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Good afternoon, I am Joongsuk 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-il Ha, Head of Corporate Center 2, followed by a Q&A session.
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Today, achievements and strategic plans for MNO will be provided by Poong Young Yoon, Head of Corporate Center 1, and Hyung-il Ha, Head of Corporate Center 2 will discuss that of the New ICT businesses.
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Today's conference call will provide consecutive interpretations, 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.
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Good afternoon, this is Poong Young Yoon, CFO of SK Telecom.
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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 10th. The spin-off ratio between the surviving company and the new company is around 6: 4. A 5 : 1 stock split was also decided to increase investment accessibility and expand the shareholder base.
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All the necessary steps are being taken as scheduled, including the submission of the registration statement to the Financial Services Commission on July 16th. We're also in the process of developing specific visions for the two companies.
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SK Telecom as the surviving company plans to develop new growth drivers in the areas of subscription, metaverse and enterprise based on its core business in 5G 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 KRW 26 trillion to KRW 75 trillion by 2025 through investment in high tech, big tech and deep tech, which encompass semiconductor, platform, and innovative new technology with high growth potential.
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The spin-off is awaiting a final approval at the general shareholders meeting to be held on October 12th by the shareholders as of July 16th. When it is approved by the shareholders, the spin-off will result in two separate companies as of November 1st, 2021. We're committed to completing the remaining process as scheduled and developing detailed strategic growth plans for the two companies.
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Now let me discuss the consolidated earnings highlights for Q2 of 2021.
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Consolidated revenue for Q2 2021 recorded KRW 4,818.3 billion, up 4.7% 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 and Q-on-Q.
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Consolidated operating income posted KRW 396.6 billion. 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.
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Net income recorded KRW 795.7 billion, posting an 84% growth year-on-year and a 39.1% growth Q-on-Q, thanks to equity method income growth on SK Hynix.
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Let me now discuss major achievements and strategic directions for each business.
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Non-consolidated MNO revenue for Q2 increased by 2.7% year-on-year and 1.4% Q-on-Q to post KRW 3,021.6 billion. As of the end of June, the number of 5G subscribers reached 7.7 million, representing more than 30% of the handset subscribers and contributing to the sustained revenue growth.
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MNO operating income posted KRW 328.4 billion, up 21.7% year-on-year and 6.9% Q-on-Q on the back of MNO revenue growth and cost stabilization.
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In July, SK Telecom launched ifland, a new metaverse platform that can make countless possibilities a reality. On the ifland 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.
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In the era of 5G and contactless communication, the platform 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, we ask for your interest and support.
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Along with metaverse business, subscription business is going to be another important growth pillar of MNO 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.
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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 benefit. 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.
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Moving on to the media, SK Broadband's consolidated revenue recorded KRW 997.1 billion. It rose by 8.7% year-on-year and 3.1% Q-on-Q, with continued net adds of IPTV subscribers. The operating income posted KRW 64.2 billion. It grew by 4.9% year-on-year, driven by revenue growth. It fell by 14.9% Q-on-Q due to higher investment in fixed line infrastructure and content.
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The revenue growth was thanks to the solid growth of CMS business and accumulated results of new business such as [Capstone]. The operating income posted KRW 28.6 billion, which marks a 3.1% Q-on-Q drop due to increased spending on new business, but a 2.9% year-on-year increase, thanks to revenue growth and profitability improvement of the new business.
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Commerce revenue posted KRW 211 billion, up 9.6% 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.
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Next, Hyung-il Ha, Head of Corporate Center 2, will discuss the achievements and strategic direction for the New ICT businesses.
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Good afternoon. I am Hyung-il Ha, Head of Corporate 2. Allow me to discuss the achievements and plans for the New ICT businesses.
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First is the media business.
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SK Broadband achieved the largest IPTV subscriber net adds in Q2 and the first half of 2021. As a result, the number of paid TV subscribers increased to 8.81 million as of the end of Q2.
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Established by SK Broadband as a multiple program provider or MPP, Media S 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 three months, it entered the top 40 among approximately 300 channels in terms of ratings at the end of June.
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SK Broadband continues to strengthen media business competitiveness in terms of platform, channel, content, and all other areas.
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Wavve continues to achieve subscriber growth based on the popularity of original content. It established Studio Wavve in May and accelerated investments in original content, including Tracer, which will be released in December.
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We will continue to boost content competitiveness through various approaches as seen in the example of signing an exclusive content distribution agreement with HBO.
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Next is S&C business.
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ADT Caps is leading the market with technology differentiation in new business areas such as cloud, home, unmanned solution, and converged security on top of the growth of existing security businesses.
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With its AI-based security services, ADT Caps ranked number one for managed security service for the first time in 2021 at Korean 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, access security for unmanned stores, and smart home security.
