enhance services. To successfully transform into an AI company, we need to secure core technologies and capabilities. Therefore, we will continue to invest in AI startups and form strategic partnerships with these companies. In this context, our investment in Konan Technology is an example of how we are securing AI capabilities. In short, our AI strategy does not involve starting new businesses. Instead, we aim to innovate our business models with AI, focusing on core businesses such as Fixed & Mobile and Enterprise. Secondly, we will apply AI to various services to deepen customer relations. Finally, we will utilize the AIX strategy to secure new growth drivers.

Let me now address your question regarding the UAM business status and overall strategic direction and the medium and long-term roadmap. We aim to add intelligence to our intrinsic core business value of connection. Therefore, we have included connected intelligence as part of the five business groups under SKT 2.0. We are planning to commercialize the UAM service for the first time in Korea in 2025, in accordance with the government's roadmap. Let me discuss how we are preparing for this UAM business. First of all, we are working to commercialize the UAM service in Korea by forging a partnership with Joby, the globally number one aircraft manufacturer, and establishing a consortium with many stakeholders including Hana System, Korea Airport Corporation, Korea Transportation Research Institute, and Korea Meteorological Industry Technology Institute. We have also been participating in the first stage of the K-UAM Grand Challenge to advance our technologies and business capabilities. For instance, in August this year, we completed the construction of the 5G airspace network for all those participating in the Grand Challenge demonstration project that is taking place in Goheung in Jeolla Province. In September and October, we signed MOUs with Jeju Special Self-Governing Province and Jeju Metropolitan City respectively in order to pursue cooperation for UAM pilot projects. Moving on to our competitive strength, we first have world-renowned telecommunications technology so we can play a key role in establishing and building a specialized airspace network for UAM services. We can also provide connections between UAM and ground transportation and have the technology to offer the best routes based on mobility data analysis. Additionally, we have a partnership with Joby Aviation to introduce UAM aircraft when needed. Based on these competitive advantages, we’re going to pursue this UAM business. In addition, we are making all the necessary preparations in terms of services, infrastructure, and business capabilities so that these demonstration projects and pilot projects can be carried out successfully. We're also building a foundation for the UAM business by strengthening capabilities with various stakeholders, including semiconductor companies, battery companies, and investment partners. We are going to continue to utilize all the capabilities available from our consortium partners. When it comes to the monetization business model of UAM, the basic idea is to share service fees paid by customers with UAM operators, vertiport operators, traffic control service providers, and other participants. However, UAM has not yet been commercialized. We are working on devising various options for this business model. Let me now give you some medium to long-term roadmap for the UAM business. In 2023, the first stage Grand Challenge will be done in terms of demonstration projects in open ground, and the second stage Grand Challenge will take place in the urban area in 2024. Our goal is to launch our pilot commercial UAM service in 2025. Thank you.

The following question will be presented by Su Jin Kim from Meritz Securities. Please go ahead with your question.

Hello, thank you for taking my questions. I have two questions. The first is about your subscription business. I noticed there was a significant update for T universe, leading to an increase in subscribers. Could you provide insight into the profit or revenue generated from T universe and what your plans are for service and other updates? My second question pertains to your metaverse platform, ifland. I've observed some fluctuations in user numbers, and you mentioned plans for global expansion. What is your overall outlook for ifland, and what earnings contribution do you anticipate from it?

Here with us is Mr. Yoon Jae-woong, the Head of Subscription Service Marketing Office, responsible for the subscription service, and Mr. Yang Maeng-seok, the Head of the Metaverse company overseeing the ifland business. They will address your questions in order.

