Earnings Call Transcript - SKM Q1 2020

Jeong Hwan Choi, IRO

Good afternoon. I am Jeong Hwan Choi, the IRO of SK Telecom. Today's conference call will consist of the presentation on the Earnings Results for Q1 of 2020 and the future management plans and strategic direction by Poong-Young Yoon, CFO and Head of Corporate Center I; and Hyoung-il Ha, Head of Corporate Center II, followed by a Q&A session. Under the dual operating system, which the company adopted late last year, the MNO business is headed by Poong-Young Yoon, Head of Corporate Center I and new businesses are headed by Hyoung-il Ha, Head of Corporate Center II. Much like last quarter, they will be presenting the achievements and strategic plans of their respective divisions for today's conference call. Today's conference call will provide consecutive interpretation and we have also here with us executives from relevant business divisions to help deepen your understanding. Before we begin, we want to remind you that all forward-looking statements are subject to change depending on the macroeconomic and market situations. Let me now present our CFO.

Poong-Young Yoon, CFO

Good afternoon. This is Poong-Young Yoon, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights for Q1 of 2020. Consolidated revenue for Q1 2020 recorded KRW 4,450.4 billion thanks to the growth in MNO revenue led by the increase of 5G subscribers, as well as new businesses, it rose by 2.7% year-on-year and by 0.9% quarter-on-quarter. Operating income recorded KRW 302 billion. While our profit from the new business grew, the MNO operating income fell leading to a 6.4% year-on-year fall and due to the reduction of the seasonal costs in Q4, it increased by 85.9% quarter-on-quarter. Net income decreased by 17.9% year-on-year due to the effect of the equity method income on SK Hynix and turned to profit quarter-on-quarter. Let me now move on to major business achievements and strategic plans for each business division. Non-consolidated MNO revenue for Q1 recorded KRW 2,922.8 billion, up 3.9% year-on-year and 2.7% quarter-on-quarter. Despite COVID-19 limiting international travel leading to a decline in roaming revenue, as well as a slower rate of 5G subscriber base growth, an overall year-on-year revenue growth was achieved thanks to 5G contributing more to the total revenue. MNO operating income recorded KRW 257.9 billion. While it recorded a 15.7% year-on-year increase due to marketing expenses, as well as depreciation and amortization costs, the number improved by 121.6% quarter-on-quarter. With the recent trend of stabilizing competition continuing forward, we will do our best to minimize the negative impact such as decline in roaming revenue through efficient cost management. April 3rd of this year marked SK Telecom's one-year anniversary of the world's first commercial 5G service launch. As of the end of Q1 of 2020, we have acquired 2.65 million subscribers, attesting to our solid MNO leadership in the 5G era. Thanks to the growing subscriber base, MNO revenue has been continuing its growth since Q2 of last year. This year our MNO business aims to not only continue to grow the 5G subscriber base but also discover new services that will allow us to push forth with 5G in full scale. The media business based on consolidated revenue of SK Broadband recorded KRW 823.5 billion. With IPTV continuing to grow, it increased by 8.2% year-on-year and 0.3% quarter-on-quarter. Operating income recorded KRW 37.4 billion. While the numbers fell quarter-on-quarter due to the home shopping transmission fee income being reflected in Q4, the revenue growth and efficient marketing cost management led to a 90.8% increase year-on-year. Security business revenue, including ADT Caps and SK Infosec, recorded KRW 291.4 billion. While it fell slightly quarter-on-quarter due to seasonal factors, it increased by 5.4% year-on-year thanks to ADT Caps' net subscriber additions and new business performance as well as SK Infosec recording higher solution revenue. Commerce business revenue recorded KRW 190.3 billion. Due to the membership point related revenue deduction that began to take effect in Q4, it fell 4.4% year-on-year and rose by 31.3% quarter-on-quarter. Operating income maintained last year's trend and nears the BEP. And now, the Head of Corporate Center II, Mr. Ha, will walk you through the achievements and plans for the new businesses.

