Earnings Call: Q3 2020

Nov 5, 2020

Quarterly report

Good afternoon. I am Song Hwan Choi, the IRO of 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 1 and Hyung Il Head of Corporate Center 2, followed by a Q and A session. Today, the achievements and strategic plans for MNO will be provided by Poong Young Yoon, Head of Corporate Center 1 and Hyung In Head of Corporate Center 2 will discuss that of the new ICT Business Division. Today's conference call will provide consecutive interpretation, and we also have here with us executives from relevant business divisions to help deepen your understanding. Before we begin, we want to remind you that all forward looking statements are subject to change depending on the macroeconomic and market situation. Let me now present our CFO. Good afternoon. This is Poong Young Yoon, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights for Q3 of 2020. Consolidated revenue for Q3 2020 recorded KRW4,730,800,000,000. Continuing on from last quarter, all business divisions achieved even growth with media, security and commerce recording 2 digit growth in particular leading to a 3.7% year on year and 2.8% quarter on quarter increase. 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 1,000,000,000 for the first time. Net income recorded KRW395.7 billion. It increased by 44.2 percent year on year due to equity method income on SK Hynix and decreased by 8.4% quarter on quarter. Let me now discuss major achievements and Non consolidated MNO revenue for Q3 recorded KRW 2,940,600,000,000. While 2 gs shutdown had a negative impact on the revenue, continued 5 gs subscriber growth led to a 1.0% increase year on year. MNO operating income recorded KRW 264,100,000,000. It rose by 4.5% year on year, thanks to revenue growth and market stabilization, leading to a year on year operating income increase. Our 5 gs subscriber count for Q3 was increased by 920,000 recording 4,260,000 as of the end September. Increased coverage, stronger non face to face channels and various 5 gs experiences have led to accelerated quarterly Meanwhile, during this quarter, we shut down our 2 gs service nationwide, which we have provided for the past 25 years. We are providing support for former 2 gs subscribers to assist their migration process, and we will ensure that the 2 gs shutdown will make way for a virtuous cycle that leads to improved services, including a more advanced 5 gs service. As such, we will continue to maintain the current stable market trend as well as aim to increase the 5 gs subscriber base with a more enhanced service quality as we continue to strengthen the 5 gs network quality and launch more specialized products. This past September, we launched a new 5 gs subscription service called V Coloring. The nation's first short form video based ring back tone service saw 400,000 subscribers within just 1 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, B2G services in the future, and we will grow it into one of the company's key subscription services along with the music platform Flow and video platform WAV. In Media Business, SK Broadband's consolidated revenue recorded KRW 966,800,000,000 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. Security business recorded KRW353,300,000,000 in revenue. With the growing new security service and higher convergence security solution sales, it increased by 15.5% year on year and 9.4% quarter on quarter. Operating income recorded KRW 40,100,000,000. Increased costs related to responding to the re spreading of COVID-nineteen and costs related to expanding new businesses brought the number down by 3.1% year on year, but it increased by 9.6% quarter on quarter, thanks to the revenue growth. Commerce revenue recorded KRW 206 600,000,000 with GMV continuing its growth trend, it rose by 18.7% year on year and 7.3% quarter on quarter. Operating income recorded KRW 6,100,000,000 with 11th Street seeing an improved operating income and that of SK Stoa continuing to grow, total operating income for the Commerce business achieved a 4 fold growth on a year over year basis and a 3 fold growth quarter on quarter. Now the Head of Corporate Center 2, Mr. Will walk you through the achievements and plans for the new ICT businesses. Good afternoon, I am Hyung Il Head of Corporate Center Q3 of 2020 was a meaningful period for new ICT businesses. Our new ICT businesses have surpassed the $100,000,000,000 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. Allow me to discuss the achievements and strategies for the new ICT business division. First, the media business. SK Broadband's 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, the highest in 4 years, allowing SK Broadband to acquire over 8,500,000 paying subscribers. Monthly active users for Wave in August exceeded 3,880,000, the highest we've seen this year. With over 2,000,000 paying subscribers and successful original content including drama series and entertainment shows starring K Pop Idols, its growth momentum is becoming stronger once again. I will now move on to the security business. Despite constraints due to the re spreading of COVID-nineteen, ADT cap's 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 demands such as CAPS SmartCheck, KAPS CleanCare and KAPS Smart Walk in, ADT KAPS is introducing new services in a timely manner, thereby expanding its business spectrum. With 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 2 digit revenue growth and the highest ever quarterly revenue. Despite the challenging environment due to COVID-nineteen, the security business will achieve the annual revenue target of KRW1.3 trillion, led by aggressive new business development efforts and generate a stable income going forward. Moving on to Commerce Business. Despite intensified competition, 11th Street and SK Stoa exceeded KRW 200,000,000,000 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. 