SK Telecom Q2 2024 Earnings Call Transcript

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August 6, 2024

There are 2 speakers on the call.

Operator

Good morning and good evening. Thank you all for joining this conference call for the earnings results of SK Telecom. This conference will start with a presentation followed by a Q and A session. Now we will begin the presentation on SK Telecom's 2nd quarter earnings results of the fiscal year 2024.

Speaker 1

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 Q2 earnings highlights and business performances, which will be followed by a Q and A session. The call is attended by our executives from relevant business divisions, including Yang Suk Kim, CFO of SK Telecom, and we're providing consecutive interpretation for the call.

Speaker 1

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 situation. Let me now present our CFO. Good afternoon. This is Young Teop Kim, CFO of SK Telecom. We are already in the second half of twenty twenty four, which marks the 40th anniversary of SK Telecom.

Speaker 1

Under the vision of becoming a global AI company, we have been mobilizing enterprise resources to implement the AI pyramid strategy. We have been especially focusing on expanding partnerships and investments with leading global AI companies to strengthen our global AI capabilities. Since last year, SK Telecom has invested more than $300,000,000 in AI, including a $10,000,000 investment in June in Perplexity, a leader in next generation AI search engine and a $200,000,000 investment in July in SGH or SMART Global Holdings, a global leading provider of AI data center solutions. We have been carrying out these investments and alliances in a strategic and organized manner according to the AI pyramid strategy. In order to expand the AI business, we will continue to pursue investments and partnerships actively to strengthen AI competitiveness and leverage global demand for AI services together with members of the Global Telco AI Alliance or GTAA.

Speaker 1

Let me now report on the consolidated financial results for the Q2 of 2024. Consolidated revenue reported KRW4,422,400,000,000, up 2.7% year over year, driven by the stable growth of MNO Business and Major Subsidiaries. Operating income posted KRW 537,500,000,000, up 16% year over year, thanks to the stabilization of costs such as marketing and depreciation costs as well as recognition of 1 off profit. The operation improvement initiative has contributed to improved business fundamentals, and the AI pyramid strategy has produced tangible results in the respective domains. Net income posted KRW350.2 billion.

Speaker 1

On a non consolidated basis, revenue posted KRW 3,191,500,000,000, up 2.3% year over year. Operating income and net income reported KRW 450,400,000,000 KRW 280,300,000,000, respectively. Let me now turn to business highlights for 2024 Second Quarter and Strategic Directions in accordance with the AI Pyramid strategy. 1st, in the AI infrastructure domain, data center revenue grew 20.5% year on year, thanks to AI driven demand growth for data center and higher utilization rates of the data centers. As was reported earlier, with our investment in SGH, we have secured differentiated capabilities in the AI data center market, which is expected to boost our AI data center business and improve operational efficiency.

Speaker 1

SGH is a leader in data center solutions. They developed ultra large AI clusters with 16,000 GPUs for Meta in 2023 and were selected in 2024 as an AI cluster operator of the voltage park with 24,000 GPUs. We plan to combine SGH's capabilities to build and operate AI clusters with SK Telecom solutions such as data center management system and liquid immersion cooling to target the global AI data center market aggressively. We will also actively leverage SGH's capabilities for edge AI, which belongs to the AI infrastructure domain. SGH owns Edge solutions specialized for industrial applications.

Speaker 1

The 2 companies will cooperate to develop telecom edge AI solutions by combining AI with telecom infrastructure. Partnership activities are also taking place actively regarding LLM. At an event organized by the TM Forum, a global alliance of telco and tech companies held in Copenhagen in June, the 2nd Global Telco Alliance Roundtable was held where the 5 founding members of the GTAA signed an agreement to establish a joint venture for Telco LMM, thereby establishing a forward base for AI ecosystem expansion. With the establishment of the joint venture, SK Telecom aims to be a game changer that leads the global AI market with domestic and foreign AI players. Next is the AI X domain.

Speaker 1

The MNO business recorded 16,230,000 5 gs subscribers as of the end of June 2024, accounting for more than 70% of the total subscriber base. Ezuki Broadband's pay TV subscribers and broadband subscribers reached 9,600,000 7,050,000 respectively as of the end of June. While the fixed and mobile market is maturing, our activities to sell high ARPU price plans and attract high tier subscribers continue to improve profitability. We're also committed to innovating business fundamentals of the fixed end mobile business through OpEx and CapEx efficiency improvement using AI. The enterprise business has maintained a growth trend of approximately 10% year over year.

