Earnings Call: Q1 2021

May 11, 2021

Quarterly report

Good afternoon. First of all, Thank you all for joining this conference call. And now we will begin the conference call by the fiscal year 2021 First Quarter Earnings Results by SK Telecom. This conference will start with a presentation followed by a divisional Q and A session. Now we shall commence the presentation by SK Telecom. 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 And Kyung Il Head of Corporate Center 2 followed by a Q and A session. Today, achievements and strategic plans for NNO will be provided by Poong Young Yoon, Head of Corporate Center 1 and Hyung Il 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 situations. Let me now present our CFO. Good afternoon. This is Poong Young Yoon, CFO of SK Telecom. First of all, let me express my appreciation to investors and analysts for their continued support. On April 14, SK Telecom announced that it was reviewing a plan for a spin off, which would result in a telecom company and a holding company with semiconductor and new ICT assets. We plan to use the spin off to increase shareholder value and create the most optimal structures for telecom business and new ICT businesses respectively, thereby accelerating their growth. To fulfill the purpose of the spin off, we completed the cancellation of treasury shares worth KRW2.6 trillion in market value, which account for 10.8% of the total issued stocks. The planned spin off was designed to prioritize shareholder value and we believe that we have gained a good understanding of the investors in the market. We will carry out the plan with a strong conviction and make sure that all the necessary decisions are finalized within the first half of the year. Now let me discuss the consolidated earnings highlights for Q1 of 2021. Consolidated revenue for Q1 of 2021 recorded KRW4,780,500,000,000. All business divisions enjoyed growth year on year And Media and Safety and Care posted a double digit growth, marking a 7.4% year on year increase. But the figure declined 1.2% Q on Q due to the base effect of higher seasonal sales in Q4. Consolidated operating increased by 29% year on year and 17.4% Q on Q to post KRW388.8 billion. MNO and Media led the operating income improvement by achieving both revenue growth and cost efficiency. SNC and Commerce also contributed to earnings with their Y o Y growth in operating income. Net income recorded KRW 572,000,000,000 posting an 86.9 growth year on year and a 54.2% growth Q on Q, thanks to equity method income on SK Hynix and sales profit of SK Wyverns. Let me now discuss major achievements and strategic direction for each Non consolidated MNO revenue for Q1 increased by 1.9% year on year and 1.4% Q1Q to post KRW298.7 billion. Celebrating the 2nd anniversary of 5 gs on April 3, we saw the number of 5 gs subscribers reach 6,740,000 as of the end of Q1 and record the biggest quarterly net adds, thereby leading MNO revenue growth. MNO operating income posted KRW307.3 billion, a 19% growth year on year and a 33.1% growth Q on Q as the market stabilization trend continued. Recently, we introduced 5 new 5 gs price plans to strengthen the 5 gs price options. They include 3 online only on tech plans that offer more benefits at lower prices and 2 additional 5 gsx plans at 69,011,79,001. We will continue to promote the transition to 5 gs services based on a variety of price plans that cater to diverse Subscription services newly pursued by MNO division are expanding partnerships and launching diverse subscription services for daily lives, including In the second half of the year, we plan to introduce an integrated subscription services Based on a new subscription marketing platform, where customers can enjoy optimal subscription life at reasonable prices, We're developing flagship products that will raise customers' expectations for subscription services. We will do our best to ensure high quality of these services. Moving on to Media, SK Broadband's consolidated revenue recorded KRW 967,000,000,000. With the t broad merger and IPTV subscriber growth, it rose by 17.6% year on year, but declined by 4.1% Q on Q due to the base effect of seasonal sales in Q4. Thanks to revenue growth and operational process improvements, Operating income increased by 98.8 percent year on year and 12.6 percent Q on Q to record KRW 75,400,000,000. As for Safety and Care business, with the merger of ADT Cabs and SK Infosec, we changed the name of the division from Security Division to Safety and Care Division to expand the scope of business. After the merger, the consolidated revenue including ADT caps recorded KRW350.5 billion. It increased by 20.3% year on year, thanks to the solid growth of new businesses such as home security, integrated security and cloud security, But it declined 5.5% Q on Q due to the characteristic of Safety and Care business in which revenue tends to peak into Q4. The new businesses enjoyed both top line growth and bottom line improvement, resulting in the quarterly operating income of KRW 27,800,000,000, a 9.4% year on year and 14.9% Q on Q increase. Commerce revenue posted KRW203.7 billion. It increased by 7% year on year based on the continued contactless consumption trend, but decreased by 9.3% Q on Q due to concentrated promotions in Q4 including the 11th day event. Marketing expenses for 11th Street and SK Store increased