Earnings Call: Q2 2021

Aug 11, 2021

Quarterly report

Good afternoon. I am Chung Seok Oh, Head of IR Planning at SK Telecom. Today's conference call will consist of the presentation on the earnings results for Q2 of 2021 and the future management plans and strategic direction by Poong Young Yoon, CFO and Head of Corporate Center 1 and Hyung Yoon Head of Corporate Center 2, followed by a Q and A session. Today, achievements and strategic plans for MNO will be provided by Kyung Young Yoon, Head of Corporate Center 1 and Kyung Yoon Head of Corporate Center 2 will discuss that of the new ICT businesses. Today's conference call will provide consecutive interpretation, and we have 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. Good afternoon. This is Poong Young Yoon, CFO of SK Telecom. First, let me update you on the spin off process that many investors are interested in. SK Telecom made the spin off official with the Board's approval on June 10. The spin off ratio between the surviving company and the new company is around 6:4. A 5:one stock split was also decided increased investment accessibility and expand the shareholder base. All the necessary steps are being taken as scheduled, including the submission of the registration statement to the Financial Services Commission on July 16. We're also in the process of developing specific vision for the 2 companies. SK Telecom as a surviving company plans to develop new growth drivers in the areas of subscription, metaverse and enterprise based on its core business in 5 gs and home media. The new company will be an investment company specialized in technology sectors. It aims to increase the current net asset value of KRW26 1,000,000,000,000 to KRW75 trillion by 2025 through investments in high-tech, big tech and deep tech, which encompass Semiconductor, Platform and Innovative New Technology with High Growth Potential. The spin off is awaiting a final approval at the General Shareholders Meeting to be held on October 12 by the shareholders as of July 16. When it is approved by the shareholders, the spin off will result in 2 separate companies as of November 1, 2021. We're committed to completing the remaining process as scheduled and developing detailed strategic growth plans for the 2 companies. Now let me discuss the consolidated earnings highlights Consolidated revenue for Q2 2021 recorded KRW4,818,300,000,000 up 4.7 percent year on year and 0.8% Q on Q. Amid governance restructuring underway, SK Telecom continued stable business growth and all business divisions, including MNO, saw their earnings grow year over year in Q on Q. Consolidated operating income posted It increased by 10.8% year on year and 2% Q on Q, mainly thanks to higher operating income of MNO business even though investments and costs related to new ICT businesses increased. Net income recorded KRW795.7 billion, posting an 84% growth year on year and 39.1% growth Q on Q, thanks to equity method income growth on SK Hynix. Let me now discuss major achievements and strategic directions for each business. Non consolidated MNO revenue for Q2 increased by 2.7% year on year and 1.4% Q on Q surpassed KRW3,21,600,000,000. As of the end of June, the number of 5 gs subscribers reached 7,700,000, representing more than 30% of the handset subscribers and contributing to the sustained revenue growth. MNO operating income posted KRW328.4 billion, up 1.7% year on year and 6.9% Q on Q on the back of NNO revenue growth and cost stabilization. In July, SK Telecom launched Ifland, a new metaverse platform that can make countless possibilities a reality. On the Eastland app, you can easily create a metaverse room using avatars. And in the metaverse room, you can have audio chat with up to 130 people and share files and documents with them. In the era of 5 gs and contactless communication, the is expected to be used for diverse purposes, including business meetings, events with many participants, knowledge sharing and social networking. We plan to grow this as a popular metaverse platform and we ask for your interest and support. Along with metaverse business, Subscription business is going to be another important growth pillar of Eneno's division and details for this new initiative are being finalized. We are currently designing subscription products that package various highly demanded services and couple them with media and commerce benefits, which will be revealed around the end of August. The membership service will be revamped based on customer input and the new membership program will be introduced in Q4 that features a new earning point benefit in addition to the existing immediate discount benefits. We will do our best to prepare for the launch of the new subscription service and the membership restructuring so that they can mark a meaningful new beginning for SK Telecom post spin off. Moving on to the media, SK Broadband consolidated revenue recorded 1,000,000,000. It rose by 8.7% year on year and 3.1% Q on 2 with continued net adds of ICP subscribers. The operating income posted KRW64.2 billion. Grew by 4.9% year on year driven by revenue growth, but it fell by 14.9% Q on Q higher investments in fixed line infrastructure and content. The revenue growth was thanks to the solid growth of CMS Business and accumulated results of new business such as Cast Home. The operating income posted KRW28.6 billion, which marks a 3.1% Q on Q drop due to increased spending on new business at a 2.9% year on year increase, thanks to revenue growth and profitability improvement of the new business. Commerce revenue posted KRW211 1,000,000,000, up 9.6 percent year on year and 3.6% Q on Q. The growth of the e commerce market and differentiated delivery services led to the growth of revenue, but operating income posted a slight loss due to intensifying market