Let me address your question about our subscription business. In the third quarter of 2022, our subscription business achieved KRW 400 billion in GMV, demonstrating significant improvement in performance. We anticipate that this GMV will reach approximately KRW 560 billion by the end of this year. As of the end of the third quarter, T universe has around 1.4 million monthly users, marking the fastest growth among all non-telecom services we have launched to date. Notably, around 70% of our users are in their 20s to 40s, and over 48% of subscriptions were completed online, indicating that T universe services resonate well with the younger demographic that utilizes online platforms. The number of partners for T universe has increased from 36 in the second quarter to 74. Since its introduction, T universe has broadened its product offerings and customer benefits. We launched Universe Pass-Life and Universe Pass-Slim in July and began offering annual subscriptions and sharing features in September. The actual user count for these new products has surpassed 200,000, receiving positive feedback from the market. Additionally, we plan to introduce subscription product gifting services and delivery-type subscription products by the end of the year. By consistently enhancing user value, we expect to foster further growth. Concerning the profitability of T universe, I want to highlight that each product unit is structured to generate a positive margin. T universe subscription products provide substantial benefits relative to their costs. This model has been facilitated by our expertise in production, subscription product development, and customer management, as well as extensive customer data gathered from various channels. We have leveraged this data to effectively promote partners’ products, minimizing our investments while maximizing contract terms with our partners. However, the profits generated from T universe have been reinvested into marketing and service development to expand our subscription base, aiming for more competitive offerings. Starting next year, I anticipate this will lead to increased earnings contributions. In the medium to long term, we aim to continue generating profits from T universe subscription services by reaching KRW 1 trillion in GMV. Between 2022 and 2023, our goal is to achieve double growth in T universe customers and products, and by the end of 2023, we plan to evolve T universe into an open-type subscription commerce platform. Thank you.

Hello, I'm Yang Maeng-seok, Head of Metaverse company. Let me first comment on the current status. In September, we introduced a major service update to strengthen the metaverse ecosystem. We launched the ifland Point Program for user rewards and host sponsorship, marking the start of our metaverse economic ecosystem. Additionally, we opened the ifland Studio where users can create their own avatar costumes, and we introduced a lounge function for first-time visitors. These features from this major update have enhanced user participation and increased service accessibility. We have been expanding the content ecosystem of ifland by collaborating with various content companies and creators, offering a singing room, a music show, a musical hall, and other original content regularly. Fans can also engage with famous artists through ultra-immersive virtual concert formats. Thanks to these constant improvements, we reached 12 million cumulative users by the end of September and continue to grow. Our priority now is to expand our subscriber base while enhancing the economic system in the metaverse. Now, regarding the global expansion of metaverse, SK Telecom will launch ifland services in 48 countries within November. We have been developing various content and relevant functions and closely collaborating with major telecom companies in these regions to secure an ifland customer base. Upon the global launch, we will add more languages to support ifland services and implement a major service update allowing the creation of various avatars with different skin colors, hairstyles, and fashion options. We plan to utilize K-pop and other globally popular IP for our marketing activities to build a social metaverse where users can communicate beyond national borders. After the global service launch in 48 countries, we will identify which countries respond best to ifland services and execute events in those markets. We will also leverage the knowledge and understanding of local customers that our partner companies possess, aiming for some customization of ifland functions and promoting content co-production and marketing to serve local customers better. This effort will help deliver more differentiated experiences for the local customers in these markets. Thank you.

The following question will be presented by Neil Anderson from HSBC. Please go ahead with your question.

Thank you very much. Good afternoon. I just have one question, please. And it relates to capital allocation. As this call has demonstrated, you're investing in a very wide range of projects that have very different return timelines and presumably capital intensity. So could you help us think and explain how you consider this at the group level? Particularly, if you have any balance sheet parameters or return parameters you consider when making these investments. Thank you.

Often in the market, there's a recognition that SK Telecom is primarily a mobile network operator. However, when you look at our business portfolio, it includes not only mobile but also business-to-business services, media, enterprise solutions, and emerging businesses like AIVERSE. Given our diverse operations, the customer profiles and markets vary significantly, and the maturity level of these businesses also differs. Consequently, we have distinct expectations regarding capital allocation, returns, and performance across these sectors. For example, AIVERSE is a relatively new venture and is currently in its initial phase. Our efforts are centered around building a critical mass and developing monetization strategies. Naturally, our strongest competitive advantage lies in our mobile network operator business, which boasts a robust network infrastructure and platforms. We intend to leverage this advantage to create synergies as we expand into relevant business areas. In terms of capital and investment decisions for these businesses, we will continue to emphasize investment efficiency and growth contribution. Following the spinoff of SK Telecom, we have restructured our operations into five distinct business groups, each with its own optimized systems. This restructuring is part of our SKT 2.0 vision. We will concentrate our investment efforts on identifying areas with the highest growth potential, specifically in media, enterprise, and AIVERSE, as these align with our core operations. In line with this overarching strategy, we will prioritize business areas that are closely aligned with our core operations, enabling us to realize synergies through prudent investments while assessing various factors. Ultimately, our aim is to enhance corporate value while considering our financial situation and available resources to ensure that our investments align with market expectations. Thank you.

This concludes the earnings conference call for the third quarter of 2022 of SK Telecom. Thank you.