in Q1, but operating income maintained the BEP level, thanks to volume growth. Next, Kyung Il Head of Corporate Center 2 will discuss the achievements and strategic direction for the new ITT 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. The number of pay TV subscribers of SK Broadband stands at 8,690,000 as of the end of Established by SK Broadband in January as a multiple program provider, Media S. Began regular broadcasting in April. In partnerships with Kakao Entertainment and SMC and C, 70% of the programs are exclusive content unavailable on other TV channels. As key broadband will strengthen the value chain in the media business that encompasses content, channels and platforms. Wave will further enhance competitiveness of original content such as Taxi Driver that is enjoying high viewer rating. We recently hired Chief Producer, Chan Ho Lee, well known for dramas such as Signal and Stranger as Chief Content Officer And we're in the process of establishing a content planning studio. Next is the Security division, which is renamed as Safety and Care Division. Launched in March, the emerged entity of ADT KABS and SK Infosec SEC will leap forward as Korea's number one integrated security company. In addition to achieving growth in the existing security domains, We will expand technology based business models in new security domains such as securities for home, unmanned stores and cloud. ADT Capital recently signed an agreement to cooperate with AWS For cloud security business, by combining ADT's cloud security services with AWS solutions, We will promote business together to gain market share in the financial and public sectors where there is high demand for transition to cloud. Also, we are in the process of selecting a lead underwriter for IPO of ADT caps and we will do our best to prepare for the IPO. Next is Commerce Business. Despite intensifying market competition, Commerce achieved growth in both revenue and profitability year on year. 11th Street started order today delivered tomorrow service through fulfillment service together with Korea Post. It is also selling popular products including daily necessities in partnerships with major domestic and global brands such as Amore and P&G Korea. In collaboration with Amazon, we are making preparations to allow customers to buy Amazon products on the 11th Street. We plan to announce more details as soon as the service is ready to be launched. In addition to investment from Uber, TMAM Mobility has received KRW 400,000,000,000 of investments from financial investors based on a valuation of KRW 1,400,000,000,000. And provide drivers with more revenue. Finally, let me move on to 1 store, which is preparing for an IPO. With continued GMV growth for 11 consecutive quarters, one store received investments from KT and LG U plus thereby solidifying its position as Korea's representative at market. We acquired Rock Media and established a content studio as a joint venture with ES24, all of which are our efforts to secure K content IPs and develop them in a variety of formats. I will now hand it back to the CFO. Thank you. Thank you, Mr. For your presentation. Dear investors and analysts, we are pleased to have delivered earnings that exceeded the market consensus in this quarter. We announced the spin off plan and canceled treasury shares to enhance shareholder value. We also demonstrated that the fundamentals in all our businesses have been strengthened. I understand that many people want to know more about our dividend policy. After final decisions concerning the spin off are made at the Board in the first half of the year, we will share with you more details including a decision on the quarterly dividend. We will continue to do our best for a successful spin off. Let me reassure you that all the decisions we make will be to maximize shareholder value. 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 Tae Won Oh from Korea Investment and Securities. Please go ahead. Thank you very much for this opportunity. I would like to ask 2 questions. The first question is regarding the spin off plan. Wave and Flow were not mentioned in your recent disclosure. So I'd like to learn how these businesses and subsidies Other subsidiaries will be divided between the surviving company and the spin off company after the spin off. The second question is related to your subscription service plan. You mentioned that in the second half of the year, you are going to launch an integrated subscription service. So can you provide us with some updates on your subscription service business plan? Mr. Oh, thank you very much for your questions. Let me first answer your question regarding where Wave and Flow will go after the spin off. After the spin off, the surviving company will Grow as an AI based infra company by combining the fixed and wireless telecommunication infrastructure and pursuing growth based on AI centered subscription marketing and data center business. And the spin off company will grow as an ITT investment company that is specialized in making aggressive investments in semiconductor, live platforms and global tech seeding, thereby making various investments that will drive value up. In your question, you asked about Wave and So they belong to media and content assets, thereby falling under the live platform area. So under the As for the specific business portfolios of the