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ADT Caps 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 public sectors.
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ADT Caps selected a main underwriter for IPO in Q2 and is currently preparing for the IPO in full swing.
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Next is Commerce.
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Recent IPO and M&A in the market further intensified e-commerce market competition, to which 11Street responded by strengthening competitiveness through external partnerships. 11Street started the next day delivery service in collaboration with Korea Post and the same day delivery service in partnership with SLX.
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We are working to make sure that Amazon Global Store can open around the end of August. That will offer convenience and differentiated shopping experience in connection with SK Telecom subscription service.
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SK Stoa increased high margin product categories, such as health supplement and beauty, to respond to market signals that consumers are turning offline for shopping. We increased the number of partner mobile channels to minimize the negative impact of reduced TV viewing. Thanks to these efforts, SK Stoa maintained a high growth trend in Q2 as well.
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TMAP Mobility is solidifying its basis for growth through business portfolio expansion. Since the launch of UT, a joint venture with Uber in April, the number of calls has increased by more than 20%.
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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 KRW 3 trillion.
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TMAP Mobility remains committed to growing the business by offering differentiated services to users and cooperating with various stakeholders.
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Finally, let me report on ONE store, which has achieved GMV growth for 12 consecutive quarters, a positive sign for a successful IPO. ONE 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.
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In addition to the acquisition of ROK Media, Korea's largest genre fiction publisher, One Store will continue to make investments to secure IP, which will be utilized for various types of content, such as films and games.
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I will now hand it back to the CFO. Thank you.
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Finally, I would like to present our dividend policy.
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Since 2015, SK Telecom has maintained a total dividend size of more than KRW 700 billion with an annual DPS of KRW 10,000. Starting from Q2 this year, we introduced quarterly dividend in accordance with the global standard. Yesterday, dividend of KRW 2,500 per share for Q2 was paid out.
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Dividend will be paid out evenly by quarter, but when there is additional amounts, it 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.
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SK Telecom would like to increase transparency and predictability on the size of dividend by providing a guideline on dividend linked to business performance.
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First, the surviving company is expected to maintain a stable cash flow after the spin-off. We would like to use 30%-40% of the amount, which is a deduction of CapEx from EBITDA, as a basis for dividend payment for the next three years, including this year. EBITDA is a cash flow generated from business operation, and CapEx is essential investment for business management. Equity investment such as M&A will be excluded. Our dividend formula is on a non-consolidated basis.
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If MNO earnings continue to improve based on 5G competitiveness, the free cash flow of the surviving company is expected to increase, which means that there is upside potential on dividend payout.
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Second, the new company will continue to enhance shareholder value through rapid growth of net asset value and value harvest.
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The spin-off will mark a new beginning for the two companies to achieve 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.
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We ask for your continued support and interest. Thank you.
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Now the Q&A session will begin. Please press one and four if you have any questions. Questions will be taken according to the order you have pressed the number one and four. Please press one and five if you want to cancel your questions.
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The first question will be provided by Jae Hyuk Yoo from Merrill Lynch. Please go ahead.
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Thank you for this opportunity. I would like to ask two 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 KRW 10,000 as a minimum level of DPS. If I do some simple calculation, this would mean that there will be about KRW 700 billion-KRW 800 billion of basis for a dividend payout. I wonder if there's any upside potential for your DPS level, because other companies in the market are expected to increase their DPS level, and there is more visibility on that side. I would like to get some more understanding on this part. You mentioned that in your dividend formula there will be EBITDA and CapEx.
As for the CapEx, is it based on your earnings presentation or is it based on the financial statement? 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. I'd like to get some more information on this. The second question is related to the new company. You mentioned that you are planning to increase the net asset value to KRW 75 trillion, and that is your target. There are many questions raised by investors saying that this target seems to be quite aggressive. 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?
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Mr. Yoo, thank you very much for your question.
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Let me first address your question regarding our dividend policy.
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As for our dividend formula, EBITDA, you can refer to our financial accounting EBITDA number, and for CapEx you can refer to the CapEx number announcing our earnings presentation.
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Of course, there is some uncertainty as to the projection for the end of this year, when we think about 30%-40% of the amount, which is a deduction of CapEx from EBITDA, as you already mentioned, it will be in the range of KRW 700 billion-KRW 800 billion. Based on this, I expect that our DPS is going to be near or more than KRW 10,000.
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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.
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CapEx is essential and necessary investment in order to maintain our telecom business. We will continue to do our best to expand the 5G coverage and improve the quality of the network. At the same time, we will do our best to increase efficiency in CapEx execution by utilizing the joint network of 5G.
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Based on this overall projection, we believe that the difference between CapEx and EBITDA will continue to grow in 2022 and 2023. As a result, we expect upside potential on the dividend payout.
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Let me now comment on your question regarding the net asset value target for the new company.