competition caused by market restructuring events. Next, Seong Yoon Head of Corporate Center 2 will discuss the achievements and strategic direction for the new ICT businesses. Good afternoon. I am Hyung Il Head of Corporate Center 2. Allow me to discuss the achievements and plans for the new ICT businesses. First is the media business. SK Broadband achieved the largest IPTV subscriber net adds in Q2 and the first half of twenty twenty one. As a result, the number of paid TV subscribers increased to 8,810,000 as of the end of Q2. Established by SK Broadband as a multiple program provider or NPP, MediaX began regular broadcasting in April. It has focused on strengthening channel competitiveness by increasing channel awareness and coverage and making content investments. As a result, in just 3 months, it entered the top 40s among approximately 300 channels in terms of ratings at the end of June. SK Broadband continues to strengthen media business competitiveness in terms of platform, channel, content and all other areas. Wave continues to achieve subscriber growth based on the popularity of original content. It established Studio Wave in May and accelerated investments in original content, including Tracer, which will be released in December. We will continue to boost content competitiveness through various approaches as seen in the example of signing an exclusive content distribution agreement with HBO. Next is S&C Business. ADTcast is leading the market with technology differentiation in new business areas such as cloud, home, online solution and converged security on top of the growth of existing security business. With its AI based security services, ADT CAS ranked number 1 for managed security service for the first time in 2021 at Korea Standard Service Quality Index by the Korean Standards Association. This achievement is attributable to our efforts to apply AI in the overall security services ranging from security camera operation, active security, Security for Online Stores and Smart Home Security. ATTCAP signed an agreement on strategic business cooperation for cloud security with AWS in Q2 and received ISV Partner of the Year. Based on the strengthened partnership with AWS, we are pursuing cloud security business opportunities in the financial and ADT Cash selected a main underwriter for IPO in Q2 and is currently preparing for the IPO in full swing. Next is Commerce. The recent IPO and M and A in the market further intensified e commerce market competition to which 11th Street responded by strengthening competitiveness through external partnerships. 11th Street started the next delivery service in collaboration with Korea Post and the same day delivery service in partnership with SLX. In addition, we are working to make sure that Amazon Global Store can open around the end of August that will offer convenient and differentiated shopping experience in connection with SK Telecom subscription service. SK Soa increased high margin product categories such as health supplement and beauty to respond to market signals that consumers are turning offline for shopping. And we increased the number of partner mobile channels to minimize the negative impact of reduced TV viewing. Thanks to these efforts, SK store maintained a high growth trend in Q2 as well. The number of calls has increased by more than 20%. TMAP Mobility expanded the scope of its business to mobility for goods by entering the goods delivery market with the acquisition of YLP, a logistics IT company. It also launched a designated driver service to gain a share in the stable designated driver service market worth KRW3 1,000,000,000,000. TMN Mobility remains committed to growing the business by offering differentiated services to users and cooperating with various stakeholders. Finally, let me report on 1 store, which has achieved GMV growth for 12 consecutive quarters, a positive sign for a successful IPO. 1 store attracted investments from Microsoft and Deutsche Telekom Capital Partners, thereby raising expectations for corporate value enhancement and building a foundation to enter the global app market. In addition to the acquisition of Rock Media, Korea's largest genre fiction publisher, 1 store will continue to make investments to secure IP, which will be utilized for various types of content such as films and games. I will now hand it back to the CFO. Thank you. Finally, I would like to present our dividend policy. Since 2015, SK Telecom has maintained a total dividend size of more than KRW700 1,000,000,000 with an annual EPS of KRW10,000. Starting from Q2 this year, we introduced quarterly dividend in accordance with the global standards. Yesterday, dividend of KRW2500 per share for Q2 was paid out. Dividend will be paid out evenly by quarter, but when there is additional announce, will be added to the year end dividend. As we communicated previously, we will make sure that this year's total dividend will be similar to last year's. Since we started dividend payments in Q2 this year, we're considering adding the Q1 portion to the year end dividend. SK Telecom would like to increase transparency and predictability on the size of dividends by providing a guideline on dividend linked to business performance. First, The surviving company is expected to maintain a stable cash flow after the spin off. We would like to use 30% to 40% of the amount, which is a deduction of King Price from EBITDA as a basis for dividend payment for the next 3 years, including this year. EBITDA is a cash flow generated from business operations and K PAX is essential investment for business management. Equity investments such as M and A will be excluded. Our dividend formula is on a non consolidated basis. If MNO earnings continue to improve based on 5 gs competitiveness, The free cash flow of the surviving company is expected to increase, which means that there is upside potential on dividend payout. 