SK Telecom Co.,Ltd (NYSE:SKM) Q3 2023 Earnings Call Transcript

SK Telecom Co.,Ltd (NYSE:SKM) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good morning and good evening. First of all, thank you all for joining this conference call. And now, we will begin the conference of the fiscal year 2023 Third Quarter Earnings 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 third quarter earnings results by SK Telecom.

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 our presentation on major events, quarterly earnings highlights, and business performances, which will be followed by a Q&A session. The call is attended by our executives from relevant business divisions, including Jin-won Kim, CFO of SK Telecom, and we are providing some 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.

Jin-won Kim: Good afternoon. This is Jin-won Kim, CFO of SK Telecom. In September, SK Telecom announced the AI Pyramid strategy to become a global AI company. It aims to lead industrial innovation and achieve its vision of a global AI company through efforts to strengthen its own capabilities to deepen customer relationships by advancing its own AI technologies and launching AI services and through cooperation with diverse domestic and foreign partners, including the K-AI Alliance, the global telco AI Alliance, Anthropic, and OpenAI. We ask for your continued interest and support for our new endeavors. Now let me report on the consolidated financial results for Q3 of 2023. Thanks to improved earnings of SK Telecom and SK Broadband, consolidated revenue reported KRW 4,402.6 billion, up 1.4% year-over-year and 2.2% Q-on-Q.

Operating income in Q3 posted KRW 498 billion, up 7% year-over-year and 7.5% Q-on-Q. Net income posted KRW 308.2 billion, up 25.5% year-over-year but down 11.4% Q-o-Q due to the base effect of one-off gains in Q2. On a nonconsolidated basis, revenue posted KRW 3,148.4 billion, thanks to gains in roaming business. Operating income and net income reported KRW 407.1 billion and KRW 250.4 billion, respectively. Let me now turn to Q3 business highlights and strategic directions in accordance with the AI Pyramid strategy. First, serving as the foundation of the AI Pyramid, AI infrastructure is an area where SK Telecom’s technological capabilities are concentrated, including AI Data Centers, AI Semiconductor, and Multi-LLM. Data center revenue continued its growth trend, up more than 30% year-over-year in the third quarter.

Preparations for the opening of new data centers are well underway to meet the growing demand for data centers triggered by the AI market. We plan to introduce energy-saving solutions like emergent cooling system and hydrogen fuel cells and enhanced data center operational efficiency through AI-based data center infrastructure management. Sapeon, an AI semiconductor company established by SK Telecom will launch a next-generation inference AI chip X330 at the end of this year. X330 has approximately twice the computation of performance and 1.3x the power efficiency compared to the latest inference chips in the market. Sapeon will also cooperate with diverse companies to secure competitiveness in software. SK Telecom is also pursuing a multi-LLM strategy where a 2-track approach is taken to secure diverse LLM lineup, an overall platform that encompasses the LLMs. To this end, we’re advancing our own LLM based on our AI technology brand A.X, and high-quality data accumulated over several decades.

Simultaneously, we are collaborating strategically with a wide range of domestic and foreign AI companies, including Anthropic, OpenAI, and Konan Technology. Currently, diverse projects are underway, and during next year, the Global AI Platform Corporation newly established in the U.S. is planning to release an LLM customized for telcos and launch an AI platform to support effective utilization of the multi-LLM. In the area of AIX, which is the middle layer of the AI Pyramid, we will innovate customer experience and boost productivity by applying AI to our internal core businesses such as MNO, broadband, and enterprise, while expanding the use of our AI capabilities to various external business areas such as mobility, AI healthcare, and media to create added value.

A skyline view of futuristic telecommunications towers.

Among the internal areas of AIX, our MNO business has an established customer base with 15.15 million 5G subscribers as of the end of September. We will solidify our superb mobile business competitiveness by using AI technology to conduct marketing, establish AI-based mobile networks, and enhance operational efficiency. As of the end of September, the Pay-TV subscribers and broadband subscribers of SK Broadband reached 9.52 million and 6.87 million, respectively. Going forward, SK Broadband’s Pay-TV service will evolve into an AI TV that offers diverse AI services such as AI curation and AI home. As for enterprise business, AICC, big data analytics platforms, and custom and platform-type generative AI models will be major growth drivers of the market.