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As of the current net asset value, based on the closure of the first quarter this year, it's KRW 19 trillion for semiconductor and KRW 7 trillion for other business areas, including platform.
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It is our plan to increase the value of Hynix to KRW 40 trillion and increase the value of other businesses, including platform, to KRW 25 trillion by 2025. We also are aiming to attract about KRW 10 trillion of new investments, which will lead to additional net value growth.
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As for Hynix, which takes up the largest portion of this net asset value, ever since SK Telecom acquired SK Hynix, for the past 10 years, IRR has been more than 20%. We will be able to further solidify the DRAM top tier structure in the industry.
After a 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.
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Through these growth strategies, we believe that the equity value of Hynix can reach about KRW 200 trillion by 2025. Based on our ownership stake, it's going to be equivalent to KRW 40 trillion.
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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. In these other areas, we believe that we can increase the net asset value to KRW 25 trillion.
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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 KRW 10 trillion of new asset value.
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Thank you.
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The next question will be provided by Joonsop Kim from KB Securities. Please go ahead.
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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 Naver are jumping into the OTT market. As a result, the market competition has been intensifying. Has there been any change to the Wavve 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. What are the specific subscription business plans and strategies? Thank you.
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Mr. Kim, thank you very much for your questions. I'm going to address your question on our subscription business, and Mr. Ha will address a question on OTT.
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As for our subscription service, as I mentioned previously, it is going to be based on the media and commerce benefits. We are 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.
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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. Ultimately, it is our goal to develop this as an AI-based digital marketing platform where various subscription products and customers will be matched in an optimal manner.
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We will not only offer these products to our SK Telecom subscribers, but also address the entire Korean population. By expanding the scope of the subscription services, we are targeting 35 million subscribers by 2025 with a GMV size of KRW 8 trillion.
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The basic business model for subscription is revenue share.
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As for more details and strategies for our subscription service, we are going to arrange a separate press conference within August.
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I'm Hyung-il Ha, Corporate Center 2 Head, I'm going to address your question regarding the intensifying OTT market competition and differentiation strategies of Wavve.
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Wavve has been enjoying sustained subscriber growth trends thanks to the popularity of original content and terrestrial broadcasting content such as Taxi Driver and Penthouse Season 3.
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In May this year, Studio Wavve was established with producer Lee Chan-ho as Chief Content Officer and the head of Studio Wavve. By using the studio, we're going to expand original content investment and production. This will lead to a competitiveness of our platform.
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Currently, Studio Wavve is collaborating actively with various creators and producers, and in December this year, we're going to release Tracer with Im Si-wan and Son Hyun-joo as lead actors.
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Recently, Wavve signed a very large size content distribution agreement with HBO in an exclusive manner so that we can offer Game of Thrones and other HBO dramas and documentaries for the next one year. This is part of our efforts to increase our content competitiveness.
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In the second quarter, while Netflix was experiencing some slowdown, Wavve was able to perform very well based on the K-content competitiveness. At the end of June, Netflix monthly active user was 7.92 million, which was a 4% drop compared to March. Wavve's MAU has increased to 3.9 million, which is a 6% increase from March, making the highest level.
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Thank you.
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The next question will be provided by HJ Kim from Daishin Securities. Please go ahead.
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Thank you for this opportunity. I would like to ask two 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 upside 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. You mentioned that the range is going to be between 30% and 40%, and if the percentage is closer to 40%, it will be very well received by investors.
Moving on to the new company's dividends plan, you mentioned at the CEO seminar that there will be additional KRW 5 trillion 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? As for the second question, it is about the 11Street. In the new company, 11Street takes up a sizable share in the new company. I believe that the earnings of the 11Street will be quite important going forward. What is your earnings outlook for the 11Street? Any updates on your collaboration with Amazon and any visibility on the timing of the IPO?
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Mr. Kim, thank you very much for your questions.
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Let me first address your question regarding our dividends.
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Regarding the dividend policy for the surviving company, as you mentioned, there will be a link between the business performance and dividend size. As EBITDA continues to increase and CapEx becomes more efficient, as you pointed out, yes, there is upside potential for dividend payout going forward. As for your suggestion, we will do our best to maintain a balance between shareholder return and stable investment, and this will be discussed at the Board as well. Thank you.
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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. I'd like to ask for your understanding on this part. As was communicated previously, the new company will be an investment company, so we do not consider any regular dividend payments. However, if there's any good occasion such as an exit or value harvest, then we may consider other options such as special dividends.
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Moving on to your question regarding the IPO timing of 11Street. As you may understand, given the nature of e-commerce business, it is very crucial to maintain a balance between earnings performance and growth. For 11Street, 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 large-scale investments planned. These will lead to more differentiation, and this will once again provide a good basis for a successful IPO.
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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.
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