surviving company and the spin off company, These will be finalized at the Board within the first half of the year. Let me now address your question regarding the subscription services. We have been accumulating know how and expertise in the subscription market by utilizing our telecommunication services. We believe that MNO is very competitive in providing subscription services. In various areas such as telecommunications, media and e commerce, we have accumulated a large amount of data And we have the digital infrastructure that can cover product planning all the way to offering and we also have marketing competitiveness in both online and off line channels. Based on such expertise and capabilities, we believe that we can produce a sizable revenue not only based on SK Telecom customers but also 50,000,000 Korean Currently, we have been expanding the scope of subscription products to media, games, delivery and education. And We're now in the process of developing product curation and offering based on AI technology in order to offer optimal packages for our customers. Furthermore, we're going to transform the existing tea membership platform into a subscription marketing platform that is provided for entire population in Korea in the second half of the year. The subscription market in Korea was KRW 49,000,000,000,000 in size last year And it is expected to grow to KRW 100,000,000,000,000 of market by 2025. Our target for the subscription products and services is Having the number of subscribers reach 35,000,000 by 2025 and achieve The revenue size of KRW1.5 trillion by 2025 by expanding partnerships and business models. I believe that we can take 20% of the market share of the subscription market that we can address. Thank you. The next question will be provided by Mina Choi from Samsung Securities. Please go ahead. Thank you very much for this opportunity. I would like to ask 2 questions. The first question is, in April, you made a disclosure that you will carry out the spin off. And you mentioned that decisions related to the spin off will be made in the first half of this year. Can you share with us the upcoming schedule regarding the spin off? The second question is related to the Tmab mobility. Recently, you received financial investments and I believe that Tmab mobility will start to accelerate its growth trajectory. So what is the current status of Tmaint Mobility? And as for UTTI, which was launched in collaboration With Uber, can you provide us with some specific growth strategies on this recently launched business? Thank you very much for these questions. I'm going to answer your question regarding the schedule for the spin off and Hyung Il will answer questions related to the T Mobile. Currently, we are reviewing the overall process regarding the spin off and we aim to table the spin off plan to the Board of Directors within the first half of the year. In consideration of the Board resolution process and the overall process for the spin off and relisting, we believe that the relisting can be completed within November after the general shareholders I am Hyung Il Head of Corporate Center 2. I'd like to address your question related to the of business of Tmab Mobility after the speed off. After officially launched in December last year, TMAP Mobility is carrying out business in the 4 key areas, including form, TMAP Auto, Mobility on Demand and Mobility as a Service. In the Q1 of the year, we built the foundation for Tmab mobility by receiving KRW400 1,000,000,000 of financial investments from financial investors and we have launched OOTI in collaboration with Uber in order to offer differentiated services centered around taxis. In the Q2, we plan to introduce a completely new type of subscription membership services in the business area of TMET Live platform and we also plan to launch a driver on demand service as a pilot for B2C customers. These new services on the 4 core business areas will be launched as scheduled, which are expected to provide differentiated customer experience. Now I'd like to discuss the future strategy and the upcoming schedules for UTI. On April 1, WuT was officially launched based on the joint investment of Uber and Tmaint Mobility. In the second half of the year, WuT plans to launch a new service by combining Uber Taxi and T Map Taxi. Initially, services will center around contracted taxi drivers and premium taxi services. But going forward, we plan to offer Various mobile services and additional value added services based on the taxi platform. As a result, customers will be able to have More options in terms of taxi rides depending on the brands, price plans and services. And at the same time, taxi drivers will benefit from these new services by increasing their sales through differentiated services and by reducing the time to drive around to spot customers. We're not really able to give you any more details today, but we will be The next question will be provided by Hoi Jae Kim from Taishan Securities. Please go ahead. Thank you for this opportunity. I would like to ask 2 questions. The first question is related to your dividend Policy, you mentioned that even though you start the quarterly dividend payout, the total amount of dividend payout will not go down. I'd like to know from when your quarterly dividend payout would begin and what is the overall dividend payout policy for the 