SK Telecom Co.,Ltd (NYSE:SKM) Q1 2024 Earnings Call Transcript

SK Telecom Co.,Ltd (NYSE:SKM) Q1 2024 Earnings Call Transcript May 8, 2024

SK Telecom Co.,Ltd isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Hee Jun Chung: Good afternoon. I am Hee Jun Chung, IRO of SK Telecom. Thank you for joining SK Telecom’s earnings conference call. Today, we will first deliver a presentation on major events, 2024 Q1 earnings highlights and business performances, which will be followed by the Q&A session. The call is attended by our executives from relevant business divisions, including Yang-Seob Kim, CFO of SK Telecom, and we are providing consecutive interpretation for the call. As you may know, I would like to remind you that all forward-looking statements are subject to change depending on various factors such as market and macro situations. Let me now present our CFO.

Yang-Seob Kim: Good afternoon. This is Yang-Seob Kim, CFO of SK Telecom. 2024 is a very meaningful year as it marks the 40th anniversary of SK Telecom. The 40-year history of SK Telecom indeed represents the history of ICT Korea. We have been leading the communications market with innovative services and unparalleled quality competitiveness. Now, SK Telecom is taking on a new challenge to become a global AI company. At MWC 2024 held in Barcelona in February, SK Telecom held an inaugural meeting of the Global Telco AI Alliance, or GTAA, and announced a plan to establish a joint venture for business cooperation, including joint development of telco specific large language model. Going forward, SK Telecom will invite leading telcos in respective regions to expand the GTAA and lead cooperation among diverse companies, thereby positioning itself as a global AI company.

Let me first report on the consolidated financial results for Q1 of 2024. Thanks to the stable growth of SK Telecom and SK Broadband, consolidated revenue posted KRW 4,474.6 billion, up 2.3% year-over-year. Operating income posted KRW 498.5 billion, a similar level year-over-year, thanks to the stabilization of marketing expenses and depreciation costs. Net income posted KRW 361.9 billion. On a non-consolidated basis, revenue posted KRW 3,188.7 billion, up 2.3% year-on-year. Operating income and net income reported KRW 436.4 billion and KRW 492.1 billion, respectively. Let me now turn to business highlights for the first quarter of 2024 and strategic directions in accordance with the AI Pyramid Strategy. First, I’d like to cover the AI Infrastructure domain, which serves as the foundation of the AI Pyramid.

Supported by the continued increase in utilization rates, data center revenue grew 26% year-on-year. At MWC in February, SK Telecom declared a full scale launch of AI data center business, which will be critical infrastructure in the AI domain. The company also announced plans for global business cooperation with Lambda, a cloud server provider powered by Nvidia’s latest GPUs. To be a global leader in the next generation AI data center market, SK Telecom is also planning to mobilize capabilities of SK Group. Specifically, we will cooperate with SK Enmove to speed up the commercialization of liquid immersion technology, capitalize on SK Hynix high bandwidth memory chips, and our subsidiary Sapeon’s AI chip capabilities for data centers, and utilize SK Broadband’s data center operational know-how.

As for LLM, we are pursuing the development and commercialization of telco-specific LLM together with the members of the GTAA, including Deutsche Telekom, e&, Singtel and SoftBank. The GTAA members have a total of 1.3 billion subscribers in 50 countries across the world, which enables them to collect multilingual telco-specific data on a scale larger than any big tech company could ever achieve. Through the GTAA, we will achieve economies of scale and strengthen negotiating power against large tech companies. The GTAA joint venture plans to develop a more advanced telco-specific LLM through training with multilingual telco data and provide locally tailored services. Next is the AIX domain. The MNO business recorded 15.93 million subscribers as of the end of March 2024, which accounts for 70% of the total subscriber base.

SK Broadband’s pay TV subscribers and broadband subscribers reached 9.59 million and 6.99 million, respectively, as of the end of March 2024. While the fixed and mobile industry is maturing, it is meaningful that our subscriber base continues to grow through new market development. We’re also striving to enhance OpEx and CapEx efficiency by actively applying AI technology to our fixed and mobile business. The enterprise business achieved an approximately 10% growth year-over-year. In particular, the cloud business revenue grew nearly 40% year-over-year, mainly thanks to recurring sales, thereby driving the entire enterprise revenue growth. The enterprise AI business, which includes big data, AICC and Vision AI, saw its revenue grow more than 10% year-over-year.

