SK Telecom Co.,Ltd (NYSE:SKM) Q2 2023 Earnings Call Transcript

SK Telecom Co.,Ltd (NYSE:SKM) Q2 2023 Earnings Call Transcript August 9, 2023

Operator: Good morning and good evening. First of all, thank you all for joining this conference call. Now, we will begin the conference of the Fiscal Year 2023 Second Quarter Earning Results by SK Telecom. This conference will start with a presentation, followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2023 second quarter earnings results by SK Telecom.

Hee Jun Chung: 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, quarterly earnings highlights, and business performances which will be followed by the Q&A session. The call is attended by executives from relevant business divisions including Jin-won Kim, CFO of SK Telecom, and we’re providing consecutive interpretation for the call. As you may know, I’d like to remind you that all forward-looking statements are subject to change depending on various factors such as market and macro situation. Let me now present our CFO.

Jin-won Kim: Good afternoon. This is Jin-won Kim, CFO of SK Telecom. SK Telecom has been at the forefront in transforming itself into an AI company. Since we launched A dot beta service in May last year, ChatGPT has become a hot topic, creating a global rush for AI technology by global big tech companies and various large language models and services based on them has been launched competitively. These changes in the business environment have resulted in a shared understanding around the world that companies cannot survive without change and innovation based on AI. Against this backdrop, while continuing to further advance the A dot service based on its own LLM, SK Telecom launched the Global Telco AI Alliance in late July to build a comprehensive cooperation framework and jointly access AI markets by mobilizing forces of global telcos.

Led by SK Telecom, the alliance consists of major telcos from Europe, the Middle East, and Asia, including Deutsche Telekom, e&, and Singtel. The Global Telco AI Alliance entails business cooperation to develop multilingual LLM jointly to gain AI leadership in the global market, and we will continue to create business synergies through broader discussions including strategic cooperation with major LLM players. Now, let me report on the consolidated financial results of Q2 2023. Consolidated revenue reported KRW4306.4 billion, up 0.4% year-on-year, thanks to the growth of both the fixed and mobile business and the new businesses. It reported a decline of 1.5% Q-on-Q due to the drop in handset sales of the subsidiary company without new flagship handset launched in Q2.

The operating income in Q2 posted KRW463.4 billion, up 0.8% year-on-year, thanks to the growth in revenue and down 6.4% Q-on-Q due to the increase in other expenses. Net income grew 34.8% year-on-year and 15% Q-on-Q to come in at KRW347.8 billion. On a non-consolidated basis, revenue posted KRW3119.2 billion which is a similar level Y-o-Y and Q-on-Q. Operating income and net income reported KRW379.1 billion and KRW272.8 billion respectively. Let me now turn to Q2 business highlights and strategic directions of the company that is pursuing transformation into an AI company. SK Telecom is expanding its AI technology capabilities and services through active collaboration and partnerships with various domestic and foreign AI companies. In June we released A dot 2.0 with a completely revamped UX, added ChatT by utilizing the ChatGPT model, and announced an emotion based AI agent called A dot friends in collaboration with Scatter Lab.

Also we have upgraded our own large language model for A dot 2.0 to support multi-turn conversations where the model understands the context and intention. With this enhancement, A dot is evolving as a more user-friendly conversational AI service. With global launch in November last year, ifland has attracted more than 30% of MAU from overseas. It is expanding the scope of global cooperation with various foreign companies including Deutsche Telekom, T-Mobile U.S. and Singtel. After a new type of Metaverse social media feature called “if home” was released in May, a total of more than 400,000 if homes were created as of the end of July, taking the ifland service to the next level. We’re well on our way to introduce an economic system based on in-app payments in late September.

The global expansion of ifland and popularity of if home are expected to be a big help in operating this revenue model. With MAU exceeding KRW2 million in Q2, T Universe has further strengthened its competitiveness based on partnerships with big players such as YouTube Premium. It will continue to expand the list of impactful partners and increase the share of voluntary sign-up channels with higher customer retention rates through compelling product partnerships. SK Telecom has acquired approximately 2% stake in Joby Aviation, a global number one UAM manufacturer, with $100 million equity investment. The investment will further – will allow exclusive use of their aircrafts in Korea, UAM-related technology cooperation and joint entry into overseas markets to create synergies in diverse areas, which will help solidify our leadership in the UAM industry.

The enterprise business is maintaining a stable revenue in the lease line business, while showing a noticeable growth trend in data center and cloud businesses. The data center business sustained the revenue growth trend of more than 30% year-on-year, thanks to stable increase in the utilization rate of Kosan and Shiksha data centers and the opening of Bundang 2 Center. As the business expansion of global CPS in Korea is leading to the growth in demand for data centers, preparations to open new data centers, including securing sites are well underway. The cloud business is expected to be on track to meet its annual target with its revenue growing more than 60% year-on-year. Additional growth is expected as we benefit from the expanding market for AI services and hybrid cloud.