Here, the multi-LLM will be combined with AI solutions like Vision AI, Language AI, and Big Data AI. The cloud business is on track to meet its annual target with revenue in Q3, growing nearly 40% year-over-year. Moving on to the external areas for AIX. SK Telecom signed a collaboration agreement with Joby Aviation in September to jointly participate in the K-UAM grand challenge, which marks a concrete step to secure a stable supply of UAM aircraft for the first commercialization of UAM service in Korea by 2025. We will combine AI technology and UAM to lead the way in an era of AI mobility that will change the paradigm of mobility. In addition, X-caliber, an AI-based veterinary X-ray analysis solution was launched only a year ago, but it is currently used in over 300 veterinary clinics around over country, making it a representative veterinary AI service.

SK Telecom is further enhancing the performance of X-caliber and pursuing global expansion by entering a partnership with Anicom Holdings, the largest provider of pet insurance in Japan in October. In the AI service area located at the top of the AI Pyramid, we will continue to promote A. (A dot) service, which was officially launched in September and pursue global expansion through the development of personal AI assistance or PAIs for the global market. We believe that PAIs and metaverse services will be integrated in the future, and the next commerce services, including subscription will ultimately be part of the AI service domain. AI A. will evolve into a personal AI assistant by innovating customers’ communications experience and expanding the use of AI services for daily lives.

Capitalizing on our know-how and domestically proven AI services, including call recording and summary, sleep management, and real-time interpretation during a call, which will be launched soon, we will localize and advance these services through cooperation with the global telco AI alliance members. Then we will launch PAIs in many parts of the global markets simultaneously to quickly gain leadership in the AI service market. ifland has attracted nearly 50% of MAU from overseas and global cooperation with various partners, including Deutsche Telekom and T-Mobile U.S. is on track. The large subscriber base of ifland will begin to use the in-app transaction-based economic system that was introduced in October, which will facilitate the creation of a virtual cycle of premium content production and consumption as well as monetization, thereby contributing to the expansion of the Metaverse platform.

Within the list of impactful partners such as YouTube Premium and preparing to include Nasform, also, T Deals’ GMV in the first half of 2023 surpassed KRW 100 billion. We are preparing for next-generation commerce. Finally, the Board determined the third quarter EPS to be the same as the previous quarter at KRW 830. In addition, as we are well underway, we will complete the share buyback within the 6 months of the Trust contract [Technical Difficulty] –to do our best to ensure that corporate value and shareholder value will be maximized through a transformation into a global AI company. [Technical Difficulty] –continued support and encouragement. Thank you.

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

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Q&A Session

Operator: [Operator Instructions] The first question will be provided by Soojin Kim from Mirae Asset Securities.

Soojin Kim: I’m Kim Soojin from Mirae Asset. Thank you for the opportunity. I would like to ask 2 questions. The first question has to do with your about promoting AI businesses and can you share with you with us. [Technical Difficulty] –and is to be able to generate revenue in the near term among various AI-related businesses? The second question has to do with the A. service. A. was official [Technical Difficulty] — so if you can, please share with us specific numbers, including the number of subscribers and the MAU. Also, I’d like to know if there are any specific business…

Jin-won Kim: [Technical Difficulty] As you know, at the AI Pyramid strategy that SK Telecom is going to pursue. And the AI Pyramid strategy includes largely AI infrastructure, AI infra, which is the largest profit source, but also new growth businesses, which may not necessarily generate significant revenue at this time. In addition to our existing fixed and mobile business, AI, its revenue contribution was roughly 9% in 2022, but our ambitious goal is to increase this number to 36% by 2028. These tangible results in the near term, I would say, first of all, that we have data center business and AI semiconductor business, which is being pursued by Sapeon with a new X330. In addition, we have many businesses as part of the AI service area, which is the top of the AI platform, AI Pyramid, they include personal AI assistant and AI-based subscription commerce platform, and we are planning to evolve our subscription service utilizing AI.

In addition, we will continue to use AI to strengthen customer engagement. Now as for specific details by each category or each domain, Mr. Choi Hwan-seok, Head of the Corporate Strategy Office, will provide more details. In addition, we launched the iPhone call recording service recently, and it is gaining good response in the market. And regarding this, Mr. Kim Ji Hoon, Head of Growth, will provide more details.