11th Street will continue to execute strategies that take both growth and profit into consideration and the goal of achieving annual GMV growth and reaching BEP levels still stand. SK Stoa is smooth sailing to become the leader in the t commerce industry. And lastly, I will discuss the achievements of our at market subsidiary, 1 Store and the spin off of our mobility business division. One store recorded continued growth for 9 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. Recently through a split off of our mobility business division, we are on our way to establish a new mobility company and have been recognized as a 1,000,000,000,000,000 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. We ask for your continued interest and support for our mobility business, which will grow into SK Telecom's 5th business arm with TMAP, the nation's number one mobility platform and Uber's taxi e hailing expertise combined. We will continue to present you with greater achievements in the new ICT area in the future. I will now hand it back to the CFO. Thank you. During the conference call 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 IPO beginning with one store over the past 10 months. We are buying back our own shares, currently undervalued shares and establishing a new mobility company to further enhance our enterprise value. 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 KRW 100,000,000,000 in operating income. Based on even stronger earnings going forward, we will meet our goals for this year 1 by 1 and achieve the enterprise value growth in full force beginning from next year. We ask for the continued support and encouragement The first question will be provided by Yee Suna from Hana Investment and Securities. Mr. Li, please go ahead. Thank you for the opportunity. I have two questions. My first question is, recently your competitor has launched a lower end 5 gs price plan. Does SK Telecom have any plans for a low end 5 gs price plan? And also what kind of effect would that have on the your 5 gs ARPU as well as the revenue? My second question is regarding the OTT service. So with the spin off of TVing by CJ ENM, we do expect a very overheated 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 waived 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. Thank you for your questions. I will be taking the first one and then Mr. Will answer your second question. Currently at SK Telecom, we are taking into consideration the overall competitive environment as well as the subscriber growth trend. And we are reviewing reorganizing our 5 gs price plans to one that is more customer oriented and friendly. And so we expect these to launch either at the end of this year or early next year. And when these new price plans are launched, we expect the 5 gs subscriber base growth rate to become even faster. And while the acquisition ARPU may be slightly lower due to a more invigorated 5 gs subscriber base growth, we believe that it will have a positive impact on the MNO revenue increase. I will now move on to answer the question regarding our strategies for Wave. In Q3, WAVE actually recorded its highest ever this year number of users in August 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. And we're also continuing to see growing number of paying subscribers and this number surpassed the 2,000,000 mark in Q3. And as we have announced in the past, we still stand by our goal of 5,000,000 paying subscribers by the year 2023 as well as a revenue target of KRW 500,000,000,000. And going forward, WAVE 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 A Story, a very capable content production company who has proven its capabilities recently in the global market. With A Story, we will be jointly investing in drama series as well as collaborate on our sales in the domestic and also overseas market. We believe that the higher or more active competition in the OTT market is a natural phenomenon in the process of the market expanding. Wave 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 ways to contribute to the K content ecosystem. The next question will be presented by Kim Joon so from KB Securities. Mr. Kim, please go ahead. I have two questions regarding your new businesses, namely 1 Store and TMAT Mobility. So my first question is, recently you finished the selection process of your IPO book runners for 1 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 TMAT 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? Thank you, first of all, for your questions. I will be taking your first question regarding 1 store. And then as for your second question, I will hand that over to Mr. Lee Jong Ho, Head of Mobility Business Division. One store selected its IPO book runner this past September. Beginning with the due diligence process of 41 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 twenty twenty one, we are planning to list the company during the back half of twenty twenty one. Going forward, as we look and closely follow the overall environment as well as the performances of our subsidiaries, we plan to have ADT companies like ADT Caps, Wave, 11 Street, Escape Broadband and in the mid to longer term TMAT Mobility, we planned to we are planning for the IPO of these subsidiaries so that they are rightly valued in the market. And once these plans for IPO are made complete, we will be sure to communicate them with the market. 19 and it has been valued at KRW 500,000,000,000 and since then its growth rate has only been accelerated. 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 Q3 this year, revenue grew by 27% year on year. And we are looking forward to welcoming quite powerful game titles in the future, which will only lead to an accelerated growth in 2021. And based on such growth momentum, we are expecting 1 store to be valued at a much higher price than at the time of funding in 2019. 