In the second quarter, we secured orders for smart chip development as well as gaming and financial businesses. We’re currently exploring additional business opportunities focused on big accounts. To meet diverse needs of customers, SK Telecom introduced 25 new 5G price plans in the first half of the year. In particular, 0-use plan has been well received by the market, helping us continue to strengthen our retention of younger customers. Thanks to these achievements, the number of 5G subscribers reached 14.67 million as of the end of Q2. As of the end of June, the Pay TV subscribers and broadband subscribers of SK Broadband reached 9.46 million and 6.81 million, respectively. We continue to grow the subscriber base by achieving number one net ads for IPTV and broadband in the first half of the year.

We’re planning to pursue additional growth by actively targeting niche markets mixed with B2C and B2B as well as continuously expanding in the single-person household and second TV market. Finally, let me report on our shareholder return policy. The Board determined the second quarter DPS to be the same as the previous quarter at KRW830. Furthermore, we decided to buy treasury shares of KRW300 billion and canceled KRW200 billion worth of shares in order to fulfill the increased shareholder return that we have been communicating to our investors since the beginning of the year. We will continue to do our best to ensure that corporate value and shareholder value will be maximized by making our core businesses more efficient and advancing our AI services through transformation into an AI company.

We ask for your continued support and encouragement. Thank you.

Hee Jun Chung: We will now begin the Q&A session.

Q&A Session

Operator: Now Q&A session will begin. [Operator Instructions] The first question will be presented by Seung Woong Lee from eBest Investment & Securities.

Seung Woong Lee: I’m Seung Woong from eBest. I would like to ask you two questions. First of all, you mentioned that you’re going to purchase treasury shares worth KRW300 billion and retire KRW200 billion of treasury shares for this year. So I wonder if you will continue to do so next year or going forward. And I wonder if there is going to be any impact of such action on your cash dividend. Secondly, you’ve been talking about your AI-related plans and the news media reported on the launch of the Global Telco AI Alliance recently. So I’d like to understand the background behind this alliance and the future plans and expected benefits?

Jin-won Kim: Thank you for the questions. I would like to first address your question regarding our plan for treasury shares. And secondly, responding to your question on the Global Telco AI Alliance. There were questions related to our potential share buyback and cancellation at the first quarter earnings call as well as the year-end earnings call. And we mentioned that we are positively considering the option of share buyback and cancellation, but we did not specify the specific timing or the size of such action. And the Board, in July, decided that we are going to purchase KRW300 billion worth of treasury shares and cancel KRW200 billion of them going forward. While macro uncertainties are still present, including interest rate hikes and economic downturn, the Board agreed that it was necessary to enhance corporate value through additional shareholder return, which is why we decided to go ahead with share buyback and cancellation.

I understand that the market is interested in whether we will continue to go in this direction next year and going forward. And we understand that there are many companies who continue to purchase and retire treasury shares to enhance corporate value and such measures have been well received in the market. In addition, we have the stable operating cash flow, and we are starting to receive dividends from SK Broadband and the invested companies this year and onward, which can be used as funds for share buyback in the future. Against this backdrop, we will seriously and positively consider the option of continued share buyback and cancellation going forward. Of course, regarding details concerning timing and size of share buyback and cancellation, these need to be determined at the Board through discussions and in consideration of the overall business environment.

But we will continue to accumulate market-friendly practice around shareholder return to shareholders market that the company has a strong commitment to increasing corporate value. And regarding its potential impact on our cash dividend, as you know, we are already practicing a dividend policy in line with global standards by paying out quarterly dividends to our shareholders. Therefore, this decision for share buyback was, of course, to increase the total size of shareholder return, and this has been our practice since it since the spinoff, and we’re committed to the direction and principle of maintaining a stable cash dividend level. Moving on to your second question on our AI-related vision since last year, we’ve been talking about our vision of transforming SK Telecom into an AI company, and we have been launching various services, including A dot to test the market.

And there have been many news announcements about specific AI strategies and detailed plans. And regarding your question on the Global Telco AI Alliance, I’d like to ask Mr. Jeong Seok-Geun, Head of Global AI Tech Business Division, who has been leading this initiative to provide you with more details.

Unidentified Company Representative: As you may know very well, the tech paradigm is being shifted from web and mobile to AI, especially generative AI. And for the past 20 years, whenever there was such a tech paradigm shift from the Internet to mobile, many telcos failed to maintain their points of contact with customers, and they have lost the hegemony leadership to Internet companies and mobile companies. In this regard, in preparation for this new era of generative AI, we are taking action preemptively so that we can utilize AI for our business enhancement. We understand that AI technology can enhance value in a diverse number of industries, but when it comes to the telecommunications industry, telcos around the world have the largest customer base, and these customers are paying customers, and there’s a high level of customer relations management and customer service.