Choi Hwan-seok: Hello, I am Choi Hwan-seok, the Head of Corporate Strategy Office. As the CFO just mentioned, among the AI businesses and areas, we are expecting high growth from several businesses, including the data center business, AI semiconductor, enterprise solutions, and subscription commerce business model that is linking AI and other services. First of all, with respect to data centers, we expect a big growth in demand for GPU data centers with the advent of the AI era, and SK Telecom will scale up the data center business through AI DCIM for operational efficiency and emergent cooling system for energy efficiency and expanding sites and partnering with other industries and expanding into the global market. Next, Sapeon, our AI semiconductor company will launch X330, an inference AI accelerator chip soon, and after securing diverse references, such as the use in global hyperscale data centers, we expect to generate more meaningful sales starting from 2025.

The enterprise market is expected to grow and change dramatically due to AI, and we will utilize our own Vision AI and LLM technology capabilities to expand a specialized AI enterprise solution business targeting various industries like the public sector, finance, and manufacturing. For AI service, we are getting positive responses regarding A., which was officially launched at the end of September, thanks to its many useful features related to phone calls. And so we will drive growth by linking AI-based new business models with the subscription commerce service model. Other than new businesses related to AI, our fixed and mobile business, our existing business, will continue to account for a significant portion of the company’s earnings. And for these existing businesses, we will use AI technology to deepen customer relations and focus on improving profitability, and we will strengthen AI marketing through AICC and reduce expenses by improving network operation efficiency also using AI.

Thank you.

Kim Ji Hoon: Moving on, I am Kim Ji Hoon, Head of Growth and I’d like to provide you with some more details regarding AI service, in particular, A. Since official launch, new features such as call recording and sleep management have been added to A. to evolve it as a personal AI assistant, and they’ve been receiving much interest and positive customer responses in the market. In particular, the iPhone call recording function that we recently introduced has been leading the growth of A., thanks to its popularity. So recently, A. ranked #1 in the free app category of Apple App Store and #1 in lifestyle category of Google Play Store, it is still ranked high with sustained user acquisition. And going forward, we will add on other functions, including personalized recommendations and diverse AI features to continue to innovate customer experience and to help the experience of using A.

phone to lead to the use of diverse A. content. And to build capabilities as a personal AI assistant, A. is not only strengthening internal capabilities but also forging collaboration with external partners. We are reinforcing the existing cooperation with start-ups such as Scatter Lab and AC and preparing for new partnerships with diverse companies. And for the first month, since the official launch, we have been focusing on experimenting and validating diverse aspects for customer experience innovation so there are additional features that we will add during the rest of the year. So please understand that we would like to report on the market responses on a later occasion, rather than giving you any numbers at this point in time. And I’d like to also comment on your question regarding business models related to A.

For A., we are considering the possibility of bundling up various services, including fleet management and photo profile to offer them as bundled subscription model. In the market, already some companies are charging on a monthly basis or per usage regarding AI content, including photo profile, and we are considering similar business models for A. Another potential business model is to take profit by charging fees on various transactions and services that occur in the process of using various A. services and as well as charging fees on advertising, which is based on personalized content offering. However, at this point in time, we are more focused on expanding the user convenience after the official launch to enhance our service experience for customers.

We are constantly introducing new features and advancing them. Thank you.

Operator: The following question will be presented by Joonsop Kim from KB Securities.

Joonsop Kim: I’d like to ask 2 questions. The first one is about third quarter earnings results. And the second question has to do with your roaming business. So when we look at the earnings results for the third quarter, they are very good and better than what the market had expected. So I’d like to understand your forward projection for the following quarters in terms of earnings because there are various factors that may impact your earnings results, including the power prices as well as inflation and other factors. The second question has to do with your roaming business. Now the pandemic is over and more people are traveling overseas. So I’d like to understand to what degree your roaming revenue has recovered? And what is your outlook going forward?

Jin-won Kim: Thank you for the question. As you understand, our Q3 operating income posted KRW 498 billion, up 7% year-over-year, and it is thanks to profit growth of both SK Telecom and SK Broadband as well as earnings improvements of other subsidiaries. As you mentioned, there have been several cost factors, including higher energy prices and inflation, however, SK Telecom was able to grow its operating income, thanks to solid growth of MNO revenue, including roaming, and we were able to continue the stabilizing trends of major expenses such as marketing and depreciation. And as a result, our operating income grew 4.7% year-over-year. Moving on to SK Broadband. Its operating income also was able to grow, thanks to B2B revenue growth centered on data centers and the growth of high ARPU B2C subscribers for IPTV, which contributed to revenue growth and cost efficiency.