2 companies after the spin off? The second question is related to the related to your investment plan and business plan for Wave. You mentioned that by 2020 You are going to receive KRW1 1,000,000,000,000 of investment and you have various plans for Wave. But this is quite different from what you mentioned previously When you're communicating with us regarding Wave plan by 2023, so the amount of investment and the amount of revenue seems to have declined slightly When you are adjusting your target for 2025, so can you provide us with some color on what is your overall investment plan for Wave, Which you mentioned is going to be around KRW 1,000,000,000,000. And what is your revenue plan and schedule for Wave going forward? Thank you very much for your questions. I'm going to address your question regarding the dividend policy and Mr. From Corporate Center Even after the spin off, we will continue to maintain the shareholder friendly management principle. We will make sure that Regardless of the spin off, the surviving company's level of dividend payout will be at least similar to that of last year. As Korea's number 1 fixed end wireless telecommunications company, as the rollout of 5 gs is accelerating, We believe that our operating income and the cash flow will be sustained going forward. As such, we will make sure that we have the Shareholder return policy so that earnings growth will lead to increased shareholder returns including dividend payout. At the Annual General Shareholders Meeting, we created a basis for quarterly dividend payout. And after discussions at the Board of Directors, we will carry out this new dividend policy plan so that we can start paying out the quarterly dividend by starting from the end of second quarter. The timing for the quarterly payout for the Q1 has already passed, but this portion will be combined for the 4th quarter Dividend payout so that we can maintain the level of dividend payout to our shoulders to be at least same or similar to that of last year. As for the spin off company, which will become a specialized investment company, we will make sure that their growth potential of the investment portfolio will be recognized. And by actively attracting investment and pursuing IPOs, we'll make sure that the As for the dividend policy of the new company, after the spin off is finalized and after the Board of Directors is composed, we will be able to communicate to the market more details later. I am Hyung Il Head of Corporate Center 2, let me first comment on the subscriber target and the revenue targets of Wave for 2023. As we increase the original content lineup and the popularity of Penthouse Season 2 And as a result of the successful advertising with IU that began at the end of last year, Weibo was able to enjoy the growth in its pay TV Paid subscribers by reaching 2,000,000 within last year and this subscriber growth trend is continuing. As we continue to differentiate Wave services based on content from terrestrial broadcasting stations and original content, We believe that we can achieve the initial target of having 5,000,000 paid subscribers and the revenue of KRW 500,000,000,000 by 2023, and we believe that we can achieve this earlier than the original target. Let me now comment on the ways we want to In March, Wave made an announcement of making an investment in original content, which is worth KRW 1,000,000,000,000, which will be done by 2025. The financial sources for these investments will come from a variety of sources, including the rights offering of KRW 100,000,000,000 of as well as external investments and reinvestment of profit from content business. As for raising external investments, we already received KRW200 1,000,000,000 of financial investments in 2019 and we're now in the process of preparing for the 2nd round of funding. As for this second round, as soon as details are prepared, we're going to communicate them with the market. Thank you. The next question will be provided by Sean Lee from Citigroup. Please go ahead. Thank you for this opportunity. I would like to ask Two questions. The first question is related to your security business. The ADT caps and SK Infosat were merged in the Q1. So what's the current status and the operation of this merged entity? And what kinds of synergy are you expecting from this merger? The second question is related to your MNO business. What is your 5 gs subscriber target by the end of this year? I understand that your initial target by the end of this year was 9,000,000, but there was a very big net adds in the Q1. So I'm asking this question. Thank you very much for your questions. I will address your question related to the 5 gs subscriber growth trend and Mr. From Corporate Center 2 will answer your question related to the security business. As we have made continued efforts to offer new 5 gs products and improve the service quality of 5 gs services And as we were improving the 5 gs ecosystem with new flagship handset launches, we were able to achieve the 5 gs subscriber number to 6 At the beginning of the year, we mentioned that our 5 subscriber target for this year was 9,000,000, but considering the current trend, we think that we can achieve even 10,000,000. The new tariff schemes for 5 gs and on tech Price plans that SK Telecom has recently offered to satisfy various customer needs are expected to provide customers