SK Telecom Co.,Ltd
Q4 2012 Earnings Call Transcript

Published: 5 Feb 2013

[Operator:]

[Korean] Good afternoon. Welcome to the conference call for the fiscal year 2012 first (sic) [fourth] quarter earnings results by SK Telecom. This conference will start with a presentation followed by Q&A session. And now, we'll begin the conference of the fiscal year 2012 fourth quarter earnings results by SK Telecom.

[Young-Gyu Park:]

[Korean] Good afternoon, my name is Young-Gyu Park, the IRO at SK Telecom. Today's conference call will consist of the presentation by our CFO, Seung Yun Ahn, on the earnings results for Q4 2013 and the management plan and strategic direction followed by a Q&A session. [Korean] To help deepen your understanding, we also have relevant executives participating in the call. [Korean] Consecutive interpretation will be provided for the call for your convenience. Let me also remind you that all the forward-looking statements are subject to change depending on the macroeconomic and market conditions. Let me now present our CFO, Seung Yun Ahn.

[Seung Yun Ahn:]

[Korean] For SK Telecom, year 2012 was a year of meaningful achievement while boosting our quality upper hand through accelerated nationwide LTE rollout, the world's first commercialization of multi-carrier technology, we successfully secured 7.53 million subscribers despite fierce market competition, further anchoring our market initiative even in the LTE space. Furthermore, our target solutions bases [ph] were crystallized, our healthcare portfolio was set up and new business -- growth businesses led by semiconductors and global business along with their implementation approach were better defined. [Korean] With the launching of SK Planet and SK Hynix, SKT reshuffled its structure to emerge as the integrated ICT company. Under such overarching change, SK Telecom not only put forth a future direction for the company, but also proactively dealt with data-centric industry and competitive landscape change and ultimately established its growth strategy, vision 2020. [Korean] Let me now discuss the earnings highlights for Q4 and 2012 on a consolidated basis. [Korean] Revenue for Q4 2012 recorded KRW 4,197.4 billion, up 1.7% quarter-on-quarter. Operating income marked KRW 544.6 billion, surging 81.1% compared to the previous quarter. EBITDA posted KRW 1,248.3 billion, rising 30.1% quarter-on-quarter while net income jumped 195.5% quarter-on-quarter to KRW 519.1 billion. [Korean] Next are the annual result. Revenue reached KRW 16,300.5 billion, gaining 2.3% year-on-year backed by the growth of the LTE subscriber base. These numbers slightly exceeded our annual guidance announced in the beginning of the year. [Korean] Operating income came in at KRW 1,760.2 billion, mainly affected by the higher marketing spend in line with the rapidly increasing LTE subscribers adding investment to support the data traffic surge, as well as the resulting expansion in depreciation. EBITDA and net income marked KRW 4,338.8 billion and KRW 1,115.7 billion, respectively. [Korean] The parent-only CapEx for SKT recorded KRW 2,858.4 billion, exceeding our original plan. However, the CapEx trend going forward is expected to trend down mid to long term due to technology development and investment efficiency enhancement efforts. [Korean] That was the summary of the achievements and -- on earnings results for 2012. Let me now turn to our management plan and strategic direction for 2013. [Korean] In 2013, SK Telecom will focus on unsurpassed customer value creating management activities to concentrate on offering innovative products and services to impact every aspect of our customers daily lives from price plans, distribution all the way to customer care, we will realign our entire system into a customer oriented one. [Korean] We will also attain successful growth stories. We will expand ARPU by gaining bigger LTE subscriber base and usage. We will shape the service initiatives through our next-generation integrated communications platform, leveraging upgraded services, including joint T. We will unlock new profit sources by creating new growth engines through new partner collaborative products and fixed mobile integrated products among others. On the new business front, we will demonstrate our growth potential step by step in the B2B solutions, media, healthcare and platform. [Korean] Year 2013 will be a year of LTE based turnaround, competitive paradigm change and the first meaningful step in reaping the results from the growth businesses. Accordingly, our revenue target for the coming year is KRW 17,200,000,000,000. With a nationwide LTE coverage already complete, our CapEx will scale back significantly from the previous year to KRW 2,100,000,000,000. As you can see, we are aiming for both growth and profitability in our management objectives in the coming year. [Korean] Dear investors and analysts, [Korean] SKT is intent on refraining from overheated competition and will convert to a retention-focused management paradigm. Now that the LTE penetration is above 30%, we anticipate cooling down of the market where products and services offer -- offering differentiated data user is experienced will emerge as the core competitive factors. As such, we will solidify our dominance in the LTE service arena by offering price plans and services optimized for the data centric era such as data gift program and retention subsidy for long-term SKT subscriber's changing phones. [Korean] SK Telecom boasts world's best technologies in its telecommunications network operations. In spite of the far higher number of subscribers on its network versus peers, SKT's LTE speed and quality are demonstrating a comparative advantage. Once the carrier aggregation technology is introduced during the first half, the maximum download speed is expected to double, reaching 150 mega BPS, further strengthening our competitive edge. [Korean] As for the B2B business, we have selected 5 solution businesses, including smart store, as the core corporate businesses. We will prove the true value of B2B business potential through actual outcome while incessantly innovating our business approaches in order to secure a solid growth foundation. To that end, we plan to launch my shop 2.0 during Q1 2013 followed by the launching of enterprise digital marketing platform, EDMP, in Q2 to further reinforce our B2B business. [Korean] As for IPTV in the media business, we successfully launched HD grade mobile TV in July 2012 in time for London Olympics and followed up with quality enhancement by expanding service targets and VOD content at the end of October. In terms of quantity, we secured 1.4 million subscribers demonstrating meaningful advancement. By 2015, we plan to acquire total 7 million IPTV subscribers, including mobile IPTV to obtain a strong foothold in the home market with IPTV at the heart of the fixed mobile bundled service. By securing a dominant position as a major pay-TV operator, we will continue to ensure stable profitability. [Korean] Our strategically important healthcare business is a focus area differentiated from competitors. As our society ages and ICT technologies evolve, this sector is garnering attention as the next-generation new growth industry. Leveraging our long accumulated ICT technological prowess, we seek to evolve this business as the hub of healthcare by integrating medical devices, information and services to create new values. By 2020, we expect this business model to grow into more than KRW 1 trillion market. [Korean] I would like to also touch up on SK Planet. During 2012, SK Planet solidified its market leadership in its core service areas while strengthening capabilities as a platform company by internalizing R&D capacity and pursuing 1 ID structure, et cetera. Also in the U.S. and Turkey, it was a year of securing a global bridgehead in the social and commerce areas. [Korean] The 11th Street gross merchandise value, GMV, more than tripled year-on-year. If you include the value coming from mobile 11th Street, the total GMV climbed 13% year-on-year to KRW 4.6 trillion. The number of users for SK Planet's major services, such as T Store and T Map, surged between 30% to 50% compared to the previous year. [Korean] Recently, SK Planet completed the merger with SK MMC, which possesses marketing platform and LBS-related capabilities, including OK CashBag. Through this merger, SK Planet will be able to combine its own B2C capacities comprising diverse services, customer base and business capabilities together with MMC's business capacities to not only reinforce the current business portfolio end user base, but also to obtain platform competitiveness to lead the mobile and big data environment which is at the center of future ICT changes. [Korean] By way of consolidation and realignment of business infrastructures possessed by the 2 entities, SK Planet will maximize post-merger synergy through big data analysis framework, customer benefit integration, online and offline interlinked model development and provision of future oriented advertisement services. The combined entity plans to pursue company-wide select and focused approach in the core growth pillars, digital content and commerce. [Korean] Furthermore, year 2013 will be the starting year of global business in earnest. The e-commerce business in Turkey is currently undergoing product development and platform deployment after establishing a JV in June 2012. This service will be commercialized during Q1 in 2013. Tapping into the rich experience from 11th Street in Korea, we will successfully make inroads into the trust-based open market in Turkey. On the social front, we launched TicToc Plus service in the U.S. and Southeast Asia in October to test the viability in the global market. We will strive to evolve our experience into appealing global services by mustering assets of SK Planet. [Korean] Lastly, I would like to discuss shareholder return. [Korean] Including the already paid out interim dividend of KRW 1,000, the cash dividend for 2012 has been approved at KRW 9,400 per share at the general shareholders meeting and will be paid out accordingly. Going forward, the management at SKT will continue to pursue both profitability and new growth. Despite the challenging business environment, we plan to maintain the cash dividend level for 2013 on par with the previous year. [Korean] In the coming year, we will do our utmost to further deepen the communication with the capital market to win a due valuation for our enterprise value. Once again, I would like to thank all the investors and analysts for your constant support for SK Telecom. Thank you.