Speaker 1

Along with stable leased line revenue, the IoT business posted a revenue growth of 29% year on year. The Cloud business also saw their revenue grow 28% y o y, excluding 1F sectors. It is worth noting that we successfully won the first order for AI Cloud Business in the 2nd quarter, thereby confirming market demand. Will pursue business scale up going forward. Next, AI Services.

Speaker 1

ADOT started to offer the call recording and summary service and real time call interpretation service for Android handsets in the 2nd quarter. As of the end of June, the cumulative downloads exceeded 4,550,000. In the second half of the year, we will upgrade U. X. To make it more user friendly and introduce a generative AI search feature of perplexity.

Speaker 1

We're working on improving convenience and accuracy of ADOT to make it a support personal AI assistant. T Universe achieved MAU of more than 2,700,000 as of the end of the Q2 2024. Following the YouTube premium package that has enjoyed popularity, we launched the Universe Pass Nest 6 in late June, which is also receiving a positive response in the market. We will continue to expand partnerships with streaming platforms to spread a new culture where people subscribe to T Universe to use streaming services including Wave. Finally, let me turn to shareholder returns.

Speaker 1

The DPS for the 2nd quarter was determined at KRW 831, the same as Q1 2023. The company will strive to reinforce strong earnings from the fixed and mobile business and improve profitability and efficiency while producing tangible results from the AI company initiatives. Furthermore, we will do our best to achieve optimal balance among investments for growth, financial structure improvement and shareholder returns, thereby maximizing corporate value and shareholder value. We ask for your continued support and encouragement. Thank you.

Speaker 1

We will now begin the Q and A session.

Operator

The first question will be presented by Jamie Nan from N. H. Investment and Securities. Please go ahead with your question.

Speaker 1

I'm Anjie Min from NH Investment and Securities. Thank you for taking my questions. First of all, I'd like to congratulate you on very good results despite a challenging market environment. I'd like to ask you a couple of questions regarding your 2nd quarter results. First of all, can you elaborate more on the factors behind your good results for the Q2, in particular, related to the one off profit you recognized related to your patent pool and also your outlook on the bottom line trend in the second half of the year?

Speaker 1

My second question has to do with the competitive landscape in the second quarter, which is also related to my previous question. And going down the road in the second half, we're expecting a new iPhone release. And so can you comment on your projections on the overall handset related competition landscape? Thank you. I am CFO, Kim Young seob of SK Telecom.

Speaker 1

Thank you for your questions. I'd like to first take your first question on the 2nd quarter results. We believe that there were several reasons behind the good results for the 2nd quarter. First of all, because the 5 gs subscriber base and the pay TV market continued to grow and also because AI and new growth businesses including AI data center are producing good results. Secondly, we have been striving to improve the overall business fundamentals across the company and have been promoting efficiency in terms of our profit structure, balance sheet and cash flow, And I believe these efforts have led to better results for the 2nd quarter as well.

Speaker 1

And thirdly, as you mentioned, we recognized patent related profit all at once and this one off gain also added to better earnings for the quarter. To elaborate more on this one off gain from our patent pool, based on our diverse R and D results, we have been utilizing monetization from the IP pools based on our So basically, the structure is that we receive royalty fees on our patent pools and the agency that is in charge of this business will allocate such income in proportion to our stake and then we will recognize some expenses including the fees that we pay to the agency as well as fees related to joint R and D. Furthermore, we benefited from Y o Y and QoQ base effects. To be more specific, in the Q2 of last year, we saw a temporary decline in MNO revenue due to stronger competition in the MVNO market. And on a Q on Q basis, in the previous quarter, we recognized incentives for employees and executives.

Speaker 1

As SK Telecom continues to evolve as a global AI company, a certain level of investments and resources will be required going forward, but we will do our best to ensure that these investments produce tangible results and there will be growth in all domains of the AI pyramid, while continuing to improve the bottom line through efforts to improve the overall business fundamentals and AI transformation. Now on your second question on the competitive landscape, our marketing strategy team will respond. I am Park Kyung Yoon from the marketing strategy team. Due to regulatory changes and increasing public interest regarding handset subsidy and marketing expenses, including discussions on the abolition of the enforcement decree of the Mobile Device Distribution Improvement Act and introduction of mobile number transfer support, we saw a slight increase in the number transfers on a year over year basis. So but while number transfers increased for all three telcos, it has had little impact on the market size or profitability.

Speaker 1

And we believe that it will take some time before we can determine whether such a trend is temporarily driven by changes in subsidy rules. As the 5 gs market continues to mature, we believe that the telcos are no longer competing on subsidy, but rather competing on price plans and differentiated benefits and services. So we will continue to focus on strengthening our own competitive edge based on differentiated services regardless of regulatory changes. We will utilize our AI capabilities for sophisticated target marketing and strengthen online distribution channel competitiveness and utilize AI customer centers for more effective marketing and cost efficiency.