with more choices and reasonable Regarding the synergy of ADT caps and SK Infosec. We successfully completed the process of merging ADT Caps and In fact, in March, as a result, we have the merged ADT caps with the revenue size of KRW 1,300,000,000,000 and EBITDA of KRW of KRW357 1,000,000,000. Now various activities are underway in earnest in order to maximize synergy from these two entities based on our infrastructure For security and various capabilities, we expect the annual revenue for 21,000,000,000 to be KRW 1,600,000,000,000. In addition, in order to become a global cloud security provider, we have signed an agreement to Pursue strategic cooperation with Amazon AWS in April. I can discuss the effect of synergy from the customer perspective and product perspective. First of all, customer perspective SK Infoset has a large volume of B2D customers including large enterprises And ADT Caps has B2C customers including small and medium enterprises and single businesses. And by combining these different customer segments, we can create cross selling opportunities. From the product perspective, we are expected to provide customized one stop services that combine Physical security, information security and building management as combined solutions. For instance, if when there is a cyber intrusion or detection of malicious codes, we can do video analysis by utilizing Form data and by leveraging on our access control system, we can detect any intruders to buildings and assets. And such flexible response will become more possible. Thank you. The next question will be provided by Neil Anderson from HSBC. Please go ahead. Thank you very much and good afternoon. Just have one question, please, and it relates to the Media business and the sequential improvement in operating margin in the Q1. So for the 3 quarters last year, it was around 6.7% and it's increased to 7.8% in the Q1. So my question is how sustainable is that? And what are your margin targets for this year? Thank you. Neil Anderson, thank you very much for your question. We believe that there are various factors that have contributed to improvement in the operating margin of SK Broadband. So these various factors include the effect of the t broad merger. That's the first factor. The second factor is the subscriber base and increase in the commissions income from home shopping broadcasting. The third factor is the continued increase in the IPTV subscriber base and the final factor would be effective CapEx implementation and cost efficiency. Going forward, we will continue to make efforts to increase the subscriber base and carry out our business in a more efficient manner so that we can maintain and increase Profitability of the Media Business. The next question will be provided by Stanley Yang from JPMorgan. Please go ahead. Thank you for this opportunity to ask Questions. The first question is related to your dividend policy. You mentioned that detailed decisions regarding the payout of the dividend policy for the spin off company will be made Soon, but can I safely assume that given the MNO dividend payout level of 1 level of KRW10,000 per share And in assuming that there will be dividend payout from the new spin off company, can we anticipate that the total amount of Dividend payout from SK Telecom will increase going forward? The second question is related to your subscription business model. There are high expectations for subscription services and I'd like to know if your subscription model will be to push Several subscription models and services separately or to follow the model of Amazon where you have one single subscription platform where multiple services are provided. And if you continue to launch these new subscription services, are they going Thank you very much for your questions. I'm going to respond to your question on the dividend policy and Han Myung Jin, Head As for the first question on our dividend policy, your understanding is correct. The dividend payout From the MNO business as part of the surviving company will be similar or more than the previous level of dividend payout. And on top of that, we have not yet decided on the dividend policy of the spin off company. But if they start to pay out dividend, it's going to be a plus alpha. As I mentioned earlier, when the Board of Directors is composed for the spin off company and when discussions on the dividend policy are made, we're going to communicate I am Han Myung Jin. I'm the Head of the Subscription Business. And let me address your second question. As you may understand, we have many family businesses under the ICT umbrella and there are many different services and products that we're preparing They will help enhance the likelihood of customers. Basically, I can say that our model will be similar to Amazon Prime, where there will be an integrated subscription paradigm. In addition to that, we are planning to offer additional services and products for subscription. So we're planning to charge a monthly subscription fee for the subscription customers. As for your question regarding the connection with MNO services, we are currently planning this subscription platform to reach out to 50,000,000 Korean population. We're currently not considering any linkage between the subscription services and the MNO fees. Thank you. We would now like to close our conference call for the Q1 of 2021. Thank you.