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. Hello, I am Lee Jong Ho, Head of Mobility Business Division as was introduced. I would have to say that the competitive edge that TMAP mobility would have compared to its competitors is the user base that TMAP 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. Despite COVID-nineteen, tmAb saw 4,540,000 daily users as of the end of October, as well as 13,230,000 monthly users in October, which was the highest ever. And this number represents 56% of all registered card in the nation as well as 74% of all navigation users. And through TMAT based data analysis, we give scores for driving patterns of our users, which leads to a discount benefit for your car insurance premiums. And this is the type of business model that we already have. And on top of that, we have TNAV based ad businesses as well as map data businesses, which are our unique business models. And already names like BMW, Renault, Volvo, Jaguar, to them we are currently providing the TMAP based in vehicle infotainment in their auto OEMs. And we also have our Tmab auto business, which does the IBI business and that would be quite a competitive edge and upper hand compared to our competitors. That we provide through the mobility and telecommunication data as well as synergies that could arise from utilized SK Telecom's marketing channels, These are all part of the competitive upper hand that SK Telecom currently has. The next question will be presented by Kim Heze from Tieton Securities. Please go ahead, sir. I have two questions. The first one is regarding the spectrum allocation and it seems to me that it is quite there is quite a gap between what the government is proposing or going toward and what the operators want. And recently, we saw that you openly stated a statement made a statement that it would even be better just to go in the form of an auction. 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 5 gs iPhone, I would first like to hear about what this what kind of impact this would have on the 5 gs ecosystem as well as the some of the more detailed outlooks on what we can expect in terms of 5 gs in 2021 and onwards. I will be taking your first question regarding the spectrum allocation. Currently, in the process of regarding the pricing of the reallocation of spectrum, 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? The 3 operators believe that reflecting the past auction results as was is excessive compared to the current value of their respective spectrums, and we also believe that there haven't been any cases like that in the past nor does it have any legal ground. And so we expect for a reasonable result and reasonable pricing that takes into consideration the 5 gs current state. And next let me answer your question regarding the launch of the 5 gs iPhone. The launch of the 5 gs iPhone will not only contribute and have a positive impact on the MNO revenue growth through 5 gs migration for LTE iPhone subscribers, but we also believe that it will have a positive influence in invigorating the current 5 gs service. 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 in and of itself is very positive. And furthermore, globally, if we are able to see stronger sales of 5 gs iPhones and more people using them, that will lead to a wider variety of various applications that can be applied to 5 gs being launched, and it will lead to a virtuous cycle that a virtuous cycle of creating an ecosystem that has very powerful 5 gs specialized services. And let me now brief you on our outlook regarding the 5 gs subscriber count going forward. With growing 5 gs 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. As for the outlook by the end of this year, we still stand by our initial target of being between hitting between 5,000,000 to 6,000,000 at the end of this year. Continuing in 20 And as we also mentioned, if the more customer friendly 5 gs experience And as we also mentioned, if the more customer friendly 5 gs price plans are launched early next year, that will lead to a faster rate of 5 gs subscriber growth. And so we believe that the number of 5 gs subscribers by the end of the year 2021 will be around 9,000,000. The next question will be presented by Anjie Min from NH Investment Securities. Please go ahead. Thank you. I have one question. It's regarding your B2B business. So recently, including your competitors, obviously B2C is extremely important, but B2B is going to be very important, especially beginning in 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. Hello. I am Han Myung Jin, Head of the M&O Marketing Group. I will take the first part of your question and then hand the mic over to answer your second part of the question. Our B2B business has 2 axes. For the first part, it is the 5 gs connected cloud services and we are strengthening this area currently. We have already signed partnership and we are currently working together with Amazon Web Service and we've also invested. And based on these efforts, we are currently preparing for a 5 gs MEC based cloud service and we plan the commercial launch for this service by the year end. And as for the trial services, we have around 20 trial service areas, which include distribution and medical. Our second axis is the B2B solution part where we aim to provide our 5 gs based services that can improve the profitability of leaders of various industries. And an example of that is in hydro power, we have established the world's very first quantum applied solution. And also for companies like HIDIC, SK Hynix, Samsung Electronics and POSCO, we have already established and rolled out 5 gs networks for these companies and we also have new business models. And one of the most representative examples of our 5 gs B2B service would be the 5 gs X Smart Factory. And as for the second part of your question regarding IDC, I will take that question. SK Broadband has been very highly interested and also we have been putting in a lot of investments regarding IDC and we have plans to open IDCs, a very large scale IDCs in Ilsean and Ghasan area of Seoul in July of 2021. 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. 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. Thank you.