Moving on to the outlook for the fourth quarter. It is a short-term outlook, but we need to be more cautious because the fourth quarter is typically when seasonal factors lead to higher expenses, including outsourcing service costs, advertising expenses, and other fees. However, when we look at the overall picture, major operating expenses such as marketing and depreciation has been quite stable. So we are focusing on improving our earnings on a year-over-year basis. Another factor will be macroeconomic and macro external uncertainty. And recently, external uncertainties are growing due to global interest rate hikes to respond to rising inflation and unstable global geopolitics triggered by Israel-Hamas war following the war in Ukraine. But as you may know, our business and our cost structure has only limited exposure to external risks such as inflation, interest rates, and exchange rates.

So we will utilize our management resources and capabilities to make sure that our earnings in the future will be managed stably. Moving on to your second question. As you mentioned, roaming has been a major driver of our revenue growth. So with respect to the recent recovery trend of roaming revenue as well as related outlook, I’d like to hand over to Mr. Kim Ji Hyung, Head of Integrated Marketing Strategy Office.

Kim Ji Hyung: Hello, I’m Kim Ji Hyung, Head of Integrated Marketing Strategy Office. For the first time since the pandemic roaming revenue is expected to recover to the pre-COVID level. While the number of overseas travelers in this quarter is just 76% of the number before the pandemic in 2019, roaming usage has increased 1.5x, so this year’s roaming revenue is expected to surpass the 2019 level. We believe that this result is attributed to customer base expansion through marketing efforts that help customers pay less such as increasing data at existing rates and family roaming promotions. Since launched in June, the youth price plan has gained nearly 280,000 users cumulatively, and this plan offers 50% discount for roaming, resulting in a twofold increase in roaming usage by customers younger than the age of 34, a segment which did not really use roaming much in the past.

Furthermore, almost half of first-time roaming users continue to use roaming for next trips. Therefore, the current growth in roaming usage is not just contributing to revenue recovery in 2023, but also is expected to become a major growth driver in terms of revenue in the medium to long term. We will continue to introduce affordable price plans and convenience services to make T Roaming a necessity for overseas travel. Thank you.

Operator: So the last question will be presented by Hoi Jae Kim from Daishin Securities.

Hoi Jae Kim: I’m Kim Hoi Jae from Daishin Securities. Today, the Ministry of Science and ICT announced measures to lessen the communications-related burden for citizens. So in this regard, I’d like to know if you have any plans to introduce allow 5G handsets to use LTE price plans? And how is this going to impact your overall trend of 5G subscriber acquisition in the future? And I’d also like to know if you have any plans to offer more affordable lower-end 5G price plans in the future?

Jin-won Kim: Back in July, the government announced measures to facilitate competition in the telecom market. We have been implementing our market operations strategy, which is based on leading market competition and expanding the base of 5G services by constantly increasing customers’ choices and benefits. We mentioned at the previous earnings call that these business strategies and activities are well aligned with the government’s policy goals and directions, which aim to increase benefits for users by promoting competition over service quality. So from this perspective, regarding today’s government announcement, in an environment where 5G subscribers continue to grow, we are positively considering to sign up for LTE price plans with 5G handsets and vice versa to promote benefits for users. And regarding more details, I’d like to hand over to Mr. Kim Ji Hyung, Head of Integrated Marketing Strategy Office.

Ji Hyung Kim: I am Kim Ji Hyung, Head of Integrated Marketing Strategy Office. As the number of 5G subscribers increases, we are positively considering to allow 5G handsets to use LTE price plans and vice versa. And we will be able to offer these plans as early as within November. As of the end of September, the share of 5G subscribers in terms of handsets is 66%. Since it’s been 4.5 years since the 5G launch, the rate of 5G subscriber growth has been slowing, but the upward trend is still very clear, and we expect this upward trend to continue. And in terms of their revenue impact, we will need to consider and monitor both cases of going up the price plans and down the price plans. Next, I’d like to comment on our plans regarding affordable lower-end price plans.

As the 5G market continues to mature, it is very natural that there are more diverse price plans and options available in the market. With our top priority on enhancing customer convenience and satisfaction, we will make necessary preparations by a comprehensively considering market competition situations and our capacity and our capabilities. And we will also aim to produce positive results, such as improved customer perception and product competitiveness. Thank you.

Hee Jun Chung: This concludes the earnings conference call for the third quarter of 2023 of SK Telecom. If you need further explanations or additional questions, please contact the IR team at any time. Thank you.