SK Telecom Co.,Ltd (SKM) Q3 2016 Earnings Report, Transcript and Summary

[Foreign Language] 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 Q3 of 2016 and the future management plans and strategic direction by Keun-Joo Hwang, CFO and Executive Vice President of the Strategy and Planning Division followed by a Q&A session. [Foreign Language] Today's call will provide consecutive interpretation. We want to remind you that all the forward looking statements are subject to change depending on the macroeconomic and market situations. Let me now present Mr. Keun-Joo Hwang.

[Foreign Language] Good afternoon. This is Keun-Joo Hwang, Executive Vice President, Strategy and Planning Division at SK Telecom. [Foreign Language] Let me first discuss the consolidated earnings highlights for Q3 2016. [Foreign Language] Revenue recorded KRW4.2438 trillion down 0.4% year-on-year and down 0.6% quarter-on-quarter. The revenue growth of our subsidiaries such as SK Broadband helped to reduce the decrease in core business revenue due to elimination of sign-up fees among others. [Foreign Language] Operating income recorded KRW424.3 billion, down 13.5% year-on-year but up 4.2% quarter-on-quarter mainly due to improved operating results of SK Planet. SKT's non-consolidated operating income recorded KRW477.1 billion, up 2.3% year-on-year and similar to the previous quarter. [Foreign Language] While EBITDA fell by 4.5% year-on-year recording KRW1,188.6 billion, it grew by 2.5% quarter-on-quarter due to equity method income on SK Hynix net income rose by 10.7% quarter-on-quarter to record KRW322.1 billion. [Foreign Language] With that I will now move on to major achievements per business area and the strategic direction of the Company. [Foreign Language] SK Telecom was ranked number one yet again in the Korea Customer Satisfaction Index announced this month defending its position for 19 consecutive years as well as setting a new record for the longest triple crown holder in the history of Korea's customer satisfaction evaluation. We thank not only our valued customers but also our investors for your unwavering support and trust. [Foreign Language] In the M&L business while the growing number of users on the monthly discount price plans partially limited revenue growth we defended and maintained our revenue by offsetting the effect through more higher ARPU price plan users and greater data usage. We also look forward to further improving profitability with the continued stabilizing trend of marketing costs. [Foreign Language] Our efforts to create results in the platform business also continue. By opening the service to all users to widen the platform T Map reached its all-time highest number of monthly users during the month of September at 9.18 million from the previous 8.0 million; while maximum daily usage surpassed the 100 million mark. The dramatic user growth led to higher quality of accumulated data, which was followed by enhanced accuracy in the navigation system thereby creating a virtual cycle of the platform's power. Furthermore commercialization of business models is also becoming stronger through partnerships with third parties such as the car insurance premium discount service based on the user's driving pattern analysis. [Foreign Language] Having acquired more than 10 million users as of the end of August, T Phone has continued to improve its functions including search and spam call filtering thereby securing its position as an unrivaled voice call application. It is also looking to enter the overseas markets such as North America. [Foreign Language] With our smartphone service solidifying its position as the standard platform of its kind with 55 smart home partners and 54 different connectible devices we are also expanding built-in models for newly constructed apartments. In the home arena, which will become the main field of competition of the IOT industry our smart home solution will serve as a solution hub and a strong foundation for greater competitive advantage. [Foreign Language] After rolling out the world's first hybrid network dedicated exclusively to IOT this past July, services in 24 different areas including gas and electricity have been developed and we have been selected as the operator for the IOT test bed thereby accumulating experience and knowledge crucial to leading the boom of the IOT industry. [Foreign Language] SK Broadband in charge of the media platform has also been maintaining solid growth with increased revenue and operating income. For the three quarters this year, the Company boasts the highest number of accumulated IPTV user net ads in the industry and recorded a 35% revenue growth year-on-year. Going forward, the Company will further strengthen its reputation as a media platform player by enhancing the competitiveness of mobile and fixed line IPTV as well as the content. [Foreign Language] Another important achievement regarding our platform business is the launch of NUGU, our voice recognition based artificial intelligence device. With voice-controlled music streaming, weather and schedule information as well as smart home functions NUGU is an example of innovation in user interface that will dramatically improve the user experience. [Foreign Language] While NUGU has met with great enthusiasm with its initial stock completely sold out there is still room for quality improvement. Thanks to the deep learning technology applied to NUGU we expect the service quality to improve hand-in-hand with the growing number of users. We ask for our investors' interest and support in what lies ahead for NUGU, a signal that marks the beginning of a new era of artificial intelligence. [Foreign Language] As for the commerce business that SK Planet is in charge of, 11th Street's position as the market leader with the most unique visitors on its application and website remains strong and transaction volume also continues to be on the rise. Through mobile centered growth and efficient cost management efforts we expect to become the industry's leader in transaction volume within the year and lay the foundations for profitability improvement. [Foreign Language] For all the investors and analysts that continue to support SK Telecom we will do our best to present tangible results of the Company's transformation. Thank you.

