SK Telecom Co.,Ltd (SKM) Q3 2020 Earnings Report, Transcript and Summary

[Foreign Language] Good afternoon. First of all, thank you all for joining this Conference Call. And now we'll begin the conference call by the Fiscal Year 2020 Third Quarter Earnings Results 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 SK Telecom. Today's conference call will consist of the presentation on the earnings results for Q3 of 2020 and the future management plans and strategic direction by Poong-Young Yoon, CFO and Head of Corporate Center I and Hyung-il Ha - Head of Corporate Center II, followed by a Q&A session. [Foreign Language] Today the achievements and strategic plans for M&O will be provided by Poong-Young Yoon, Head of Corporate Center I and Hyung-il Ha - Head of Corporate Center II will discuss that on the new ICT business division. [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 macro economic and market situation. Let me now present our CFO.

[Foreign Language] Good afternoon. This is Poong-Young Yoon, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights for Q3 of 2020. [Foreign Language] Consolidated revenue for Q3 2020 recorded KRW4,730.8 trillion. Continuing on from last quarter all business divisions achieved even growth, with Media, Security and Commerce recording two digit growth in particular, leading to a 3.7% year-on-year and 2.8% quarter-on-quarter increase. [Foreign Language] Consolidated operating income increased by 19.7% year-on-year and 0.6% quarter-on-quarter to record KRW361.5 billion. Q3 saw meaningful achievements, including MNO’s operating income rebound year-on-year and the operating income of Media, Security and Commerce businesses exceeding KRW100 billion for the first time. [Foreign Language] Net income recorded KRW395.7 billion, it increased by 44.2% year-on-year due to equity method income on SK Hynix and decreased by 8.4% quarter-on-quarter. [Foreign Language] Let me now discuss major achievements and strategic direction for each business division. [Foreign Language] Non-consolidated MNO revenue for Q3 recorded KRW2,940.6 trillion, while 2G shut down had a negative impact on the revenue, continued 5G subscriber growth led to a 1.0% increase year-on-year. [Foreign Language] MNO operating income recorded KRW264.1 billion, it rose by 4.5% year-on-year, thanks to revenue growth and market stabilization, leading to a year-on-year operating income increase. [Foreign Language] 5G subscriber count for Q3 it was increased by 920,000, recording 4.26 million as of the end of September. Increased coverage, stronger non-face-to-face channels, and various 5G experiences have led to accelerated quarterly subscriber growth. [Foreign Language] Meanwhile, during this quarter, we shut down our 2G service nationwide, which we have provided for the past 25 years. We are providing support for former 2G subscribers to assist their migration process. And we will ensure that 2G shut down will make way for a virtuous cycle that leads to improved services, including a more advanced IT service. [Foreign Language] As such, we will continue to maintain the current stable market trends, as well as aim to increase the 5Gsubscriber base with a more enhanced service quality, as we continue to strengthen the 5G network quality and launch more specialized products. [Foreign Language] This past September, we launched a new 5G subscription service called V Coloring, the nation's first short form video based ringback tone service saw 400,000 subscribers within just one month of its launch, and has also been well received globally, garnering attention from major global MNO companies from Hong Kong and Australia. While it started out as a B2C service, we plan to expand our subscriber base by launching B2B, B to G services in the future. And we will grow it into one of the company's key subscription services, along with the music platforms flow and video platform way. [Foreign Language] In Media SK Broadband’s consolidated revenue recorded KRW966.8 billion with strong earnings from Pay TV, including IPTV and Cable TV, it rose by 20.3% year-on-year and by 5.3% quarter-on-quarter. Operating income increased by 78.8% year-on-year and 6.7% quarter-on-quarter, recording KRW64.9 billion, thanks to the revenue growth. [Foreign Language] Security business recorded KRW353.3 billion in revenue. With the growing new security service and higher convergence security solution sales is increased by 15.5% year-on-year and 9.4% quarter-on-quarter. Operating Income recorded KRW40.1 billion. Increased costs related to responding to re-spreading of COVID-19 and costs related to expanding new businesses brought the numbers down by 3.1% year-on-year, but it increased by 9.6% quarter-on-quarter, thanks to the revenue growth. [Foreign Language] Commerce revenue recorded KRW206.6 billion, with GMV continuing its growth trend, it rose by 18.7% year-on-year and 7.3% quarter-on-quarter. Operating income recorded KRW6.1 billion, with 11 Street [ph] and improved operating income and that is SK Stoa continuing to grow, total operating income for the Commerce business achieved a four fold growth on a year-over-year basis and a three fold growth quarter-on-quarter. [Foreign Language] Now the Head of Corporate Center II, Mr. Ha will walk you through their achievements and plans for the new ICT businesses.