Hyoung-il Ha, Head of Corporate Center II

Good afternoon. I am Hyoung Il Ha, Head of Corporate Center II. Let me now discuss the achievements for the new business division for Q1 2020 as well as our strategies. First, the Media business. With the social climate of refraining from outdoor activities, at-home media consumption is growing. To respond to the new environment, SK Broadband is doing its best including acquiring quality content to translate the growing trend of media consumption into revenue growth by adding high-quality and diverse content, while also strengthening direct channel competitiveness and non-face-to-face marketing efforts. Finally, on April 30, the merged entity of SK Broadband and t-broad was launched. With over 8.2 million paying subscribers, the new entity will aim to strengthen the competitiveness of both IPTV and cable TV through an advanced media platform and a wider-reaching business model. To do so, it plans to strengthen its content competitiveness offer bundled services with cable TV, utilize Wavve's original content, and offer partnership-based products. To strengthen content competitiveness, Wavve has significantly expanded the movie content library available to existing wavve users early April of this year. It will also secure quality original content by investing KRW 60 billion within the year and has established a partnership with NBC Universal to export Wavve original content as well as expand the service's global content ecosystem. With a more solid investment foundation for content as well as global market expansion, Wavve will increase significantly in value going forward. Moving on to the Security business. While subscriber acquisition through marketing efforts has experienced difficulties due to COVID-19, demand for Security solutions has been on the rise with more people working from home, as has demand for home security services due to the increased usage of parcel and food delivery services. There is also growing demand for new products such as thermal imaging cameras. ADT Caps and SK Infosec are strengthening non-face-to-face and contactless marketing efforts while actively responding to new demand. As our Security business continues to solidify its leadership in the CMS market, it is also proactively expanding its tech-based new business portfolio such as unmanned parking, home security, and personal care, and will put in its utmost efforts to achieve the KRW 1.3 trillion annual revenue target set early this year. Let me now discuss achievements of the Commerce business. With non-face-to-face consumption becoming a major trend, the growth potential of the overall e-commerce market has been gradually growing. 11st saw a 9% year-on-year increase in transaction volume, and that of food and necessary goods increased by over 30%. To further accelerate the GMV growth, 11st strengthened the grocery section. On top of Homeplus and GS Fresh, the nation's number one retailer E-Mart recently joined as a partner seller in late April, allowing 11st customers to enjoy the wide variety of products provided by these major retailers and have them delivered to their door on the day of purchase. Going forward, 11st will continue efforts to strengthen its fundamental competitiveness through partnerships with various external companies. The T-commerce company SK Stoa's revenue grew by 44% year-on-year thanks to the effect of widening its sales channels to include PC and mobile. SK Stoa will continue to strengthen its PC and mobile channel sales through enhanced product sourcing capabilities and offer a wider range of its own brand thereby maintaining strong growth trends and becoming the leader of the T-commerce industry. Lastly, we have also seen notable achievements in the game business, one of the major so-called untapped businesses that have been garnering attention. This past March, we established a joint venture with Singtel and AIS, the leading telecom operators of Singapore and Thailand, and are in preparation process to create a network platform for the over 800 million gamers in the Southeast Asian region for game-specific networking and game media content. Also, T1 our joint venture with Comcast became the first Korean sports team to sign a sponsorship with the BMW Group to create new content. As such, we have discovered new growth potential in various game-related fields. Going forward, we will continue to show how SK Telecom creates various opportunities for growth in the ICT field. I will now hand it back to the CFO. Thank you.

Poong-Young Yoon, CFO

This year the world has been faced with an unprecedented challenge of the COVID-19 pandemic and this has indeed had an effect on our plans and targets set early this year. However, because we have diversified our portfolio with MNO, Media, Security, and Commerce businesses in the last three years, we believe that we are better equipped than ever to overcome the current situation in a flexible manner. We will stand strong and carry on our efforts to grow our diverse portfolio to create synergy, encourage and complement one another, and achieve growth in our enterprise value. We ask for the continued interest and support from investors and analysts. Thank you.

Sean Lee, Analyst

Thank you for the opportunity. I have two questions. My two questions are about the dividend policy and CapEx. The first question is regarding your dividend policy. I remember, last quarter you said that you were reviewing various options. And in particular, will you be able to provide us an update as to whether or not you will indeed be linking the performances of your subsidiary companies to the dividend policy? And also, if you are opting for a new dividend policy does this mean that we can expect the actual EPS amount to be lower? My second question has to do with the recent announcement by the Ministry of Science and ICT on the early spending of 5G CapEx. What kind of effect has that had in relation to what was actually guided early this year? And also, does this include the investment that will go into the 28 gigahertz spectrum at all? So I'd like to hear about your plans for CapEx.