[Foreign Language] Now Q&A session will begin. [Operator Instructions] The first question will be provided by Mr. Jongin Yang from Korea Investment Securities and the next question will be provided by Mr. Hoi Jae Kim from Daishin Securities. Mr. Yang, please go ahead sir.

[Foreign Language] Thank you for the opportunity to ask questions. I have the following two questions. The first question has to do with the dramatic increase in data traffic. Will this be able to translate into growth in ARPU? And my second question is regarding SK Planet. I would first like to know the total head volume of 11th Street as well as the earnings outlook for SK Planet. I would also like to ask about the external funding plans that you had previously mentioned.

[Foreign Language] Thank you for your questions. [Foreign Language] The first effort has to do with connecting the dramatic increase in data usage to growth of ARPU. [Foreign Language] Currently because many of our users are focusing their internet and smartphone usage based on the video streaming, our data usage is growing exponentially and we believe that going forward user needs regarding data usage will continue to grow. [Foreign Language] And to be more specific, during the third quarter the data usage volume per LTE user rose to 5.1 gigabytes from the previously given 3.9 gigabytes as of the end of last year. [Foreign Language] And when you look at the subscribers subscribed to certain price plans in the past this price plan was called the Band 59 but it is now known as the band data Perfect price plan and the users opting for this particular plan are growing as well. [Foreign Language] And if you look at the portion of those opting for this plan over 40% of all newly added subscribers and handset upgrade subscribers during the third quarter opted for the band data Perfect plan. [Foreign Language] And the second effort has to do with our efforts to enhance ARPU in the unlimited price plan sector. [Foreign Language] By providing various products and services that provide customer benefits including the T Signature we are inducing the up-selling and growing usage. [Foreign Language] And if you look at the actual numbers more than 70% of users that have switched to the T Signature plans are showing that they are opting for a higher priced price plan than the previous one. [Foreign Language] And the third effort is that we want to focus our efforts to grow the ARPU based on those that are handset account users. [Foreign Language] And what that means is already we have over one million second device accounts. [Foreign Language] So going forward rather than focusing on increasing second device accounts we want to pursue growth in new handset accounts such as new handset accounts for younger students for example. [Foreign Language] Let me now address your second question regarding SK Planet's earnings results as well as our plans for funding. [Foreign Language] The third quarter revenue recorded KRW269.6 billion which is a 4% increase from the previous quarter. [Foreign Language] And this is a 7% increase year-on-year. As for the operating loss it recorded KRW96.6 billion which is KRW10.1 billion lower than the previous quarter and this was mainly due to various better fee improvement of O2O services including 11th Street. [Foreign Language] However as you know SK Planet targets to become the number one domestic e-commerce company in terms of GMV within this year. Therefore we believe that for the short term operating losses related to enhancing the competitiveness of the service is quite inevitable. [Foreign Language] Moving on to address your question regarding our funding plan. [Foreign Language] As I mentioned during the conference call for the second quarter earnings results we are currently still undergoing the negotiation processes, however it is true that it has been a little bit delayed somewhat. Therefore, we will be sure to communicate to the market as soon as the timing and the size and conditions become more concrete. [Foreign Language] However, I do want to tell you that SK Planet does not have any liquidity issues as of now because it holds about KRW350 billion in cash and it has enough financing capabilities. Also its costs are centered around variable costs and it is not looking for any kind of large scale investment in the near future.

[Foreign Language] The next question will be presented by Mr. Hoi Jae Kim from Daishin Securities and the following question will be presented by [indiscernible] from Deutsche Securities. Please go ahead, Mr. Kim.

[Foreign Language] Hello, I'm Hoi Jae Kim of Daishin and I have the following two questions. The first one is you spoke about ARPU numbers. When will your M&L revenue be able to turn around? And I'd also like to know if the Company's strategies are focusing more on top line growth or enhancing productivity. My second question has to do with your internalization of T Map this past April. Is it true that you have - because you internalized T Map on a non-consolidated basis this has a cost cutting effect worth KRW300 billion? And also can that be translated into us having greater expectations in terms of your dividend? I would like to hear about your payout strategies going forward.