[Foreign Language] Good afternoon, I am Hyung-il Ha, Head of Corporate Center II. [Foreign Language] Q3 of 2020 with a meaningful period for new ICT businesses. Our new ICT businesses have surpassed the KRW100 billion mark in operating profit. Through this meaningful achievement, we expect new ICT businesses to be recognized for its value as a key business division that leads SK Telecom's growth. [Foreign Language] Allow me to discuss the achievements and strategies for the new ICT business division. First, the Media business. [Foreign Language] SK Broadband revenue in Q3 grew by over 20% year-on-year based on the growth of the Pay TV business arm, including IPTV and Cable TV. Profitability also improved recording an operating margin of 6.7%, a 2.2 percentage point increase year-on-year. Net subscriber additions for IPTV reached 129,000 in Q3, is the highest in four years, allowing SK Broadband to acquire over 8.5 million paying subscribers. [Foreign Language] Monthly active users for Wavve in August exceeded 3.8 million, the highest we've seen this year. With over 2 million paying subscribers and successful original content, including drama series and entertainment shows starring K-Pop idols, its growth momentum is becoming stronger once again. [Foreign Language] I will now move on to the Security business. [Foreign Language] Despite constraints due to the re-spreading of COVID-19, ADT Caps revenue continued to grow, thanks to increase in CMS service subscribers and new non-face-to face services. From home security and unmanned parking to new services responding to non-face-to-face service demand such as Caps Smart Check, Caps Clean Pair and Caps Smart Walk-in, ADT Caps is introducing new services in a timely manner, thereby expanding its business spectrum. [Foreign Language] This increased demand from corporate clients and new business growth, including cloud and convergence security, SK Infosec is continuing to see its revenue grow. And as a result, Security business achieved a two digit revenue growth and the highest ever quarterly revenue. [Foreign Language] Despite the challenging environment due to COVID-19, the Security business will achieve the annual revenue target of KRW1.3 trillion one, led by aggressive new business development efforts and generate a stable income going forward. [Foreign Language] Moving on to Commerce business. [Foreign Language] Despite intensified competition 11th Street and SK Stoa exceeded KRW200 billion in quarterly revenue, while also achieving income growth by strategically responding to the market. In particular, 11th Street executed a sales strategy in line with market trends and an efficient marketing strategy, thereby achieving both revenue growth and operating surplus simultaneously for the first time and confirming the validity of its growth strategy. [Foreign Language] 11 Street will continue to execute strategies that take both growth and profit into consideration and the goal of achieving annual GMV growth and reaching BP levels still stand. SK stoa is smooth sailing to become the leader in the e-commerce industry. [Foreign Language] And lastly, I will discuss the achievements of our app market subsidiary, ONE Store and the spin off of our Mobility business division. [Foreign Language] ONE Store recorded continued growth for nine consecutive quarters. This past September we've completed selection of book runners and aim to complete the IPO process in 2021. Thanks to growing number of available applications and users, revenue in Q3 increased by 26% year-on-year, recording the highest ever quarterly revenue. [Foreign Language] Recently, through a split off of our Mobility business division, we are on our way to establish a new mobility company and has been recognized as KRW1 trillion business. Furthermore, we've formed a strategic partnership with Uber to create synergies through hyper-collaboration. The newly established mobility company will attract investment from Uber to provide innovative services, as well as establish a taxi JV with Uber. [Foreign Language] We ask for your continued interest and support for our Mobility business, which will grow into SK Telecom’s business arms, with T Map, the nation's number one mobility platform and Ubers taxi e-hailing expertise combined. [Foreign Language] We will continue to present you with greater achievements in the new ICT area in the future. [Foreign Language] I will now hand it back to the CFO Thank you.

