Sk Telecom Co Ltd Q1 FY2024 Earnings Call

Good afternoon. I am Hee Jun Chung, IRO of SK Telecom. Thank you for joining SK Telecom's earnings conference call. Today, we will first deliver a presentation on major events, 2024 Q1 earnings highlights and business performances, which will be followed by the Q&A session. The call is attended by our executives from relevant business divisions, including Yang-Seob Kim, CFO of SK Telecom, and we are providing consecutive interpretation for the call. As you may know, I would like to remind you that all forward-looking statements are subject to change depending on various factors such as market and macro situations. Let me now present our CFO.

Good afternoon. This is Yang-Seob Kim, CFO of SK Telecom. 2024 is a very meaningful year as it marks the 40th anniversary of SK Telecom. The 40-year history of SK Telecom indeed represents the history of ICT Korea. We have been leading the communications market with innovative services and unparalleled quality competitiveness. Now, SK Telecom is taking on a new challenge to become a global AI company. At MWC 2024 held in Barcelona in February, SK Telecom held an inaugural meeting of the Global Telco AI Alliance, or GTAA, and announced a plan to establish a joint venture for business cooperation, including joint development of a telco-specific large language model. Going forward, SK Telecom will invite leading telcos in respective regions to expand the GTAA and lead cooperation among diverse companies, thereby positioning itself as a global AI company. Let me first report on the consolidated financial results for Q1 of 2024. Thanks to the stable growth of SK Telecom and SK Broadband, consolidated revenue posted KRW 4,474.6 billion, up 2.3% year-over-year. Operating income posted KRW 498.5 billion, a similar level year-over-year, thanks to the stabilization of marketing expenses and depreciation costs. Net income posted KRW 361.9 billion. On a non-consolidated basis, revenue posted KRW 3,188.7 billion, up 2.3% year-on-year. Operating income and net income reported KRW 436.4 billion and KRW 492.1 billion, respectively. Let me now turn to business highlights for the first quarter of 2024 and strategic directions in accordance with the AI Pyramid Strategy. First, I'd like to cover the AI Infrastructure domain, which serves as the foundation of the AI Pyramid. Supported by the continued increase in utilization rates, data center revenue grew 26% year-on-year. At MWC in February, SK Telecom declared a full-scale launch of AI data center business, which will be critical infrastructure in the AI domain. The company also announced plans for global business cooperation with Lambda, a cloud server provider powered by Nvidia's latest GPUs. To be a global leader in the next generation AI data center market, SK Telecom is also planning to mobilize capabilities of SK Group. Specifically, we will cooperate with SK Enmove to speed up the commercialization of liquid immersion technology, capitalize on SK Hynix high bandwidth memory chips, and our subsidiary Sapeon's AI chip capabilities for data centers, and utilize SK Broadband's data center operational know-how. As for LLM, we are pursuing the development and commercialization of telco-specific LLM together with the members of the GTAA, including Deutsche Telekom, e&, Singtel, and SoftBank. The GTAA members have a total of 1.3 billion subscribers in 50 countries across the world, which enables them to collect multilingual telco-specific data on a scale larger than any big tech company could ever achieve. Through the GTAA, we will achieve economies of scale and strengthen negotiating power against large tech companies. The GTAA joint venture plans to develop a more advanced telco-specific LLM through training with multilingual telco data and provide locally tailored services. Next is the AIX domain. The MNO business recorded 15.93 million subscribers as of the end of March 2024, which accounts for 70% of the total subscriber base. SK Broadband's pay TV subscribers and broadband subscribers reached 9.59 million and 6.99 million, respectively, as of the end of March 2024. While the fixed and mobile industry is maturing, it is meaningful that our subscriber base continues to grow through new market development. We're also striving to enhance OpEx and CapEx efficiency by actively applying AI technology to our fixed and mobile business. The enterprise business achieved an approximately 10% growth year-over-year. In particular, the cloud business revenue grew nearly 40% year-over-year, mainly thanks to recurring sales, thereby driving the entire enterprise revenue growth. The enterprise AI business, which includes big data, AICC, and Vision AI, saw its revenue grow more than 10% year-over-year. We will further promote the enterprise AI business as a key pillar of our B2B business by continuously developing innovative AI products such as the recently released TransTalker, an AI simultaneous interpretation solution. Next, AI services. The call recording and summary service and real-time call interpretation service of A., which were very popular among iPhone users, are available on Android handsets starting from April. Going forward, A. will continue to add killer services and evolve into a truly personal AI assistant. Our long-term goal is to secure new business models through successful development of global PAA together with the GTAA members. As for ifland, thanks to the stable trend of if home and the economic system launched last year, MAU recorded 2.46 million as of the end of March 2024, and the average duration per user on the platform increased to 90 minutes, indicating that ifland has become a meaningful and substantive platform for users. T Universe achieved MAU of more than 2.6 million as of the end of the first quarter of 2024, driven by the popularity of the YouTube premium package. In the first half of the year, we plan to turn T Universe into a subscription market to expand partnerships and solidify its position as a leading subscription service in Korea. Finally, let me turn to shareholder returns. SK Telecom recently announced a medium-term shareholder return policy of returning to shareholders more than 50% of the adjusted net income on a consolidated basis. The decision is driven by our commitment to enhance shareholder returns in line with earnings improvement by leveraging resources, including subsidiary results on a consolidated basis and eliminating caps on shareholder returns. The DPS for the first quarter was determined at KRW 831, the same as the first quarter of last year. As we mentioned at the shareholders' meeting, SK Telecom will produce tangible results as an AI company. We will further solidify our strong fixed and mobile business foundation, improve the business fundamentals in terms of profitability and efficiency and produce concrete results by fully executing the AI Pyramid Strategy. We will continue on this journey to achieve our grand vision of becoming a global AI company. We ask for your continued support and encouragement. Thank you. We will now begin the Q&A session.