Poong-Young Yoon, CFO

Thank you, Mr. Lee, for your question. Let me first address your question regarding our dividend policy. So first of all, as I have mentioned before, the decision to review our current dividend policy started from questioning ourselves whether or not the current dividend policy is in line with our current business structure in which we have a more diversified portfolio. I think that especially as recent times in which the environment is such that our stock prices are extremely undervalued, we have seen a difference of opinion among our shareholders. For example, some currently prefer the current fixed EPS payout policy while some others prefer a different method of shareholder return. So I know that there are different preferences among our different shareholders. In that aspect, we are reviewing all possible options which include share buybacks, linking our subsidiaries' performances, as well as our earnings improvement and the current fixed EPS. As for the details, we will have to go through an in-depth internal discussion as well as with the Board of Directors and be able to share that with you by the time we announce our interim dividend. But if we were to opt for a different payout or dividend policy, I can say that it will gear toward a direction where the overall shareholder return volume will be greater than that of now. Let me now move on to address your question on CapEx in regards to the Ministry's announcement. In order to overcome the current COVID-19-affected situation, SK Telecom is indeed also actively reviewing early spending of CapEx during the first half of the year. However, while we are indeed reviewing that option, because it is going to be discussed in link with the demand as well as the overall investment volume, we do not see the overall CapEx being increased due to early spending. By that I mean, during the first half of the year. Lastly, to address your question regarding investment into the 28 gigahertz spectrum. As for the 28 gigahertz spectrum, because the ecosystem, including the equipment and service, is not yet complete, the schedule will be in line – and the schedule by that I mean the official commercialization will be in line with the completion of the ecosystem. The 28 gigahertz service will be provided centering on B2B accounts. In linked with the demand, we believe that we will be able to see a very efficient rollout. Thank you.

Kim Hoi Jae, Analyst

Hi. My first question is regarding the recent launch of the new models including S20 late May or early May. We are seeing a little increase in the competition in the market. And so there is concern in the market about possible overheated competition taking place during Q2. So I'd like to hear about a possibility of that happening. And my second question is finally the merged entity of SK Broadband and t-broad. You started out as the number three player in the market. And you've also, of course, disclosed your revenue target. So do you have any other specific plans in terms of your strategy to become number two in the market including M&As? So I'd just like to hear about your overall strategies regarding subscriber acquisition of the merged entity.

Poong-Young Yoon, CFO

Thank you, Mr. Kim, for your questions. I will address the first question and then pass it over to Mr. Ha for your second question. Regarding the potential for market overheating in terms of marketing, we have observed the market stabilizing since the fourth quarter of last year, and that trend has persisted. However, COVID-19 did impact demand for devices, leading to some promotional activities on specific devices to enhance marketing efforts. Nonetheless, when we analyze overall subsidy levels and MNP numbers, it does not suggest an overheated competitive environment. The current promotional activities will not result in cost increases, and thus, there will not be a structural change. Moving forward, SK Telecom will strive to maintain the current stabilizing market trend, concentrating competition on service and customer benefits.

Hyoung-il Ha, Head of Corporate Center II

Allow me to answer your second question regarding the merged entity, the possible synergies and any possible M&As going forward. SK Broadband and t-broad launched as a merged entity on 30th of April. With 8.21 million pay TV subscribers and 6.48 million Broadband subscribers, SK Broadband will achieve KRW 4 trillion in revenue this year. We are expecting not just an acceleration of the subscriber base growth, but through an advanced media platform and an expanded business model, we believe that both IPTV and cable TV service competitiveness will grow hand in hand. To achieve this, we plan to provide various new services such as big data and AI-based personalized services, as well as a much stronger content competitiveness. Also, for the cable TV service provided by t-broad, we plan to provide bundled products with SK Broadband Internet. By utilizing Wavve's original content as well as providing partnered products, we are expecting and we will do our best to generate as much synergy within the SK ICT Family Group. As for the more detailed strategies for the merged SK Broadband, before the next earnings release conference call, we will make – we will have an opportunity to communicate them to you in the form of hopefully a press conference. To answer your question regarding any possible M&As going forward, what I can say is that SK Broadband is currently focusing all of its resources in generating the merged entities' synergy with t-broad. Thank you.

Kim Taewon, Analyst

Hi. So, I know that you just mentioned the marketing situation as well as your marketing cost outlook, but I just wanted to add on to that. Can you provide us with a guidance for non-consolidated operating income for the year? And also, regarding your 5G subscriber accounts by the year-end, have there been any changes to that?