[Foreign Language] During the conference calls held at the beginning of the year, I told you that we would make this year the starting point of our company being rightly recognized for our enterprise value. To realize the inherent corporate value, we announced a new dividend policy linked to the performance of new ICT businesses and shared plans of our subsidiaries IPOs beginning with ONE Store over the past 10 months. We are buying back our own shares currently our own currently undervalued shares and establishing a new mobility company to further enhance our enterprise value. [Foreign Language] On top of such efforts to pave the way for enterprise value growth during this year, we've been rewarded with the MNO earnings turning around and new ICT businesses reaching KRW1 billion in operating income. Based on even stronger earnings going forward, we will meet our goals for this year one by one and achieve the enterprise value growth in full force beginning from next year. [Foreign Language] We ask for the continued support and encouragement from our investors and analysts. Thank you.

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[Operator Instructions] [Foreign Language] The first question will be provided by Ethan [ph] from Hana Investment and Securities. Hana investment and securities. Mr. Lee Please go ahead.

[Foreign Language] Thank you for the opportunity. I have two questions. My first question is, recently your competitor has launched a lower end 5G price plan. Does SK Telecom have any plans for a low end 5G price plan? And also what kind of effect would that have on the - your 5G ARPU, as well as the revenue? My second question is regarding the OTT service. So with the spin off of Tving by CJ E&M, we do expect a very overheated competition for - quite a competition to take place in full force in the OTT market domestically. And there's talks of Disney Plus entering Korea as well. You did mention that users were Wavve compared to the last year, the year end of last year that it rose by 30%. So I would like to hear about your strategic direction for wave?

[Foreign Language] Thank you for your questions. I will be taking the first one and then Mr. Ha will answer your second question. [Foreign Language] Currently at SK Telecom, we are taking into consideration the overall competitive environment, as well as the subscriber growth trend. And we are reviewing, are reorganizing our 5G price plans to one that is more customer-oriented and friendly. And so we expect these two launch either at the end of this year or early next year. And when these new price plans are launched, we expect the 5G subscriber base growth rate to become even faster. And while the acquisition ARPU may be slightly lower, due to a more invigorated 5G subscriber base growth, we believe that it will have a positive impact on the MNO revenue increase. [Foreign Language] I will now move on to answer the question regarding our strategies for Wavve. [Foreign Language] In Q3, Wavve actually recorded its highest ever this year number of users in August and September, thanks to a stronger original content strategy, which include original content that showed very high viewership, such as titles like Alice and Lie After Lie. [Foreign Language] And we are also continuing to see growing number of paying subscribers and this number surpassed the 2 million mark in Q3. And as we have announced in the past, we still stand by our goal of 5 million paying subscribers by the year 2023, as well as a revenue target of KRW500 billion. [Foreign Language] And going forward Wavve will continue to put its efforts in enhancing its core competitiveness, including stronger content. And one example of that is our recent announcement of a strategic partnership plan with Astory a very capable content production company who has proven its capabilities recently in the global market. With Astory we will be jointly investing in drama series, as well as collaborate on casting endeavors and also collaborate on our sales in the domestic and also overseas markets. [Foreign Language] We believe that the higher or more active competition in the OTT market is a natural phenomenon in the process of the markets expanding. Wavve aims to be an open platform through which we work together with a variety of different players, and through hyper-collaboration with players from home and abroad, we also want to be very open in Wavve’s to contribute to the K-content ecosystem. Operator [Foreign Language] The next question will be presented by Kim Joonsop, KB Securities. Mr. Kim, please go ahead.

[Foreign Language] Thank you for the opportunity. I have two questions regarding your new businesses, namely ONE Store and T Map Mobility. So my first question is recently you've finished the selection process of your IPO book runners for ONE Store. I'd like to hear about the schedule going forward for the IPO, as well as your expected corporate value? And my second question is regarding the split-off of - the establishment of T Map Mobility. So in the existing competitive structure of the traditional mobility market, what does SKT have that is a stronger competitive edge compared to your competitors?