2nd, the new company will enhance will continue to enhance shareholder value through rapid growth of net asset value and value The spin off will mark a new beginning for the 2 companies to greater growth based on clear identity. We will do our best to complete the remaining process successfully and continue to improve the quality of our business. We ask for your continued support and interest. Thank you. Now the Q and A session will begin. The first question will be provided by Jaehyung Yu from Merrill Lynch. Please go ahead. Thank you for this opportunity. I would like to ask 2 questions. The first question is as SK Telecom made a disclosure And as was mentioned by CFO, SK Telecom is expected to provide the DPS level of 10,000 won as a minimum level of DPS. So if I do some simple calculation, this would mean that there will be about KRW700 1,000,000,000 to KRW800 1,000,000,000 of basis for dividend payout. So I wonder if there's any upside potential for your DPS level, because other companies in the market are expected to increase their EPS level and there is more visibility on that side. So I would like to get some more understanding on this And you mentioned that in your dividend formula, there will be EBITDA and CapEx. So as for the CapEx, is it based on your earnings presentation or is it based on the financial statement? And I would also like to get some more visibility on the overall outlook for EBITDA and CapEx going forward because these will be linked to the dividend side. And you are paying out on a quarterly basis, so I'd like to get some more information on this. And the second question is related to the new company. You mentioned that you are planning to increase the net asset value to KRW75 and that is your target. And there are many questions raised by investors saying that this target seems to be quite aggressive. So I wonder how you are going to deliver and try to meet this target. In addition to what the CFO mentioned in the seminar in June, is there any other plan that you have devised to achieve this target? Mr. Yu, thank you very much for your Let me first address your question regarding our dividend policy. As for our dividend formula, EBITDA, you can refer to our financial accounting EBITDA number. And for Casex, you can refer to the Casex number announcing in our earnings presentation. Of course, there is some uncertainty as to the projection for the end of this year. But when we think about 30% to 40% of the amount, which is a of CapEx from EBITDA, as you already mentioned, it will be in the range of KRW700 1,000,000,000 to KRW800 1,000,000,000. So based on this, I expect that our DPS is going to be near or more than KRW10,000. EBITDA is operating cash flow generated from our business operation continuing on from 2020, in the first half of this year, we saw the EBITDA to continue to grow in a stable manner, and we expect that EBITDA will continue to grow going forward as well. KTAS is essential and necessary investment in order to maintain our telecom business. We will continue to do our best to expand the 5 gs coverage and improve the quality of the network. And at the same time, we will do our best to increase efficiency in CapEx execution by utilizing the joint network of 5 gs. Based on this overall projection, we believe that the difference between CapEx and EBITDA will continue to grow in 20222023. As a result, we expect upside potential on the dividend payout. Let me now comment on your question regarding the net As of the current net asset value, based on the closure of the Q1 this year, it's KRW19 1,000,000,000,000 for semiconductor and KRW7 and KRW7 trillion for other business areas, including platform. It is our plan to increase the value of Hynix to KRW40 1,000,000,000,000,000 and increase the value of other businesses, including platform, to KRW25 1,000,000,000,000 by 2025. And we also are aiming to attract about KRW10 1,000,000,000,000 of new investments, which will lead to additional net value growth. And as for Hynix, which takes up the largest portion of this net asset value, ever since SK Telecom acquired SK Telecom's share program, acquired SK Hynix for the past 10 years, IRR has been more than 20%. And we will be able to further solidify the DRAM Top to structure in the industry. And after successful completion of the acquisition of Intel NAND Business, we believe that there will be further industry consolidation, which means that there will be more competitiveness in the NAND business as well. Through these growth strategies, we believe that the equity value of Hynix can reach about KRW200 1,000,000,000,000 by 2025. So based on our ownership stake, it's going to be equivalent to KRW40 1,000,000,000,000. In addition to Hynix, we have other assets, including security, commerce, mobility and OTT. And we believe that these assets have a lot of growth potential to realize going forward. So in these other areas, we believe that we can increase the net asset value to KRW25 1,000,000,000,000. In addition to these two areas that I just mentioned, we will continue to collaborate with various global partners so that we can make preemptive investments in future core technology, which will lead to additional KRW10 1,000,000,000,000 of new asset value. The next question will be provided by Joon Suk Kim from KB Securities. Please go ahead. Thank you for this opportunity. I would like to ask two questions. The first question is related to your OTT business strategy. Currently, not only Netflix, but also Coupang and MAVER are jumping into the OTT market. As a result, the market competition has been intensifying. So has there been any change to the Wave strategy in order to respond to this intensifying competition in the