The first question will be presented by Hoi Jae Kim from Daishin Securities.

I am Kim Jae from Daishin Securities. I would like to start with a question about your new shareholder return policy. You mentioned that you plan to return over 50% of the adjusted net income on a consolidated basis. However, looking at the past dividend payout trend, the payout ratio was about 70% in real terms. Does this suggest that your dividend payments may decrease in the future? Previously, you provided a specific amount for the dividends you intended to pay, but this time it was not included in your presentation. Should we expect this year's dividend payout to be similar to last year's? Additionally, do you have any plans for share buybacks or cancellations in the near future? My second question concerns your capital allocation plan. I understand you need funds for shareholder returns but also for investments. You mentioned pursuing your AI strategy more aggressively this year, which will require investment. Given the MNO revenue trend is not improving, how do you plan to allocate your capital resources? What is the expected size of your AI investment this year?

I am CFO Yang-Seob Kim of SK Telecom. Thank you for your questions. I would like to discuss our new shareholder return policy. For the past three years, our dividend policy was based on 30% to 40% of the EBITDA minus CapEx on a non-consolidated basis. This served as the foundation for our shareholder return strategy. We have received considerable feedback from shareholders and investors, and we have tried to address their concerns as best as we can. Our new shareholder return policy is distinct from previous ones because there is no cap on resources allocated for shareholder returns, and it is now based on a consolidated basis, allowing us to share the results of our subsidiaries with shareholders. As for your question about the baseline being set at 50%, despite previously distributing over 70% of net income in dividends, I would like to clarify that 50% is merely the minimum baseline. This three-year shareholder return policy is long-term, and we wanted to have some buffer against potential risks in future management conditions. Please note that this does not imply we will limit our returns to 50% of net income; it is simply the minimum threshold. We will work hard to elevate this baseline by enhancing our business fundamentals and ensuring we can provide more returns to shareholders in the future. While the actual shareholder returns each year will be decided by the Board, I can assure shareholders that the level of dividends will be comparable to last year, and we will strive to meet that goal. Regarding potential share buybacks, given recent interest rate changes, we believe it's still beneficial to repurchase shares when they are undervalued. We will consider both cash dividends and share buybacks as avenues for shareholder return, but our priority is to maintain a consistent cash dividend trend. We will continue to weigh various factors such as valuation, financial structure, investment for growth, and foreign investor stakes when deciding on share buybacks or retirements in the future. Now, let me update you on our capital allocation plans. Despite some fluctuations, consolidated EBITDA for SK Telecom is around KRW 5 trillion to KRW 5.5 trillion, with about KRW 3 trillion budgeted for CapEx and KRW 1 trillion to KRW 1.5 trillion for recurring expenses, including frequencies and interest payments. This leaves us with roughly KRW 1 trillion of free cash flow. Although KRW 1 trillion might seem significant, we also need to consider about KRW 700 billion in cash dividends annually, which limits our ability to invest in growth and manage loans. While we have maintained a relatively high level of shareholder returns, corporate value is not solely determined by these returns. Investors understand we need further growth to enhance our corporate value. As a telecom company, we recognize that dividends are crucial for our market valuation, but it’s essential to balance growth investments and shareholder returns for overall valuation enhancement. To secure resources for future investments, including those in AI to foster growth, we will strive to create additional resources in all areas, including improving profitability through cost control, asset securitization, and enhancing investment efficiency. Thank you.