We will further promote the enterprise AI business as a key pillar of our B2B business by continuously developing innovative AI products such as the recently released TransTalker, an AI simultaneous interpretation solution. Next, AI services. The call recording and summary service and real-time call interpretation service of A., which were very popular among iPhone users, are available on Android handsets starting from April. Going forward, A. will continue to add killer services and evolve into a truly personal AI assistant. Our long-term goal is to secure new business models through successful development of global PAA together with the GTAA members. Ass for ifland, thanks to the stable trend of if home and the economic system launched last year, MAU recorded 2.46 million as of the end of March 2024, and the average duration per user on the platform increased to 90 minutes, indicating that ifland has become a meaningful and substantive platform for users.

T Universe achieved MAU of more than 2.6 million as of the end of the first quarter of 2024, driven by the popularity of the YouTube premium package. In the first half of the year, we plan to turn T Universe into a subscription market to expand partnerships and solidify its position as a leading subscription service in Korea. Finally, let me turn to shareholder returns. SK Telecom recently announced a medium-term shareholder return policy of returning to shareholders more than 50% of the adjusted net income on a consolidated basis. The decision is driven by our commitment to enhance shareholder returns in line with earnings improvement by leveraging resources, including subsidiary results on a consolidated basis and eliminating caps on shareholder returns.

The DPS for the first quarter was determined at KRW 831, the same as the first quarter of last year. As we mentioned at the shareholders’ meeting, SK Telecom will produce tangible results as an AI company. We will further solidify our strong fixed and mobile business foundation, improve the business fundamentals in terms of profitability and efficiency and produce concrete results by fully executing the AI Pyramid Strategy. We will continue on this journey to achieve our grand vision of becoming a global AI company. We ask for your continued support and encouragement. Thank you. We will now begin the Q&A session.

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Q&A Session

Operator: [Operator Instructions] The first question will be presented by Hoi Jae Kim from Daishin Securities.

Hoi Jae Kim: I am Kim Jae from Daishin Securities. I would first like to ask a question regarding your new shareholder return policy. You mentioned that you are planning to return to shareholders more than 50% of the net adjusted income on a consolidated basis. But when we take a look at the past dividend payout trend, the overall payout trend was — payout ratio was about 70% in real terms. And now you’re mentioning that it will be more than 50% of the adjusted net income. Does that mean that there is a likelihood for your dividend payments to decline going forward? And until recently, you mentioned about the specific amount of dividends that you’re planning to pay to shareholders. But this time, it was not included in your presentation.

So would it be appropriate for us to expect that this year’s dividend payout will be similar to that of last year? And I would also like to understand if you have any plans for share buyback and cancellation in the near future. Secondly, I would like to ask a question about your capital allocation plan. I can see that you need resources for shareholder returns, but at the same time you need resources for investments. And as you mentioned, you are going to pursue your AI strategy in full swing starting from this year, which means that you will have to make investments. While the MNO revenue trend is not very improving, I’d like to understand how you are planning to allocate your capital resources. And what is the size of AI investment that you’re expecting this year?

Yang-Seob Kim: I am CFO, Yang-Seob Kim of SK Telecom. Thank you for your questions. I would first like to comment on our new shareholder return policy. As you may know very well, for the past 3 years, our dividend policy was based on 30% to 40% of the EBITDA minus CapEx amount on a non-consolidated basis, and that was the basis for our shareholder return. And so far, we have received a lot of input from shareholders and investors and we’ve been trying to accommodate them as much as possible. We believe that this new shareholder return policy is quite differentiated from the previous ones in that, first of all, there is no limit or cap on resources available for shareholder returns and that it is on a consolidated basis so that we can share results of the subsidiaries with shareholders.

And you also asked a question regarding why we have set the baseline as 50% while we actually use more than 70% of the net income for dividends in the previous years. I’d like to comment on your point. The 50% is just the minimum baseline. As we are announcing the 3-year shareholder return policy 3 years is a rather long term in this regard. So we wanted to have some cushion against risks around future management environment. So I like to once again ask you to see that this does not mean that we will only return 50% of the net income, it is just the minimum level. We will do our best to elevate the baseline by continuing to improve our business fundamentals, and we will make sure that we can return more to the shareholders going forward. While the actual size of shareholder returns for each year will be determined through discussions at the Board, what I can say to the shareholders is that the level of dividends paid out to the shareholders will be similar to that of last year, and we will make sure to achieve that.

As for potential plans for share buyback and retirement, given the recent interest rate trends, we still believe that it is meaningful to buy back and retire shares when the stock price is undervalued. As for means of shareholder return, we will, of course, consider both cash dividends and share buyback. But our priority is to maintain a stable cash dividend trend, and we will continue to consider diverse factors such as valuation, financial structure, investment for growth and foreign investors stake in deciding whether to proceed with additional share buyback and cancellation in the future. Next, I’d like to comment on our cash — our capital allocation plans. While there have been some fluctuations, consolidated EBITDA of SK Telecom is around KRW 5 trillion to KRW 5.5 trillion and we spend about KRW 3 trillion of CapEx and KRW 1 trillion to KRW 1.5 trillion of recurring expenses, including frequencies and interest payments.