Operator

The next question will be presented by Aram Kim from Shinhan Securities. Please go ahead with your question.

Speaker 1

I'm Kim Aram from Shinhan Investment and Securities. Thank you for taking my questions. We can expect good results for the Q3 and the Q4 as well, thanks to your continued efforts to improve the bottom line. So when you have these additional resources available from these improved earnings, I'd like to understand how you're going to utilize them, especially when it comes to striking a balance between reducing the liabilities, which is an initiative that has been led by the SKY Group as a whole and shareholder returns and investments for your AI business. And secondly, there has been many reports in the media about your data center business as well as your new AI initiatives.

Speaker 1

So can you comment on which AI businesses you believe are going to be most profitable? And can you also elaborate on your edge AI plans? Thank you for your questions. I'm CFO. Let me comment on your question regarding our resource allocation plans.

Speaker 1

On a consolidated basis, our EBITDA is approximately KRW5 1,000,000,000,000 to KRW5.5 trillion and when we spend about KRW3 1,000,000,000,000 for CapEx and KRW1 1,000,000,000,000 to KRW1.5 trillion for recurring expenses, including payments for frequencies and interests, then we're left with about KRW1 1,000,000,000,000 of free cash flow. This year, we are carefully examining our earnings and debt structure and cash flow to figure out where we can generate additional cash flow. And based on our initial analysis in the next 3 to 5 years, although I cannot suggest any concrete numbers at this point in time, the company is expected to generate additional resources. As you may know, the company may utilize these excess cash flow in 3 major ways. We first need to consider investments for future growth and also need to consider to increase shareholder returns when we see significant improvements in our earnings.

Speaker 1

And at the same time, it is crucial to boost financial stability as well. First, to give you more elaboration on our investment plans. Our investments will continue to be strictly guided by our AI pyramid strategy and will be made in areas that can generate profit in the future. For the past 2 years, we have invested in Anthropic, Lambda and SGH for businesses such as LLM, AI Data Center and PAA, and these are the areas where we can monetize based on AI. And this year, our AI related equity investments are going to be around KRW 300,000,000,000 including a $200,000,000 investment in Doing AI business requires an astronomical amount of and we have been making small scale investments to secure capabilities that we need.

Speaker 1

We often receive questions on why SK Telecom and not SK Square is making these investments after the spin off. But I'd like to reiterate that we're executing these investments under the AI pyramid strategy with the clearer goals of dramatically strengthening our core competitiveness as a telco, creating new sources of profit and improving earnings. Next, in terms of shareholder returns, I we believe that our shareholder returns are in line with global standards in terms of size and methods. Our dividend payout ratio is higher than 70% and our dividend yield is a 7% level, and we also carried out large scale share buybacks and cancellations in 20212023. However, it is also true that these efforts and a high level of shareholder returns have not been properly reflected in our corporate valuation in the stock market.

Speaker 1

And honestly, this is something that concerns me as a CFO. So in principle, in terms of total shareholder return, I believe we need to return to shareholders more than the cost of equity through business growth and higher earnings. We will continue to maintain a stable dividend level, conduct share buybacks and cancellations when the timing appropriate and in the medium to long term, we will consider increasing shareholder returns in proportion to significant earnings improvements. Finally, to comment on borrowings, we are confident that SK Telecom's balance sheet is very strong as is demonstrated by the very high credit ratings that we've been maintaining in Korea and abroad for a long time. Nevertheless, to expand room for future investments and shareholder returns in the long run, it is also necessary to reduce borrowings to a more comfortable level.

Speaker 1

Rather than mentioning any artificial target as to how much to reduce by when, what I can say now is that some portion of additional cash flow generated from improved business performance will be used to improve the financial structure in a flexible manner. So to sum up, we will improve our business fundamentals in all areas of business to generate meaningful additional resources, which will be used for investments for growth, shareholder returns and balance sheet improvement in a balanced manner. Thank you. Regarding your question on Edge AI, the Infrastructure Engineering Office will take that question. I'm Ryu Jong Won from the Infrastructure Engineering Office.

Speaker 1

As you may know very well, AI services demand AI computing power for large scale AI learning and inference and AI computing has been provided by centralized AI data centers. Recently, we also see a growing demand for distributed AI computing such as on device AI, But on demand AI has limitations in terms of battery life and performance. And here, Edge AI has emerged as an alternative solution. And we believe that Edge AI can offer new opportunities for telcos. To give you more details, Edge AI is about delivering AI computing and communication services using telcos assets and equipment.