market? The second question is related to your subscription business. Ever since your last conference call, there has been increased expectation on your subscription business. So what are the specific subscription business plans and strategies? Thank you. Mr. Kim, thank you very much for your questions. I'm going to address your question on Our subscription business and Mr. Will address the question on OTT. As for our subscription service, as I mentioned previously, is going to be based on the media and commerce benefits. We're going to bundle various useful and popular services For the benefit of customers and we will offer them at very attractive prices, there will be the basic plans and premium plans for the subscription packages. Currently, work is underway smoothly as collaboration with various domestic and overseas partners are going on because they want to be part of our subscription service business. And ultimately, it is our goal to develop this as an AI based digital marketing platform where various subscription products and customers will be matched We will not only offer these products to our SK Telecom subscribers, but also address the entire Korean population. And by expanding our the scope of the subscription services, we are targeting 35,000,000 subscribers by 2025 with a GMV size of KRW8 1,000,000,000,000. The basic business model for subscription is revenue share. And as for more details and strategies for our subscription service, we are going to arrange a separate press conference within August. I'm Hyunghin Corporate Center 2 ahead, and I'm going to address your question regarding the intensifying OTT competition and differentiation strategies of Wave. In content such as Taxi Driver and Penthouse Season 3. In May this year, Studio Wave was established with producer Lee Tan Ho as Chief Content Officer and the Head of And by using the studio, we're going to expand original content investment and production. This will lead to a competitiveness of our platform. Currently, Studio Wave is collaborating actively with various creators and producers. And in December this year, we're going to release Stranger with Inchi won and Song Hyeon ju as lead actors. Also recently, Wave signed a very large size content distribution agreement with HBO in an manner so that we can offer Game of Thrones and other HBO dramas and documentaries for the next for 1 year. And this is part of our efforts to increase our content competitiveness. In the Q2, while Netflix was experiencing some slowdown, Wave was able to perform very well based on the K content competitiveness. At the end of June, Netflix monthly active user was 7,920,000, which was a 4% drop compared to March, but waived MAU has increased to 3,900,000, which is a 6% increase from March, making the highest level. The next question will be provided by Hojae Kim from Taejin Securities. Please go ahead. Thank you for this opportunity. I would like to ask 2 questions. The first question is related to the dividend. You mentioned in your guideline the minimum dividend level and you mentioned that the dividend size will be linked to business performance, which means that As you indicated, there is a slight potential. When I apply the dividend formula to last year's dividend, I would say that there is 39% of the difference between CapEx and EBITDA used for dividend payout. And you mentioned that the range is going to be between 30% 40%. And if The percentage is closer to 40%. It will be very well received by investors. So as for your Moving on to the new company's dividends plan, you mentioned at the CEO seminar that there will be additional KRW5 1,000,000,000,000 of financial raising, which is mainly going to be used for investment only or is it going to be also used for dividend in the future? And as for the second question, it is about the 11th Street. In the new company, 11th Street takes up a sizable share in the new company. So I believe that the earnings of the 11th Street will be quite important going forward. So what is your earnings outlook for the 11th any updates on your collaboration with Amazon and any visibility on the timing of the IPO? Mr. Kim, thank you very much for your questions. Let me first address your question regarding our dividend. And regarding the dividend policy for the surviving company, as we mentioned, there will be a link business performance of dividend size. So as EBITDA continues to increase and CapEx becomes more efficient, as you shareholder return and stable investment, and this will be discussed at the Board as well. Thank you. And as for the new company's dividend policy, the spin off has not been completed yet, and there will be further discussions with the members of the new Board of the new company. So I'd like to ask for your understanding on this part. And as was communicated previously, the new company will be an investment company, so we do not consider any regular dividend payment. However, if there is any good occasion such as an exit or value harvest, then we may consider other options such as special dividend. And moving on to your question regarding the IPO timing of 11th As you may understand, given the nature of e commerce business, it is very crucial to maintain a balance between earnings performance and growth. As for 11th Street, we will continue to find ways to differentiate our services in collaboration with Amazon for cross border purchase experience and there will be major promotions and larger scale investments planned. And these will lead to more differentiation and this will once again provide a good basis for a successful IPO. As for our collaboration with Amazon, as I mentioned previously, there will be a separate press conference on this topic. This is going to be an opportunity for us to communicate more details with the market. Thank you.