Poong-Young Yoon, CFO

Thank you for your question. I will start by discussing our strategies related to the 5G subscriber target. Due to ongoing social distancing measures, we have seen a reduction in customers visiting our offline shops. In the first quarter, we added 570,000 net 5G subscribers, bringing our total to 2.65 million. This figure is approximately 10% to 20% lower than our initial expectations. While the duration of COVID-19's impact remains uncertain, based on current subscriber migration trends, I estimate that the year-end total for 5G subscribers may be about 10% to 15% below the previously guided range of 6 million to 7 million. Regarding our operating income outlook for the mobile network operator business, we are reassessing our strategies and management plans due to increasing uncertainties. As I mentioned, the growth in the 5G subscriber base has slowed and roaming revenue has decreased, and it is unclear when these trends might reverse. Nevertheless, we are still seeing an increase in data traffic and a stabilization trend in the market. Across the company, we are making concerted efforts to reduce unnecessary costs. I believe that an early end to the COVID-19 pandemic will not greatly affect our MNO income. The challenges are notable, but we plan to maintain this stabilizing trend moving forward and aim to generate higher earnings than last year. Thank you.

Hong Sunyoung, Analyst

Hello. I want to ask about Wavve. So last year, I remember you telling us that in terms of unique users your subscriber count was at 2.7 million, but I think we found that by the end of February, we actually saw the numbers drop quite a bit down to 2.5 million. That compared to other OTT services, which have been doing very well in these circumstances, is quite relatively low, and I think the market assumes that it had a lot to do with the strategic partnership between JTBC and Tving. I know that you have announced your plans to invest KRW 60 billion in original content. What other kinds of strategies do you have to grow Wavve?

Poong-Young Yoon, CFO

First of all, thank you, Ms. Hong, for your question. In fact, Wavve is continuing to see a rise in its paying subscriber base, and we stand by our target of reaching five million subscribers by the year 2023 as well as a revenue target of KRW 500 billion. Recently, due to the discontinuation of certain content, we did see a temporary stagnation in Wavve. However, beginning from April, we have significantly increased and strengthened our film content library and we are also putting in a lot of investment into original content. So we believe that this number will continue to improve. As for the amount of investments that we will be putting into original content for Wavve, we still stand by the total accumulated amount of KRW 300 billion by 2023. As for our film library for Wavve, we started from the previous figure count of 1,200; we now have 3,300 titles. We expect this number to soon reach 4,000. We also have plans to increase the enterprise value of Wavve, one of the examples of which are our recent partnership signing with NBC Universal. Thank you.

Kim Hongsik, Analyst

I first want to start off by saying thank you for mentioning your possible plans to change your dividend policy. So the CFO during the last earnings call, you've mentioned that you expect your earnings to turn around during the second half of the year. I mean, I think the reason of course as we all know it, that your stock price hasn't been doing so well is because of your dividend and concerns over your earnings in the future. You have talked about the dividend. So I'd like to hear about your plans regarding how to improve your earnings in the second half. Will you still think that it will be able to turn around during the second half of the year? Recently we have definitely seen the cost become more stable. However, your revenue has been doing quite poorly. In particular, we have seen a very slow growth in the 5G subscriber net additions. So I think in order for us to lessen our worries for the second half, what do you have to say to us?

Poong-Young Yoon, CFO

Thank you, Mr. Kim, for your question. To address your question regarding the profit turnaround, first of all, talking about the subsidiary companies of SK Telecom, aside from MNO, of course, the COVID-19 crisis will have both a positive and a negative effect in business terms. However, overall, we believe that our subsidiaries' earnings on a year-on-year basis will improve within the year. Of course, we have to focus on the operating income outlook for our MNO business. Last year, there were investments made into the commercialization of 5G with the launch of our 5G service. There was also a reflection of changes in the accounting regarding marketing costs. Our original business plan was to make up for these changes and these impacts with the growing 5G subscriber base, as well as growing roaming revenue. As we all know, COVID-19 has affected both of these factors and so there are some uncertainties in the original plan. Despite these conditions, however, as I just mentioned, based on the growth of our subsidiaries' performances as well as making our investments as efficient as possible, we remain optimistic that we will do our best to turn our profit around during the second half of this year. Thank you.

Operator, Operator

This concludes the earnings conference call for Q1 2020. Thank you.