Then we have about KRW 1 trillion of free cash flow. While you may think that KRW 1 trillion of cash — free cash flow is a large amount, but considering about KRW 700 billion of cash dividends each year, it’s true that we do not have much room to maneuver around investments for growth and loan management. While we have maintained a relatively high level of shareholder returns, corporate value is not just determined by the size of shareholder returns, but I’m sure that investors understand that we need further growth to be able to enhance our corporate value. Of course, as we are currently positioned as a telecom stock, we fully understand that dividend is what supports our valuation in the market. But it is important to achieve balance between investment for growth and shareholder returns for the purpose of valuation enhancement.

So in order to secure resources for future investments, including investments for AI to drive growth, we will do our best to create additional resources in all domains, including profitability improvement through cost control, securitization of certain assets and investment efficiency enhancements. Thank you.

Operator: The next question will be presented by Sun Jung Lee from Bank of America.

Sun Jung Lee : I’m Lee Sun Jung from Bank of Korea. As you mentioned in your previous answers, you’re going to continue to try to expand resources available for shareholder return. So in this regard, I’d like to get more details on your business plans. In particular, the telco revenue and the growth momentum is slowing down. So what are your key priorities for this year for your MNO business as well as strategies? And secondly, starting from last year, you have been pursuing and implementing the AI Pyramid Strategy and you’re promoting your AI businesses. So I’d like to get a better understanding of the achievements so far and future plans. Please also share with us your plans for investment so that we can understand how much resources will be available for shareholder returns.

Yang-Seob Kim: Thank you for your questions. As for the first question, the Head of the Integrated Marketing Strategy Office will comment on the key priorities and strategies for the MNO business. And then the Head of the Corporate Strategy Office will comment on the major achievements and plans for the AI Pyramid Strategy.

Kim Ji-hyeong: I am Kim Ji-hyeong, Head of the Integrated Marketing Strategy Office. I believe you asked this question because the MNO growth trend centered on 5G subscriber net adds is likely to slow down with the 5G penetration rate being nearly 70%. So going forward, the key to our MNO business will be to grow the top line through pricing and differentiated and competitive services as well as enhancing the operational efficiency through AI technology. So more specifically, we announced new price plans at the end of March, including a KRW 30,000 range 5G plan and an additional segment pricing plan for the youth. And it is intended to offer more customer benefits and options in order to retain customers who are sensitive to price.

And in consideration of the popularity of OTT services in Korea, we offer our 5G customers discounts for OTT subscriptions and we also launched a new premium price plan, and these are part of our effort to continue to create demand based on customers’ needs. Also, we restructured roaming plans into borrow pricing scheme to respond to increasing travel needs after the pandemic, and this has resulted in the increasing roaming revenue. And it is an example of how we continue to develop new revenue streams. And in terms of market operation, we use AI technology to recommend products and services tailored for customers and conduct more efficient marketing by utilizing online channels for customer acquisition. And finally, we are also planning to utilize AI contact centers to enhance customer experience and improve cost efficiency in an effort to further improve the MNO profitability and productivity.

Thank you.

Choi Hwan-seok: Hello. I am Choi Hwan-seok, Head of the Corporate Strategy Office. I’d like to address your question on the AI Pyramid Strategy’s major achievements and future plans. As the CFO mentioned during his presentation, the Global Telco AI Alliance, or GTAA, was officially launched in February to expand SK Telecom’s AI Pyramid Strategy globally. And the founding members of the Global Telco AI Alliance are Deutsche Telekom in Europe, e& in the Middle East, Singtel in Southeast Asia and SoftBank in Japan, as well as SK Telecom. So when combined, we have access to 1.3 billion subscribers in 50 countries. In addition to these 5 founding members, we have been receiving a lot of interest and attention from various telecom companies around the world.

So we are in the process of expanding the membership of the alliance, and we will achieve economies of scale and global coverage by utilizing global telco’s customers, technology and service capabilities. So when we apply what I just mentioned to the AI Pyramid Strategy, the first layer is the AI infrastructure domain. And there, we plan to develop telco-specific LLM based on multinational customers and data and offer it to our member companies. And we believe that this will help build a common platform for telcos and strengthen our negotiating power against big tech companies. In addition, AI DC and AI semiconductors are part of the AI infrastructure domain and we have been accumulating related capabilities. We will not only utilize these capabilities internally, but also offer them to the members of the GTAA so that we can expand our business globally.