Therefore, we understand that Telecoms telecommunications industry can benefit the most from using AI by increasing their business efficiency and innovating their customer relations. In this regard, if we can successfully use AI and go through AI transformation in this particular telecommunications industry that has the highest level of difficulty in managing the customers, we believe that we can prove the value of using AI, and we can apply these references to other industries by providing platforms and successful references. In the AI industry, we are seeing a great potential of utilizing LLM and there’s growing demand for large language models. And currently, the large language model technology has been led mainly by global big tech companies, which means that telcos are struggling to secure LLM related technology.

As you may know, SK Telecom has been making investments in AI for the past couple of years, so we believe that we can lead this particular alliance with global telcos so that we can gain the economies of scale. By doing so, we can strengthen the negotiating power of the telcos as part of the alliance, and we can use our own LLM technology to build AI platforms for global telcos, develop LLM technologies together and provide AI assistant services for telcos to utilize. And in this way, we can help telcos around the world to utilize LLM more successfully. This is the purpose of this alliance. To be more specific, the telcos in the alliance will be able to utilize the generative AI-based AI transformation to increase efficiency in their marketing, network management and outsourcing, and they can further develop new business models using AI assistant and innovate the customer experiences.

Discussions for the formation of such an alliance began since February when we attended the MWC, and we decided to join hands with a leading telco companies representing Europe, Asia and the Middle East, and they participated at the founding members. They include the Deutsche Telekom, e& and Singtel. We signed an MOU together, and we are currently carrying out discussions on various issues, including joint investments. And we will further invite other telcos to join us, and we’re going to utilize their subsidiaries and the advanced markets so that we can increase the size of the alliance. Through the Global Telco AI Alliance, we will develop the telco AI platform and large language model so that we can offer diverse AI services, which can be provided at the global level and also localized and further advanced for the respective local markets.

And the Global Telco AI Alliance ever since the CEO Summit will create the joint working group to discuss specific matters related to governance and business plan and development direction and C-level executives will be designated for this alliance so that they can pursue extensive cooperation. Thank you.

Operator: The following question will be presented by Hoi Jae Kim from Daishin Securities. Please go ahead with your question.

Hoi Jae Kim: I am Kim Hoi Jae from Daishin Securities. Thank you for this opportunity. I have two questions. First of all, the government recently announced plans to promote competition in the telecommunications industry. As the MNO market has been growing, I wonder what kind of impact these government announcements will have on your MNO business going forward? And secondly, the YouTube premium has been added as an option for T Universe subscription. So I’d like to know the impact of such addition of YouTube Premium on T Universe and its outlook going forward?

Jin-won Kim: Thank you for the questions. Let me first address your question on the impact of the government’s decision to promote competition in the industry. Since the launch of 5G, the number of 5G subscribers has been on the rise, and we have been leading market competition by announcing measures to expand benefits and choices for users. During the pandemic, we were the first company to launch the most affordable on-tech price plan, and we added more 5G price plans in August last year and early this year to offer more choices for customers, which has been helping growing the 5G market. Based on the differentiated customer choices and benefits, we have secured a large 5G subscriber base and contributed to the government’s effort to stabilize the livelihood of the public by enhancing the welfare of the customers.

The government’s announcement in July to promote competition in the telecom market is in line with the company’s value pursued through market leadership in that it aims to enhance user benefits and convenience through service quality competition among the telcos. The government’s announcement includes various measures, including a potential introduction of another telco player and measures related to MVNO players. And some of the measures announced by the government may have the potential to impact our revenue, but some of the measures require relevant loss to be revised. So, it may take some time for us to understand the details and their potential impact on our revenue. And at the same time, we have this stance that we will continue to offer more choices and differentiated benefits for our customers, and we are going to engage in conversation with the government continuously.

And at the same time, while some of the measures may have an impact on our revenue, we will continue to improve efficiency in our operation so that we can maintain a solid level of earnings continuously, because it is not only important to respond to the MNO market, but also to realize the vision of becoming an AI company. We need to have a solid earnings basis to pursue these measures, pursue future measures to achieve this vision. So, that is our overall stance. Your second question is related to the benefit or impact of YouTube Premium on the performance of T Universe. And in this regard, I would like to invite Ms. [indiscernible], the subscription service planning team leader to comment on this question.