The next question will be presented by Sun Jung Lee from Bank of America.

I'm Lee Sun Jung from Bank of Korea. As you mentioned in your previous answers, you're going to continue to try to expand resources available for shareholder return. So in this regard, I'd like to get more details on your business plans. In particular, the telco revenue and the growth momentum is slowing down. So what are your key priorities for this year for your MNO business as well as strategies? And secondly, starting from last year, you have been pursuing and implementing the AI Pyramid Strategy and you're promoting your AI businesses. So I'd like to get a better understanding of the achievements so far and future plans. Please also share with us your plans for investment so that we can understand how much resources will be available for shareholder returns.

Thank you for your questions. As for the first question, the Head of the Integrated Marketing Strategy Office will comment on the key priorities and strategies for the MNO business. And then the Head of the Corporate Strategy Office will comment on the major achievements and plans for the AI Pyramid Strategy.

I am Kim Ji-hyeong, Head of the Integrated Marketing Strategy Office. I believe you asked this question because the MNO growth trend centered on 5G subscriber net adds is likely to slow down with the 5G penetration rate being nearly 70%. So going forward, the key to our MNO business will be to grow the top line through pricing and differentiated and competitive services as well as enhancing the operational efficiency through AI technology. So more specifically, we announced new price plans at the end of March, including a KRW 30,000 range 5G plan and an additional segment pricing plan for the youth. And it is intended to offer more customer benefits and options in order to retain customers who are sensitive to price. And in consideration of the popularity of OTT services in Korea, we offer our 5G customers discounts for OTT subscriptions and we also launched a new premium price plan, and these are part of our effort to continue to create demand based on customers' needs. Also, we restructured roaming plans into borrow pricing scheme to respond to increasing travel needs after the pandemic, and this has resulted in the increasing roaming revenue. And it is an example of how we continue to develop new revenue streams. And in terms of market operation, we use AI technology to recommend products and services tailored for customers and conduct more efficient marketing by utilizing online channels for customer acquisition. And finally, we are also planning to utilize AI contact centers to enhance customer experience and improve cost efficiency in an effort to further improve the MNO profitability and productivity. Thank you.

Hello. I am Choi Hwan-seok, Head of the Corporate Strategy Office. I’d like to address your question on the AI Pyramid Strategy’s major achievements and future plans. As the CFO mentioned during his presentation, the Global Telco AI Alliance, or GTAA, was officially launched in February to expand SK Telecom’s AI Pyramid Strategy globally. And the founding members of the Global Telco AI Alliance are Deutsche Telekom in Europe, e& in the Middle East, Singtel in Southeast Asia and SoftBank in Japan, as well as SK Telecom. So when combined, we have access to 1.3 billion subscribers in 50 countries. In addition to these 5 founding members, we have been receiving a lot of interest and attention from various telecom companies around the world. So we are in the process of expanding the membership of the alliance, and we will achieve economies of scale and global coverage by utilizing global telco’s customers, technology and service capabilities. So when we apply what I just mentioned to the AI Pyramid Strategy, the first layer is the AI infrastructure domain. And there, we plan to develop telco-specific LLM based on multinational customers and data and offer it to our member companies. And we believe that this will help build a common platform for telcos and strengthen our negotiating power against big tech companies. In addition, AI DC and AI semiconductors are part of the AI infrastructure domain and we have been accumulating related capabilities. We will not only utilize these capabilities internally, but also offer them to the members of the GTAA so that we can expand our business globally. And the second layer of the AI Pyramid Strategy is the AIX, which involves transforming TBE or MNO media and enterprise businesses using AI. As was mentioned previously, we are planning to use AI for customer contact and marketing activities. And furthermore, we will share these use cases of telco-specific use cases of AI with members of the GTAA and expand them globally to build global references for telco AIX. And finally, the top layer of the AI Pyramid Strategy is about developing global PAA. It refers to services provided by the GTAA on the common telecom platform that we will build for the first layer. And the PAA service of A. will be expanded globally, and each telco will be able to localize PAA for their local users and present new customer experiences. You also asked a question about the plans for AI investments. As was the case of our investment in Anthropic last year, when we see opportunities that are very much in line with our AI strategy and where we can create synergies, we will make reasonable and various types of investments for AI. As for specifics on what companies or how much investment or when, we have not yet finalized on these details. But we are going to continue to approach them from an enterprise or a company-wide perspective. And we will be prudent and careful in making decisions regarding these investments in consideration of credibility and the size of resources available. Thank you.