[Foreign Language] Thank you first of all for your question. [Foreign Language] I will be taking your first question regarding ONE Store. And then as for your second question, I will hand that over to Mr. Jong Ho Lee, Head of Mobility Business Division. [Foreign Language] One Store selected its IPO book runners this past September. [Foreign Language] Beginning with the due diligence process for ONE Store in October, we have begun the preparation process for the IPO with our underwriters, and after we go through all of the processes, including applying for the preliminary IPO review, during the first half of 2021, we are planning to list the company during the back half of 2021. [Foreign Language] Going forward as we looked and closely followed the overall environment, as well as the performances of our subsidiaries, we plan companies like ADT Caps, Wavve, 11th Street, SK Broadband, and in the mid to longer term team at mobility, we planned to - we are planning for the IPO of the subsidiaries, so that they are rightly valued in the market. [Foreign Language] And once these plans for IPO are made complete, we will be sure communicate them with the market. [Foreign Language] ONE Store has attracted its financial investment in 2019. And it has been valued at KRW500 billion. And since then his growth rate has only been accelerated. [Foreign Language] With more applications coming to join us and forming a more diverse application platform, as well as a growing user base, in 2019 its revenue grew by 23%. And as for up to the third quarter this year, revenue grew by 27% year-on-year. [Foreign Language] And we are looking forward to welcoming quite powerful game titles in the future, which will only lead to a accelerated growth in 2021. [Foreign Language] And based on such growth momentum, we are expecting ONE Store to be valued at a much higher price than at the time of funding in 2019. [Foreign Language] As for more detailed outlooks on ONE Store and our future plans, when we have the IPO preparation all set in place, we will be sure to communicate that with the market. [Foreign Language]

Hello, Jong Ho Lee, Head of Mobility Business Division as introduced. [Foreign Language] I will have to say that the competitive edge that team that Mobility would have compared to its competitors is the user base that team up has, as the Mobility service with the highest number of users in the nation, as well as the large amount of data that it has. [Foreign Language] Despite COVID-19 T-Map saw 4.54 million daily users as of the end of October, as well as 13.23 million monthly users in October, which was the highest ever. [Foreign Language] And this number represents 66% of all registered card in the nation, as well as 74% of all navigation users. [Foreign Language] And through T-Map based data analysis, we give scores for driving patterns of our users, which leads to a discount benefits for your car insurance premiums. And this is the type of business model that we already have. [Foreign Language] And on top of that, we have T-Map based ad businesses, as well as Map data businesses which are our unique business models. [Foreign Language] And already names like BMW, Renault, Volvo, Jaguar to them we are currently providing the T-map based in vehicle infotainment in their auto OEMs. And we also have our T-Map auto business which does the IVI business and that would be quite a competitive edge and upper hand compared to our competitors. [Foreign Language]. Also a unique line of services that we provide through the mobility and telecommunication data, as well as synergies that could arise from utilized SK Telecoms marketing channels. These are all part of competitive upper hand that SK Telecom currently has. [Foreign Language]

[Foreign Language] The next question will be presented by Kim Hoi from Daishin Securities. Please go ahead, sir.

[Foreign Language] I have two questions. The first one is regarding the spectrum allocation. And it seems to me that its quite - that there is quite a gap between what the government is proposing or going towards and what the operators want. And recently, we saw that you openly stated in that statement - made a statement that you know it would even be better just to go and - in the form of an option. So where is this coming from? And why the gap of your opinion? And what should we expect to happen? And my second question is with the launch of the 5G iPhone, I would first like to hear about what this - what kind of impact this would have on the 5G ecosystem, as well as the some of the more detailed outlooks on what we can expect in terms of 5G in 2021 and onwards?

