SK Telecom Co.,Ltd (SKM) Q3 2018 Earnings Report, Transcript and Summary

[Foreign Language] Good afternoon. First of all, thank you all for joining this conference call. And now we will begin the conference call for the Fiscal Year 2018 Third Quarter Earnings Results by SK Telecom. This conference will start with a presentation, followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation by SK Telecom.

[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 2018 and the future management plans and strategic direction by Young Sang Ryu, CFO and Executive Vice President of the Corporate Center, followed by a Q&A session. [Foreign Language] Today's conference call will provide consecutive interpretation, and we also have 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 situation. Let me now present our CFO.

[Foreign Language] Good afternoon. This is Young Sang Ryu, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights of Q3 2018 under IFRS 15. [Foreign Language] Consolidated revenue recorded KRW4,186.4 trillion, up 0.8% quarter-on-quarter. The effects of the tariff cuts were offset by efforts to innovate customer value and a stronger media business led by IPTV contributed to increasing the total revenue. [Foreign Language] Consolidated operating income recorded KRW304.1 billion, down 12.3% quarter-on-quarter. While the income fell, it is worth noting that it was due to our marketing efforts to acquire a larger handset subscriber base and a stable market, which will later be the foundation for revenue, as well as external communication regarding our value-innovating products such as the T Plan and the Young Plan [ph]. Among our subsidiaries, SK Broadband achieved a record high quarterly operating income, thanks to IPTV subscriber additions and greater consumption of paid content. [Foreign Language] Consolidated net income exceeded the KRW1 trillion mark for the first time at KRW1,049.8 trillion, up 14.8% quarter-on-quarter. This is due to the record-breaking performance of SK Hynix. SK Hynix recorded the highest ever quarterly operating income based on unwavering semiconductor demand. Our equity method income on SK Hynix also broke records, recording KRW981 billion. [Foreign Language] I will now move on to major business achievements. [Foreign Language] First, in MNO, with our value innovation efforts being recognized by our customers, we have set a new record as the company with the longest consecutive years of being ranked number one in all three major customer satisfaction indices across all industries. [Foreign Language] While marketing cost increased quarter-on-quarter, this contributed to net handset subscriber additions, thereby growing the foundation for revenue. Furthermore, we countered the MNO revenue decrease through the successful market acceptance of T Plan, as well as Customer Value Innovation Programs, gaining the recognition of our customers such as the Guam-Saipan roaming pass. Churn rate also maintained the lowest level at around 1.2%. Our focus on innovation program, centering on resolving negative customer experiences and enhanced satisfaction will continue throughout the remainder of the year. [Foreign Language] We completed the acquisition of ADT Caps on October 1. And last week, we made the decision to acquire SK Infosec. Thus, SKT has now secured a more competitive position to provide security solutions of the future and discover new business models, encompassing both physical and information security. By combining it with 5G technologies that will soon be commercially launched, SK Telecom will grow its security business into a core access for future growth. [Foreign Language] Moving on to achievements in our Commerce business. This past September, 11street officially set out on its journey to become the nation's top commerce portal. While accumulated losses up to Q3 decreased by 43% year-on-year, we will move further to differentiate 11street from its competitors through dramatic improvements in customer experience and an integrated offering of related services. In particular, we will increase direct traffic by leveraging our strong mobile presence while also utilizing the assets of the SKT family, including AI technology, to grow it into an un-rivalled platform. [Foreign Language] Next, our Media business. IPTV revenue increased by 26.3% year-on-year and 5.5% quarter-on-quarter to record KRW322.8 billion. The growing premium subscriber base and content consumption led to continued revenue growth. As for oksusu, a stronger personalized menu and efforts to diversify content contributed to acquiring 9.46 million subscribers as of the end of Q3. And the number of monthly unique visitors reached 7 million, a 29.4% growth year-on-year, thereby solidifying its position as the nation's leading mobile media. In the process to further enhance the content competitiveness, we will strengthen strategic partnerships with various players as well as investment. [Foreign Language] I will now discuss our preparation for 5G commercialization. 5G will be more than an evolution of telecommunication technology and become a catalyst for business model innovation that is crucial for us to make the leap of becoming a new ICT company. SKT will realize the 5G service through invigorating the media server business centering on oksusu, expanding the new security business based on ADT Caps and Infosec, innovating commerce with 11street at the forefront and focusing on business innovation in areas of connected car and energy solution in the context of IoT. [Foreign Language] To achieve this goal, we have been striving to prepare for the commercial launch of 5G with our partners since finalizing the selection of 5G equipment providers in mid-September. We plan to start the network rollout from Q4 this year beginning in certain regions. We will take measures to increase investment efficiencies so that the CapEx guidance for the year will remain unchanged. [Foreign Language] Investors and analysts, as part of the growing pains that come with our efforts to transform into a new ICT company, earnings may be affected at times. However, I can assure you that starting from next year, we will become a new ICT company through business model innovation and 5G-led positive changes. We ask for your continued support and encouragement along the way. Thank you.