And the second layer of the AI Pyramid Strategy is the AIX, which involves transforming TBE or MNO media and enterprise businesses using AI. As was mentioned previously, we are planning to use AI for customer contact and marketing activities. And furthermore, we will share these use cases of telco-specific use cases of AI with members of the GTAA and expand them globally to build global references for telco AIX. And finally, the top layer of the AI Pyramid Strategy is about developing global PAA. It refers to services provided by the GTAA on the common telecom platform that we will build for the first layer. And the PAA service of A. will be expanded globally, and each telco will be able to localize PAA for their local users and present new customer experiences.

You also asked a question about the plans for AI investments. As was the case of our investment in Anthropic last year, when we see opportunities that are very much in line with our AI strategy and where we can create synergies, we will make reasonable and various types of investments for AI. As for specifics on what companies or how much investment or when, we have not yet finalized on these details. But we are going to continue to approach them from an enterprise or a company-wide perspective. And we will be prudent and careful in making decisions regarding these investments in consideration of credibility and the size of resources available. Thank you.

Operator: The next question will be presented by Eun Jung Shin from DB Financial Investment.

Eun Jung Shin: I would like to ask two questions. When I look at the IR material, I can see that among your MNO services, your roaming usage is constantly on the rise. So if there are any specific statistics that you can share with us regarding roaming, I would appreciate that. I would also like to understand your outlook on your roaming business. The second question has to do with your growing enterprise business. What was the actual result for the first quarter? And what is your annual or full year outlook on your enterprise business?

Yang-Seob Kim: Thank you for your questions. I would like to address your question on our roaming business and then the Head of the Enterprise Business Strategy Office will address your second question on the enterprise business. So now I’d like to comment on the actual results of the roaming service and outlook. In 2023, the outbound travel was only about 70% of the level of 2019. However, the roaming usage increased by 1.5x. We believe that this roaming usage increase was mainly thanks to the expansion of the customers, thanks to marketing campaigns to reduce the financial burdens for customers, including 50% off promotion for the first time roaming users and 50% off for the youth and more data provision for the same price plans as well as differentiated services, such as the borrow call plan that more than 75% of the roaming price plan customers are using.

The outlook for roaming business is pretty bright because 2024 is expected to be the first year since the pandemic when outbound travel will reach the 2019 level. Thanks to the family roaming and 50% off promotion for December, the number of roaming users in the first quarter grew 1.6x year-over-year and compared to the first quarter of 2019. So this year, roaming usage growth is expected to be driven by the family roaming service utilized by more than 70% of households that use roaming, as well as increased roaming usage by Youth 0 plan subscribers that enjoy 50% off for roaming at all times. In particular, the family roaming subscribers are constantly on the rise from 280,000 in the first quarter of 2023 to the — in the fourth quarter of 2023 to 410,000 in the first quarter of 2024, so up 46% Q-on-Q and with a high level of customer satisfaction, the semi roaming service has become a major SK Telecom roaming product with a cumulative number of users standing at 970,000 since it was launched in June 2023.

And so going forward, we are planning to offer promotions for first-time users to experience roaming service without much burden and launch differentiated roaming products in order to continue to attract new customers. Thank you.

Unidentified Company Representative: I am [Bae Jae-joon], Head of the Enterprise Business Strategy Office. I’d like to address your question on our enterprise business. In the first quarter, enterprise revenue posted KRW 415.4 billion, up 9% year-over-year, thanks to the increase in data center utilization rates and cloud contracts. The data center business continues to grow on a quarter-over-quarter basis on the back of increased utilization of new data centers. So the annual data center revenue for 2024 is expected to record a similar growth rate as last year. And we are also in the process of establishing new data centers in the Seoul metropolitan area to become Korea’s #1 data center provider by doubling our capacity to more than 200 megawatts by 2030.

And the cloud business will focus on growing multi-cloud business and expanding AI cloud business based on higher demand for AI cloud brought on by the popularity of ChatGPT. And for MSP, we will continue to support our transition to multi-cloud, and we will utilize our own cost optimization technology to gain contracts from big accounts to achieve meaningful scale up. The enterprise AI business growth has been driven by the increased contracts for AICC, which is a transition from the traditional IPCC. And we are also trying to respond preemptively to the upcoming trend where AI is utilized for B2B market. So we recently launched new products, including TransTalker, an AI simultaneous interpretation solution that supports 13 languages, SK Telecom AI CCaaS, a subscription-based AI contact center service and AI Copywriter that can generate advertising copies.

So we are planning to continue to identify new opportunities and capture them and scale up our business by actively targeting expected AI demands in the B2B market.

Hee Jun Chung: Now this concludes the earnings conference call for the first quarter of 2024. If you need further explanations or have additional questions, please contact IR any time. Thank you.