Unidentified Company Representative: Yes, the YouTube Premium was included as an option in March – in May this year, and this has been very successful, and there is much more to expect in the future. We have been carrying out some marketing activities, but it has rather become more viral by the customers on social media. So, it’s been contributing to the increase of subscriber base of T Universe. The reason why this has been well received by the market is because of the value that it offers. When you sign up for a Universe Pass that includes the YouTube Premium, then you can get the benefit of maximum KRW60,000 per month for the same price that you would pay for the YouTube Premium subscription only. Because of this wonderful benefit in terms of value, there has been very good results and YouTube Premium has become already one of the top three most popular selections of Universe Pass.

Thanks to this, the number of T Universe subscribers has already reached 2 million in the second quarter. And in the first half of this year, the GMB amounts to about KRW630 billion. In addition to the YouTube Premium service, we are constantly engaging in negotiations and discussions to include popular products and services as part of the subscription package. And we are going to continue to introduce and add impactful partnerships and products going forward. So, I will like to ask for your continued interest.

Operator: The following question will be presented by Joonsop Kim from KB Securities. Please go ahead with your question.

Joonsop Kim: I am Kim Joonsop from KB Securities. I have two questions. The first question is related to your marketing-related outlook. And the second is related to your cloud business. First of all, we see that there has been a stabilization trend for marketing expenses in the MNO market. And there are some expectations for flagship handset launches in the second half of the year. And there may be some competition to acquire additional 5G or new subscribers. So, in the second half of the year and going forward, how much marketing expense are you planning to execute? And what is the overall guideline for marketing-related expenses. The second question has to do with your cloud business, and I would like to understand more in terms of cloud business growth potential and business strategies.

As the CFO mentioned, there has been a 60% growth Q-on-Q of your cloud business revenue and the CEO mentioned that the company may benefit from increasing demand for AI and hybrid cloud. So, to be more specific, what kind of clients are you targeting and kind of cloud strategies are you going to pursue so that you could achieve KRW500 billion or half of revenue by 2027? Thank you.

Jin-won Kim: Thank you for your questions. Yes, looking at the trend of marketing expenses is a litmus test to see how much of competition there is in the market. Therefore, it may be meaningful to take a look at the overall trend of marketing expenses. But when it comes to the comparisons because of the flagship handset launch schedules announced by the manufacturers, the quarter-over-quarter comparison may not be meaningful that much compared to the Y-o-Y comparison. So, on – in terms of the Y-o-Y basis, I would like to say that the marketing expenses for the second quarter declined by 0.6%, and it has been maintaining a stable level. And going forward, we will continue to stick with the existing spends of focusing more on margin and profitability while engaging in efficient market operation.

And regarding the overall market landscape, I am going to invite Kim Ji-Hoon, Head of the Integrated Marketing Strategy Office to comment more on that. And moving on to your second question, I am going to invite Kim Myung-Gook, Head of Cloud Business Office to comment on our cloud-related strategies.

Kim Ji-Hoon: Hello. I am Kim Ji-Hoon, Head of Integrated Marketing Strategy Office. When we look at the current market, it has been maintaining a stability because of the lengthening of the handset replacement period. As you mentioned, in the second half of the year, flagship handset releases are to be scheduled. However, as the 5G market becomes more mature, we see an increasing share of customers switching from 5G to a 5G. Therefore, it is our view that competition to acquire additional new 5G subscribers will not be fierce. Therefore, we will continue to manage our marketing expenses in a strategic and efficient manner in consideration of the market situations. Thank you.

Kim Myung-Gook: I am Kim Myung-Gook, Head of Cloud Business Office. In the second quarter of 2023, the cloud revenue recorded KRW39.8 billion, up 67.7% year-on-year. In particular, as for MSP, the recurring revenue takes more than 90% of the total revenue for five consecutive quarters. This has been made possible thanks to our fundamental strengths, including being number in terms of mobile and fixed telecommunications business in Korea. And we have the AI and big data and other very high-quality telecommunications assets, which have been the basis for such a success. And going forward, as there will be increasing demand for hybrid cloud, we believe that we can continue to utilize these assets and serve as the sophisticated MSP.

We were not just doing the reselling a CSP, but rather provide a customized cloud-related consulting services and help customers maximize their cost efficiency using AI and provide more tailored total solutions to our clients so that we can continue to increase the portion of recurring revenue from MSP business. For instance, for the financial institutions, we can provide support in terms of data analysis and information security using AICC. And for AI developing companies, we can provide a GPS supported cloud infrastructure. And we will continue to utilize our own AI cloud and design capabilities and collaborate with SAPEON so that we can address – actively address and respond to public and hybrid cloud demand triggered by ChatGPT. By utilizing these capabilities and strengths, SK Telecom will continue to pursue high growth in the medium to long-term by operating in the markets where CSPs or reselling MSPs cannot enter easily.

Thank you.

Operator: This concludes the earnings conference call for the second quarter of 2023. If you need further explanations or have additional questions, please feel free to contact IR. Thank you.