[Foreign Language]

[Foreign Language] [Operator Instructions] Our first question will be provided by Jaemin Ahn from NH Investment & Securities. Mr. Ahn, please go ahead, sir.

[Foreign Language] Hello. And thank you for this opportunity. I have the following two questions. My first question has to do with your decline in MNO revenue for the quarter, and I think obviously that has had a negative impact on your profit as well. So when can we see the MNO revenue turn around? And I also want to ask in the context of the portion of your subscribers subscribe to the monthly selected discount plans. To what extent does this portion of the change in terms of - in order for your MNO revenue to turn around? And could you please also give us an outlook on the ARPU as well? And my second question has to do with your dividend policy regarding SK Hynix. SK Hynix, as we all know, have been doing very well, and as a result, their dividend is also going up. However, when we look at just us, it seems that our profit is going to decline further, and I would like to hear about your dividend policy in regards to your profit outlook, along with the increased Hynix's dividend. And is there any possibility that you will be raising your dividend after next year?

[Foreign Language] First, thank you, Mr. Ahn, for your question. [Foreign Language] Let me first address your first question regarding our MNO revenue and ARPU. [Foreign Language] With the effects of the tariff exemption provided to basic pension recipients that begun last July, being fully reflected on our numbers, we saw a continued fall of the MNO revenue in Q3 as well. However, thanks to our Customer Value Innovation Program effects, as well as increased handset subscriber numbers, the decline was - it became smaller than that of the previous quarter, and we believe this trend will continue on for the remainder offer the year. [Foreign Language] While ARPU also fell quarter-on-quarter this quarter, because the rate of the selected discount price plan subscriber increase is slowing, and we are going to see continued growth in data needs with greater data consumption going forward, we believe that the ARPU fall should be subdued by the second half to first half of next year. [Foreign Language] And also, taking into consideration that we can look forward to the effects of the commercial launch of 5G, we believe that the MNO revenue can turn around by the second half of next year. [Foreign Language] Now moving on to your second question regarding our dividend policy. [Foreign Language] Currently, SK Telecom is contemplating a new dividend policy that better reflects the changes that we have in our business portfolio, including the growing percentage of non-telco areas, including ADT Caps, as well as the each business environment of the respective division. [Foreign Language] We stand by our previous position in that we are considering in a positive manner of linking the - linking part of our dividend gains on SK Hynix with our own dividend. However, these will become more detailed under the new dividend policy. [Foreign Language] We believe that it will be adequate for us to decide our new dividend policy once SK Hynix's dividend has been set. [Foreign Language] And this issue will go through an internal reviewing process and will - the final decision will come out at the board meeting to be held early next year. [Foreign Language] Thank you.

[Foreign Language] The next question will be presented by Jong In Yang from Korea Investment & Securities. Mr. Yang, please go ahead, sir.