[Foreign Language] First, thank you for your questions Mr. Kim. [Foreign Language] I will be taking your first question regarding the spectrum allocation. [Foreign Language] Currently in the process of - regarding the pricing of the reallocation of spectrums, there is indeed a discrepancy between the operators and the government, whether it will reflect former or past auction results and if so, to what extent it would be reflected. [Foreign Language] The three operators believe that reflecting the past auction results as was is excessive compared to the current value of their respective spectrum. And we also believe that there haven't been any cases like that in the past nor does it have any legal grounds. [Foreign Language] And so we expect for a reasonable results and reasonable pricing that takes into consideration the 5G current state. [Foreign Language] And next let me answer your question regarding the launch of the 5G iPhones. [Foreign Language] The launch of the 5G iPhone will not only contribute and have a positive impact on the MNO revenue growth through 5G migration for LTE iPhone subscribers, but we also believe that it will have a positive influence in invigorating the current 5G service. [Foreign Language] And in particular, including the iPhone mini now that there is a wider range of devices from which our users can choose from, we believe that this is in and of itself is very positive. [Foreign Language] And furthermore, globally if we are able to see stronger sales of 5G iPhones and more people using them, that will lead to a wider variety of various applications that can be applied to 5G being launched. And it will lead to a virtuous cycle - a virtuous cycle of creating an eco system that has very powerful 5G specialized services. [Foreign Language] And let me now brief you on our outlook regarding the 5G subscriber count going forward. [Foreign Language] With growing 5G coverage, as well as mentioning - as I just mentioned, including the Apple iPhone, having a better and more diverse, device lineup, we expect the net subscriber additions to continue going forward. [Foreign Language] As for the outlook by the end of this year, we still stand by our initial target of being between – in between 5 million to 6 million at the end of this year. [Foreign Language] Continuing its in 2021 as well, we will be focusing on enhancing the overall 5G experience through more devices, network and service. And as we also mentioned if the more customer friendly 5G price plans are launched early next year, that will lead to a faster rate of 5G subscriber growth. And So we believe that the number of 5G subscribers by the end of the year 2021 will be around 9 million. [Foreign Language] Thank you.

[Foreign Language] [Operator Instructions] The next question will be Ahn Jae-min from NH Investment & Securities. Please go ahead.

[Foreign Language] Thank you. I have one question. It's regarding your B2B business. So compared - recently, including your competitors now, obviously B2C is extremely important, but B2B is going to be very important, especially the beginning and from next year. So I would like to hear about your strategies as well as some of maybe recent achievements in the B2B area? And related to that, compared to your competitors, it seems that your IDC and cloud related services seem to be a little bit weaker than your competitors. So are there any plans to further expand the IDCs or any kind of outlook that you can provide us regarding your cloud business would be very appreciated?

[Foreign Language] Hello, I am Han Myung-Jin, Head of the MNO Marketing Group. I will take the first party fair question and then hand the mic over to answer your second part of the question. [Foreign Language] Our B2Bb business has two axis. For the first part, it is the 5G connected cloud services and we are strengthening this areas. Currently, we have already signed partnership on work we are currently working together with Amazon Web Service. And we've also invested. [Foreign Language] And based on these efforts, we are currently preparing for a 5G MEC based cloud service and we plan to commercial launch for this service by the year end. [Foreign Language] And as for the trial services, we have around 20 trial service areas, which include distribution and medical. [Foreign Language] Our second axis is the B2B solution part where we aim to provide our 5G based services that can improve the profitability of leaders of various industries. [Foreign Language] And an example of that is in a hydro power, as we have established the world's very first quantum applied solution. [Foreign Language] And also for companies like Hynix, SK Hynix, Samsung Electronics and POSCO, we have already established and rolled out 5G networks for these companies. And we also have new business models. [Foreign Language] And one of the most representative examples of our 5G B2B service would be the 5G Smart Factory.

[Foreign Language] And as for the second part of your question regarding IDC, I will take that question. [Foreign Language] SK Broadband has been very highly interested and also we have been putting in a lot of investment regarding IDC and we have plans to open IDC, a very large scale IDC in Ilsan and [indiscernible] area also in July of 2021. [Foreign Language] So we are smooth sailing in terms of the preparation process and once it is open, we believe that the IDC business will be able to see significant results. [Foreign Language] And just to add we are currently reviewing additional investment plans in the field of IDC. And once these plans become more concrete, we will open them and communicate them with the market. [Foreign Language] Thank you. [Foreign Language]

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[Foreign Language] With that, we will conclude the conference call for Q3 of 2020. [Foreign Language] Thank you.