SK Telecom Q2 2023 Earnings Call Transcript

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August 8, 2023

There are 2 speakers on the call.

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 2nd quarter earnings results by SK Telecom. This conference will start with your presentation followed by a divisional Now which will commence the presentation on the fiscal year 2023 2nd quarter earnings results by SK Telecom.

Speaker 1

Good afternoon. I am Hee Joon Chung, IRO of SK Telecom. Today, we will first deliver a presentation on major events, quarterly earnings highlights and business performances, which will be followed by the Q and A session. The call is attended by our executives from relevant business divisions, including Chinwon Kim, CFO of SK Q Telekom, and we're 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.

Speaker 1

Let me now present our CFO. 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 ADOT data service in May last year, Chat GPT 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 have been launched competitively.

Speaker 1

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 the spectra, while continuing to further advance the ADAP 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 as 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 Telecom, Yen and Singtel. The Global Telco AI Alliance entails business cooperation to develop Multilingual LLLM 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.

Speaker 1

Consolidated revenue reported KRW 4306 400,000,000, up 0.4 percent 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 launch in Q2. The operating income in Q2 posted KRW463,400,000,000 up 0.8 percent 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 15% Q on Q to come in at KRW347.8 billion. On a non consolidated basis, revenue posted KRW 319,219,200,000,000, which is a similar level Y o Y and Q on Q.

Speaker 1

Operating income and net income reported KRW379.1 billion 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. Key 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 8.2.0 with a completely revamped UX, added ChatT by utilizing the ChatTeePT model and announce an emotion based AI agent called 8. Friend in collaboration with ScatterLab.

Speaker 1

Also, we have created our own large language model for 8.2.0 to support multi turn conversations where the model understands the context and intentions. With this enhancement, ADOT is evolving as a more user friendly conversational AI service. With global launch in November last year, Eastland 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.

Speaker 1

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 2,000,000 in Q2, T Universe has further strengthened its competitiveness based on partnerships with big players such as YouTube Premium.

Speaker 1

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 1 UIM manufacturer with $100,000,000 equity investment. The investment will further will allow exclusive use of their aircrafts in Korea, UAN 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 leased 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 Kaesan and Shixa Data Centers and the opening of Pundang 2 Center.

Speaker 1

As the business expansion of global CPSs 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 ship development as well as gaming and financial businesses. We're currently exploring additional business opportunities focused on big accounts.

Speaker 1

To meet diverse needs of customers, SK Telecom introduced 25 new 5 gs price plans in the first half of the year. In particular, 0 Youth 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 5 gs subscribers reached 14,670,000 as of the end of Q2. As of the end of June, the pay TV subscribers and broadband subscribers of SK Broadband reached 9,460,000 and 6,810,000 respectively. We continue to grow the subscriber base by achieving number 1 net adds for IPTV and broadband in the first half of the year.

Speaker 1

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 markets. Finally, let me report on our shareholder return policy. The Board determined the 2nd quarter DPS to be the same as the previous quarter at 831. Furthermore, we decided to buy treasury shares of KRW 300,000,000,000 and canceled KRW 200,000,000,000 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.

Speaker 1

We ask for your continued support and encouragement. Thank you. We will now begin the Q and A session.

Operator

Now Q and A session will begin. The first question will be presented by Sun Yoon Lee from Ives Investment and Securities. Please go ahead with your question.

Speaker 1

I am Yi Seung Woo from Evest. Thank you for this opportunity. I would like to ask you two questions. First of all, you mentioned that you're going to purchase Treasury shares worth KRW 300,000,000,000 and retired KRW 200,000,000,000 of our treasury shares for this year. So I wonder if you will continue to do so here or going forward.

Speaker 1

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. I'd like to understand the background behind this alliance and the future plans and expected benefits. 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.

Speaker 1

There were questions related to our potential share buyback and cancellation at the Q1 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 canceled KRW 200,000,000,000 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 in whether we will continue to go in this direction next year and going forward.

Speaker 1

And we understand that there are many companies who continue to purchase and retire treasury shares enhanced 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 show the market that the company has strong commitment to increasing corporate value.

Speaker 1

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, the this decision for share buyback was, of course, to increase the total size of shareholder return, and this has been our practice since the spin off, 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 telecom into an AI company, and we have been launching various services, including ADAS to test the market. And there have been many news announcements about specific AI strategies and detailed plans.

Speaker 1

And regarding your question on the global telco AI alliance, I'd like to ask Mr. Chung Seok Head of Global AI Tech Business Division, who has been leading this initiative to provide you with more details. 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 and 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 our business enhancement.