Speaker 1

AI learning requires large data centers, AI data centers, but AI inference can be handled by edge AI. AI. Edge AI is superior to AI data centers in terms of response time and information security while providing stronger AI computing compared to on demand on device AI, and it is an area where telcos can excel. For that, we are working with global big tech companies and telcos to develop ways to provide efficient AI computing by placing AI service in some telco base stations. We will continue with technology standardization related activities and develop into an AI RAN in the future where one equipment can provide both AI and telecom services.

Speaker 1

If AI if edge AI infrastructure is well established, then we can increase AI revenue and expand AI business in a cost efficient manner utilizing our existing telecom assets and equipment. And this will result in top line growth as well as creating an opportunity for our telco infrastructure to be revalued. Thank you.

Operator

The next question will be presented by Joongseok Kim from KB Securities. Please go ahead with your question.

Speaker 1

I am Kim Joon Seo from KB Securities. Thank you for taking my questions. I'd like to ask 2 questions related to your AI business. First of all, when are you expecting more materialization of results coming from your AI businesses? Recently, SK Telecom has been exhibiting a good growth in terms of AI business, and I'd like to understand when these initiatives will actually translate into more visible earnings.

Speaker 1

Secondly, this is related to the first question. What is your expectation for your investment, a $10,000,000 investment in perplexity? And what has been going on regarding this? Thank you for your questions. I will first take your first question on the time line regarding AI businesses.

Speaker 1

It's been 3 years since SK Telecom pursued AI in earnest, and we see now visible ways to monetize AI. SK Telecom aims to generate profit in 3 main areas of AI data center, AI B2B and AI B2C Business. AI data center is the first area that we can pursue right away. Typically, traditional data centers start to generate revenue 3 years after construction, but AI data centers can post sales right away. We will move away from a conventional colocation type data centers, but offer GPU as a service, add energy solutions and pursue global expansion.

Speaker 1

In the AI B2B market, there has been a shift from cloud to AI, and this is where we are cooperating with tech companies such as Anthropic and OpenAI. And our in house developed A. X is becoming important in this market as well in terms of security and cost. So for enterprise business, we will cooperate with SK Group Companies to meet AI needs of customers and affiliates and pursue global expansion as well. In the short term, our revenue target for this year is more than KRW60 1,000,000,000 by providing generative AI, AICC and AI data as solutions to the public, financial and the manufacturing sectors.

Speaker 1

Finally, on the AI B2C business, we were actually the 1st company to enter this market with ADOT and we are working on service upgrade to strengthen personal assistant features and considering various ways to generate profit using ADOT this year. Monetization through subscription is becoming a common business model for global AI services and SK Telecom can be competitive in operating this type of We also aim to conduct global market test this year for global PAA. We're planning to add multi LLM model including ADOTX, Anthropic and OpenAI. We're considering diverse services such as AI search in cooperation with Perplexity and Productivity Services. Thank you.

Speaker 1

Now regarding your second question, the Head of AI Growth Strategy will address this question. I'm Lee Jae Shin, Head of AI Growth Strategy. To respond to your second question, in June SK Telecom made an equity investment of $10,000,000 in Perplexity, an AI search engine company. Perplexity specialized in generative AI search and they launched an AI search service with higher accuracy and reduced hallucinations through search engine optimization and retrieval augmented generation and their corporate value has exceeded $3,000,000,000 in just 2 years after start up. Based on generative AI search technology of Herplexity, we will develop user friendly AI agents and the 2 companies have agreed to cooperate on AI technology expansion including Inference Software.

Speaker 1

In particular, the 2 companies have agreed to develop Korean enhanced AI search, which will be optimized for Korean Internet search environment and search culture. SK Telecom and Perplexity will combine their technological capabilities to offer the most optimized AI search experience for our customers. Perplexity will be added to the upgraded ADAT as part of multi LLM agent together with ChaChiPT, Anthropic and Claude in late August. And also SK Telecom will be the only telco in Korea to offer the pro model of perplexity, which will be available exclusively for our customers free of charge for 1 year from September. Global PAA, Personalized AI Assistant In addition, perplexity engine will be added to the global personal AI assistant project that we're currently working on as a default AI search engine, which will offer convenient AI search experiences that reduce hallucination and increase accuracy.

Speaker 1

This concludes the earnings conference call for 2024 Q2. If you need further explanations or have additional questions, please contact IR at any time. Thank you.

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Earnings Conference Call
SK Telecom Q2 2024
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