[Foreign Language] Thank you for the opportunity. I have two questions as well. My first question has to do with your 5G CapEx. I'd like to hear about your CapEx plans - your CapEx amount for the years 2018 and 2019 and also your total 5G CapEx. My second question has to do with the recent discussions that went on within the National Assembly regarding the separation of your - of the handset contract and the telecom service contract. What is SK Telecom's official stand on this issue?

[Foreign Language] Thank you, Mr. Yang, for your question. [Foreign Language] Let me first answer your question on 5G CapEx. [Foreign Language] First, after finishing the selection process of our 5G equipment partners this past September, we are doing everything we can to prepare for the 5G commercial launch with these partners. And we plan to begin the network rollout process in certain areas in the next quarter. [Foreign Language] However, because we have to take into consideration various variables which includes 5G demand, as well as the development process of the handset manufacturers, we ask for your understanding and that we cannot disclose the detailed network rollout strategy here, including the total investment amount. [Foreign Language] However, our basic principle is that we will be scaling or linking the investment spending along with the discovering of new business models that can guarantee profitability. [Foreign Language] Also, along with seeking new business models, we will continue to come up with measures - reasonable measures for cost cutting, which include the virtualization technology that allows us to operate our existing physical equipment based on software, as well as taking a flexible approach to the investment amount that will be going into our existing network infrastructure. [Foreign Language] While in the process of preparing for the 5G commercial launch for next - early next year, we will begin the investment spending in Q4, we will be sure to establish measures that will allow us to enhance the cost efficiency so that we can stay within the guided CapEx amount that was given out to you early this year. [Foreign Language] As for the 5G CapEx outlook, after the - after 2019, we will be sure to share these plans with you once they become more detailed and also taking into consideration the internal and external competition environment, as well as once our management plans for next year has been settled. [Foreign Language] Let me now move on to your second question. [Foreign Language] There was discussion regarding the separation of handset contracts with service contracts in the recent National Assembly inspection of the Ministry of Science and ICT. However, at this time, it's difficult to predict whether it will be introduced, as well as the impact that it may have. [Foreign Language] However, if these were to be introduced, I believe that it will contribute to resolving some of the issues that were there because of the blending of the service fee and the handset pricing. [Foreign Language] Also, the market competition paradigm will shift to one that centers more on prices and service quality, which will ultimately lead to greater user benefit. So I believe that these will be some of the positive effects that this will have. [Foreign Language] I also believe that there should be measures or time for contemplation on such measures that can minimize negative impact that it may have on the overall ecosystem, including the distribution structure. [Foreign Language] And going forward, throughout the whole discussion and reviewing process, we look forward to a reasonable conclusion being generated in the context of market competition and enhancing customer convenience. [Foreign Language] Thank you.

[Foreign Language] The next question will be presented by Neale Anderson from HSBC. Mr. Anderson, please go ahead, sir.

Thank you. Good afternoon. Two questions, please. Firstly, on the security business. I noticed you're aiming to generate KRW1.6 trillion in sales by 2020. Could you give a discussion on potential synergies from the security businesses that you have? And if you're likely to realize any of those synergies next year. The second question relates to oksusu, the media business. Is it possible to differentiate just using content or will you look to use other services that SKT already has? And if so, when you likely to do that, please? Thank you very much. [Foreign Language]