Speaker 1

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.

Speaker 1

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 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.

Speaker 1

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 assistance and innovate the customer experiences. Discussions for the formation of such an alliance began since February when we attended the NWC, and we decided to join hands with leading telco companies representing Europe, Asia and the Middle East, and they participated as the founding members. They include the Deutsche Telekom, Yen and Singtel.

Speaker 1

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 Telkol AI Alliance. Ever since the CEO Summit, we 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.

Speaker 1

Thank you.

Operator

The following question will be presented by Hae Jae Kim from Daesin Securities. Please go ahead with your question.

Speaker 1

I am Kim Aeje from Taixin 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?

Speaker 1

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. 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 5 gs, the number of 5 gs subscribers has been on the rise, and we've been leading market competition by announcing measures to expand benefits and choices for users.

Speaker 1

During the pandemic, we were the 1st company to launch the most affordable untapped price plan, and we added more 5 gs price plans in August last and early this year to offer more choices for customers, which has been helping growing the 5 gs market. Based on the differentiated customer choices and benefits, we have secured a large 5 gs subscriber base and contributed to the government's effort 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 pursuit value pursued through market leadership and that it aims to enhance user benefits and convenience through service quality competition among the telcos. The government's announcement includes various measures, including 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.

Speaker 1

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 stands that we will continue to offer more choices and differentiated benefits for our customers, and we're 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.

Speaker 1

Your second question is related to the benefit or impact of YouTube Premium on the performance of T Universe. And in this regard, I'd like to invite Ms. Naso Young, the subscription service planning team leader, to comment on this question. Yes. The YouTube premium was included as an option in March in May this year, and this has Been very successful, and there's much more to expect in the future.

Speaker 1

We've been carrying out some marketing activities, but it has rather become more viral by the customers on The reason why this has been well received by the market is because of the value that it offers. When you sign up for U Pass, Universe Pass that includes the YouTube premium, then you can get the benefit of maximum KRW 60000 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 3 most popular selections of Universe Pass. Thanks to this, the number of T Universe subscribers has already reached 2,000,000 in the second quarter. In the first half of this year, the GMV amounts to about KRW 630,000,000,000.

Speaker 1

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're going to continue to introduce and add impactful partnerships and products going forward. So I'd like to ask for your continued interest.

Operator

The following question will be presented by Joon Seok Kim from KB Securities. Please go ahead with your question.

Speaker 1

I'm Kim Joon Seop 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 M and O 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 5 gs or new subscribers. So in the second half of the year and going forward, how much marketing expense are you planning to execute?

Speaker 1

And what is the overall guideline for marketing related expenses. The second question has to do with your Cloud business, and I'd 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 kinds of What clients are you targeting and what kinds of cloud strategies are you going to pursue so that you could achieve KRW 500,000,000,000 or alpha of revenue by 2027? Thank you for your questions.

Speaker 1

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, And 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 YOY comparison. So on in terms of the YOY basis, I would like to say that the marketing expenses for the Q2 declined by 0.6%, and it has been maintaining a stable level. And going forward, we will continue to stick with the existing stance of focusing more on margin and profitability while engaging in efficient market operation.

Speaker 1

And regarding the overall market landscape, I'm going to invite Kim Ji Hyung, Head of the Integrated Marketing Strategy Office, to comment more on that. And moving on to your second question, I'm going to invite Kim Myung guk, Head of Cloud Business Office to comment on our cloud related strategies. Hello, I'm Kim Ji Young, 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.

Speaker 1

However, as the 5 gs market becomes more mature, we see increasing share of customers switching from 5 gs to 5 gs. Therefore, it is our view that competition to acquire additional new 5 gs subscribers will not be fierce. And Therefore, we will continue to manage our marketing expenses in a strategic and efficient manner in consideration of the market situations. Thank you. I am Kim Myeong Guk, Head of Cloud Business Office.

Speaker 1

In the Q2 of 2023, the cloud revenue recorded KRW39.8 billion, up 67.67 percent year on year. In particular, as for MSP, the recurring revenue takes up more than 90% of the total revenue for 5 consecutive quarters. This has been made possible thanks to our fundamental strengths, including being 1 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 has been the basis for such 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 as CSP, but rather provide 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.

Speaker 1

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 and collaborate with Sapion so that we can address actively address and respond to public and hybrid cloud demand triggered by ChaChiPT. 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.

Speaker 1

This concludes the earnings conference call for the Q2 of 2023. If you need further explanations or have additional questions, please feel free to contact IR. Thank you.

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SK Telecom Q2 2023
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