The next question will be presented by Eun Jung Shin from DB Financial Investment.

I would like to ask two questions. When I look at the IR material, I can see that among your MNO services, your roaming usage is constantly on the rise. So if there are any specific statistics that you can share with us regarding roaming, I would appreciate that. I would also like to understand your outlook on your roaming business. The second question has to do with your growing enterprise business. What was the actual result for the first quarter? And what is your annual or full year outlook on your enterprise business?

Thank you for your questions. I would like to address your question on our roaming business and then the Head of the Enterprise Business Strategy Office will address your second question on the enterprise business. So now I'd like to comment on the actual results of the roaming service and outlook. In 2023, the outbound travel was only about 70% of the level of 2019. However, the roaming usage increased by 1.5x. We believe that this roaming usage increase was mainly thanks to the expansion of the customers, thanks to marketing campaigns to reduce financial burdens for customers, including 50% off promotion for the first-time roaming users and 50% off for the youth and more data provision for the same price plans as well as differentiated services, such as the borrow call plan that more than 75% of the roaming price plan customers are using. The outlook for roaming business is pretty bright because 2024 is expected to be the first year since the pandemic when outbound travel will reach the 2019 level. Thanks to the family roaming and 50% off promotion for December, the number of roaming users in the first quarter grew 1.6x year-over-year compared to the first quarter of 2019. So this year, roaming usage growth is expected to be driven by the family roaming service utilized by more than 70% of households that use roaming, as well as increased roaming usage by Youth 0 plan subscribers that enjoy 50% off for roaming at all times. In particular, the family roaming subscribers are constantly on the rise from 280,000 in the first quarter of 2023 to 410,000 in the first quarter of 2024, so up 46% Q-on-Q and with a high level of customer satisfaction, the semi roaming service has become a major SK Telecom roaming product with a cumulative number of users standing at 970,000 since it was launched in June 2023. And so going forward, we are planning to offer promotions for first-time users to experience roaming service without much burden and launch differentiated roaming products in order to continue to attract new customers. Thank you.

I am Bae Jae-joon, Head of the Enterprise Business Strategy Office. I'd like to address your question on our enterprise business. In the first quarter, enterprise revenue posted KRW 415.4 billion, up 9% year-over-year, thanks to the increase in data center utilization rates and cloud contracts. The data center business continues to grow on a quarter-over-quarter basis on the back of increased utilization of new data centers. So the annual data center revenue for 2024 is expected to record a similar growth rate as last year. And we are also in the process of establishing new data centers in the Seoul metropolitan area to become Korea's #1 data center provider by doubling our capacity to more than 200 megawatts by 2030. And the cloud business will focus on growing the multi-cloud business and expanding AI cloud business based on higher demand for AI cloud brought on by the popularity of ChatGPT. And for MSP, we will continue to support our transition to multi-cloud, and we will utilize our own cost optimization technology to gain contracts from big accounts to achieve meaningful scale up. The enterprise AI business growth has been driven by the increased contracts for AICC, which is a transition from the traditional IPCC. And we are also trying to respond preemptively to the upcoming trend where AI is utilized for the B2B market. So we recently launched new products, including TransTalker, an AI simultaneous interpretation solution that supports 13 languages, SK Telecom AI CCaaS, a subscription-based AI contact center service and AI Copywriter that can generate advertising copies. So we are planning to continue to identify new opportunities and capture them and scale up our business by actively targeting expected AI demands in the B2B market.

Now this concludes the earnings conference call for the first quarter of 2024. If you need further explanations or have additional questions, please contact IR at any time. Thank you.