[Foreign Language] Thank you for your questions. [Foreign Language] As for the M&L revenue it is true that there are some negative factors including the discount price plans. However we plan to make sure that the number turns around in the near future through the growing number of LTE subscribers and the portion compared to the total subscriber base as well as the growing data usage and our success in the IOT platform. [Foreign Language] Excluding the impacts of the elimination of the sign-up fee, which still seems to have an impact on our numbers, after we have entered into 2016 you could see that the overall seed or the portion of revenue fall has become a little bit better this year. [Foreign Language] And also as was mentioned during the first opening speech, there are greater needs for data usage which has translated into more users opting for higher price plans, which means that there is a greater ARPU number due to that. Also, we are providing various different types of products and services that will contribute to the revenue growth. Therefore, we believe that we will be able to see a revenue turnaround during the fourth quarter of this year. [Foreign Language] Next, let me answer your second question regarding the cost-cutting effects of the internalization of T Map and our dividend strategies going forward. [Foreign Language] First of all, we do, we are seeing a cost-cutting effect of over KRW200 billion. [Foreign Language] However, I think that it is quite difficult to give you a concrete answer at this particular time because when you look at the Company as a whole, we do have our needs to invest in the platform business and also when it comes to our earnings forecast it is quite - it has certain variables. [Foreign Language] At this particular time, I believe that it won't be easy to raise our level of dividend. However, we will continue our efforts to maintain the current level of dividend. And also, as soon as we see a secure growth as well as profitability enhancement, we will be sure to get back to that. [Foreign Language] That is the answer to your question, thank you.

[Foreign Language] The next question will be provided by [indiscernible] from Deutsche Securities, and the following question will be presented by Mr. Stanley Yang from JP Morgan. Mr. [indiscernible] please go ahead sir.

[Foreign Language] Thank you for the opportunity to ask questions. My first question has to do with your current stance as to how you are preparing for the fifth-generation network. What is your outlook on it, and also have there been any changes to your already set schedule? Yesterday I know that an executive from SK Telecom has used the word commercialization by the year 2018, so I would like to hear if there has been any changes regarding your 5G plan? My second question has to do with a more detailed IoT business model. Because recently one of your competitors have said that they will come out with a more detailed and an exact solution by the end of this year, in terms of their IoT business. So, I would like to hear if you have any other detailed plans for SK Telecom?

[Foreign Language] Let me first address your question regarding the 5G network. [Foreign Language] I would say that I think there has been a misunderstanding; I don't think that the word commercialization should have been used with the year 2018. [Foreign Language] When you consider the global trends, as well as the process of the standardization of the technology that is taking place right now, we stand by the original plan that technology standardization will take place at the year 2018 and commercialization will take place at least in 2020. [Foreign Language] Currently at SK Telecom, we are focusing our efforts on the development of equipment and technology needed for 5G, in cooperation with major equipment manufacturers. And also on a separate note, we are also focusing our efforts to enhance cooperation in order to develop various 5G related services. [Foreign Language] Our main areas that we want to focus on include AR, VR, IoT and connected car; areas in which we plan to connect services and technology development. [Foreign Language] I will hand the mic over to our executive from the network office, so that he may answer your question regarding 5G in a little bit more detail.

[Foreign Language] Hello, I am Head of the Network Strategy. And in fact, SK Telecom is the chair company of the Global 5G Forum, so we are actually leading the global discussion in preparing ourselves for the fifth-generation network. With various other companies, we are focusing our efforts in establishing an ecosystem that will prepare us for the next generation network. And we believe that in this process standardization of technology will be crucial. [Foreign Language] The main goal of the technology standardization is to be able to provide a speed of at least 1 giga-bps per second. We believe that this will be able to connect with various new technologies, including SDM. However, we still stand by our original plans to complete technology standardization by the end of 2018. When we say the year 2018, we are not talking about a commercial network, but a test network. And we believe that, through the test network, we will be able to test it on various new technologies and areas, including the unmanned vehicle, AR and VR. I think that maybe talks relating to this kind of network being finished by 2018 may have been confused with the word commercialization. [Foreign Language] In this process, frequency, of course, is very important. And now, as with the recent KICP spectrum plan having been unveiled, we are going to do our best to create an ecosystem in which all three; in other words, the government, the telcos and the vendors can come together and work in cooperation to achieve the optimal type of transition into the next generation network. [Foreign Language] Let me next address your question regarding IoT. [Foreign Language] At the end of June this year, we have finished the nationwide rollout of the lower-end network, as well as the hybrid network. [Foreign Language] And, as of now, we are focusing our efforts on five major areas, which are energy and utility, public service, manufacturing industry, car industry and smart home. [Foreign Language] And to be a little bit more detailed, we plan to launch a total of 35 services by the end of this year focusing on public services including gas and electricity. Also, not only will we be focusing on creating our own products, but we plan to focus our efforts in this area in creating new solutions, in partnership with various other partners. [Foreign Language] And also, we believe that the main and the core essence of competitiveness for SK Telecom's IoT service lies in the establishment of an ecosystem. [Foreign Language] In order to do so, we are running various partnership programs in order to support that. And we have also distributed over 100,000 APIs so that our partners can develop various services. And we are also - we will be utilizing the lower-end network as well. [Foreign Language] And, by 2017, we plan to secure over 1000 new services related to IoT and over 10 global companies. [Foreign Language] As for the more detailed business models for IoT, first of all, when it comes to the smart home service, the application usage fee will be the main source of revenue. [Foreign Language] Going forward, we will be more aggressive in terms of forming partnerships, so that we can generate revenue through various usage charges. And, in partnership with third companies including construction companies, we will be sharing revenue coming from connected services. [Foreign Language] And to sum it up, in 2017 we plan to develop and launch various services on IoT, and also we will focus on establishing an ecosystem with a variety of different players. By doing so, we believe that we will be able to monetize on that, beginning from 2018. So, we will see profitability enhancing from 2018. [Foreign Language] Thank you.