[Foreign Language] First, thank you, Mr. Anderson, for your questions. [Foreign Language] Let me first address your question regarding the synergies that come with the acquisition of ADT Caps. [Foreign Language] First, through the acquisition of ADT Caps, along with us being able to increase the value of our existing security business, we also believe we will be able to provide a differentiated level of security services based on new ICT, including unmet parking lots and offline stores. [Foreign Language] First, we plan to secure revenue sources within - by utilizing our intragroup assets, and we also plan to further secure company corporate clients that the entire SK Group currently has. [Foreign Language] Also, while providing new security products that are based on the integrated offering that encompasses our existing home service, as well as the security service, we also plan to increase our subscriber base, using our SK Telecom's distribution channels. [Foreign Language] Along with these efforts, through merger of ADT Caps and then oksusu, we believe we will be able to integrate the vehicles and sales points, as well as unify the security product's structure. In other words, we could expect such cost-cutting efforts through a more efficient management of our overall security business. [Foreign Language] And through such revenue growth and cost-cutting efforts and synergies, we believe that the EBITDA for our security business will grow by over 30% over the next 3 years. [Foreign Language] Now moving on to your question about oksusu. [Foreign Language] For the growth of oksusu, not only our content is important, but we also believe that the expansion of markets, including global markets, is crucial. [Foreign Language] We are already seeing media consumption shifting away from television and PCs to mobile. And with the significance of content competitiveness becoming even greater with the growth of global OTT such as Netflix, we believe that going forward, the media market - the growth of media market will be focused on mobile-based OTT services, as well as premium content. [Foreign Language] And in this context, centering on oksusu, our mobile media platform, we will review all possible options, including division separation, external funding and strategic partnerships so that we can secure an independent platform growth structure. [Foreign Language] Going forward, oksusu will secure an independent growth structure and also shift into a business model that centers on subscription VOD, and we plan to lay the foundation for a stable profit, which include lock in of subscribers. [Foreign Language] We also plan to focus on creating differentiated and un-rivalled pay content competitiveness through joint investments with production companies, entertainment companies, as well as broadcasters and also by participating in the production process. [Foreign Language] In particular, along with efforts to strengthen our support content which tend to be very popular among the domestic OTT users, we also have plans to expand production and investments in the K-Content, including film, drama series and entertainment programs that are shown to be highly competitive in the global market. [Foreign Language] And to do so, we have plans to enter the global market at least in the Southeast Asian region, and we are talking to a potential partner in the region. [Foreign Language] Thank you.

[Foreign Language] The next question will be presented by Hong-sik Kim from Hana Financial Investment. Mr. Kim, please go ahead, sir.

[Foreign Language] Thank you. I have two questions. The first has to do with how currently the issue of excessively expensive devices and the high rebates are creating a lot of noise. And in response to this phenomenon, the government is talking about the separation of device contracts and service contracts. And there is skepticism of whether this is a possible scenario. So I'd like to hear what SK Telecom has to think - has to say on this issue. And my second question is you have spoken or hinted a lot about the responsibility of restructuring your ownership structure, and there are concerns among investors regarding how if you were to become a middle holding company that could lead to a lower dividend. I'd like to hear your take on this as well, please.

[Foreign Language] Thank you, Mr. Kim, for your question. [Foreign Language] I think the first question was about the talk of the separation of the telecommunication services fee, as well as the rest contract and whether or not if this is a feasible scenario. [Foreign Language] And there are active discussions going on currently in the National Assembly inspection, as well as in the market. However, whether or not what will happen, I believe we still have to wait a while. [Foreign Language] Of course, SK Telecom has - we have our own stand on this issue. However, we will be open to all the various options before making a decision. [Foreign Language] Let me now answer your second question regarding worries about a lower dividend payout after or if we were to become a middle holding company. [Foreign Language] Not - the decision has not been made yet regarding an ownership restructuring. However, if we were to become a middle holding company, we will continue to maintain the growth potential of our new ICT businesses, as well as the stability of our MNO business, meaning that it will not have an impact on our cash flow. And the stance of which - and the process of how we go about our growth strategies, including M&As, nothing will change from what we currently have. [Foreign Language] Rather, not only can a holding company directly link their dividends to the dividend gains of their subsidiaries, but we can also look forward to tax benefits as well. So I believe there will be a greater upside to our dividend. [Foreign Language] However, in the - as for in the context of SK Hynix's dividend payout, because nothing has been made concrete yet, we cannot say for sure. However, we can say that we are taking a positive review - positive approach in reviewing a higher dividend. [Foreign Language] Thank you.

[Foreign Language] Currently, there are no participants with questions.

[Foreign Language] With no further questions, then this will conclude the earnings conference call for Q3 2018. Thank you.