[Foreign Language] The next question will be presented by Mr. Stanley Yang from JP Morgan. Mr. Yang, please go ahead sir.

[Foreign Language] I have two questions. First, regarding AT&T's moves to acquire Time Warner, it seems that globally it is a trend of the media and the telco business converging together. So, my question is, if one of your competitors were to go ahead and acquire, or try to acquire, a media company, will you try to do it as well again? I just want to hear your plans on that. My second question has to do with SK Planet. As you said, it recorded a loss of about KRW96 billion. Now is this mainly because of 11th Street? Also, in the case of Gmarket, we saw that they recorded an operating income rate of about 10%. So, do you think that the reason that SK Planet is not able to do so, is that because of mainly marketing costs?

[Foreign Language] Thank you for your questions. Let me address your first question regarding converging with other acquisitions. [Foreign Language] As you're aware of, during the first half of this year, our efforts regarding the CJ HelloVision deal did not go through. In fact, at SK Telecom we are keeping an eye on what happens with AT&T and Time Warner, as we believe it is quite a similar case. [Foreign Language] However, for the time being and in the near future, we plan to focus on achieving growth and greater core competitiveness of SK Broadband's IPTV and [indiscernible], our mobile video service. [Foreign Language] However, according to the revisional direction of the current United Broadcasting Act and the overall market conditions and external factors, it is safe to say that we will be open to all options that will help with achieving growth in our media strategy and our core media related competitiveness. [Foreign Language] As for your second question regarding numbers of SK Planet, I will hand the mic over to Pak Kan Shu, Head of Finance at SK Planet.

[Foreign Language] Hello, I am Pak Kan Shu, Head of the Finance Office at SK Planet. [Foreign Language] It is true that we are continuing to report a certain amount of losses, and it is also true that part of it has to do with 11th Street. However, it is not all because of 11th Street, I would say about half would be correct. [Foreign Language] You compared 11th Street to Gmarket. I believe that the most important difference comes from economy of scale. [Foreign Language] As you may know, when it comes to an open-market service, its main sources of revenue come from sales commissions, as well as ad sales. [Foreign Language] From a seller's point of view, you would probably want to work with the market leader, rather than work with the second or third player of the market. So, even with the same kind of products, the price that the sellers would be paying to the leader of the market would be larger. [Foreign Language] And in fact, when you look at the size of the sellers, even if it was just - even if you say that the transaction volume is, for example, KRW10 trillion, just 1% of that is KRW100 billion. So that's how great a change economy of scale makes in our industry. [Foreign Language] I think it's safe to say that the reason that we are being quite aggressive with our efforts to become the leader of the industry has to do, to some extent, with what I have just explained to you.

[Foreign Language] Well, if I may just ask you a follow-up question on that. You were giving the number KRW10 trillion as an example, but eBay Korea, I think that is putting Auction and Gmarket together, you have combined the two together. I think because overall GMV is similar to 11th Street, so I would just like for you to clear up on that. Are you talking about the bundled effect when it comes to the sales commission and the ad sales? I would just like - because I thought that they were different platforms, so I would just like for you to clear up on that.

[Foreign Language] If I may attempt to give you an answer to that, I do think that Gmarket and Auction are running different platforms. However, when it comes to economy of scale, when you look at Gmarket and 11th Street, I mean I think you can tell that there is definitely an impact there. I think that, structurally speaking, Gmarket and Auction, when it comes to being more efficient with their operation of infrastructure, they do have the upper hand. So I think that the difference with us could stem from such factors.

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