[Young-Gyu Park:]

[Korean] We will now begin the Q&A session. Please go ahead with questions.

[Operator:]

[Korean] [Operator Instructions] [Korean] The first question will be provided by Jong In Yang from Korea Investment & Securities and the next question will be provided by Seyon Park from Barclays.

[Jong In Yang:]

[Korean] I have the following 2 questions. First of all, despite the suspension of new subscriber acquisition that is imposed for Q1, if you look at the recent Q1 numbers, I guess, the number of MMP subscribers seems to be higher than anticipated. So how does the company's management assess the current competitive landscape for the first quarter and how do you foresee the outlook for the second quarter? And my second question has to do with your ARPU outlook. During the fourth quarter, you have achieved quite a stellar ARPU number increase. So going into the 2013 period, how much of an ARPU growth are you anticipating? For your information, your competitors have answered about 8% to 10% growth to the same question.

[Seung Yun Ahn:]

[Korean] Let me first address your first question regarding the competition in the first quarter. As you are well aware, right before the actual implementation of the suspension of the new subscriber acquisition ban in the beginning of January, there has been a temporary pickup in terms of heated competition. But as you're well aware, starting from LG U+, the 3 operators are consecutively implementing their implementation of the suspension of the new subscriber acquisition. So in actuality, if you look at company by company, we are given between 20 to 24 days of new acquisition suspension period. So during those particular periods, we anticipate the overall expense to come down and, therefore, for the first quarter, as a whole, we believe that the competitiveness in the market will weaken. [Korean] Typically speaking, usually, every first quarter of the year has been showing a moderately higher competition compared to the rest of the quarters because what -- each company seeks to set a good first step in terms of expanding the revenue for the entire year. Therefore, typically, every first quarter has seen an increased competition in subscriber acquisition. And also, we believe that there will be some competition nevertheless regarding the acquisition of the new LTE subscribers in order to secure an upper hand for the long-term growth. [Korean] However, seeing how the LTE penetration in the entire market has already exceeded 30%, I believe that there is much lower incentive for heated competition in the market, as I see it. And also, the competition to secure the second position in this competitive dynamics in the LTE arena will be pretty much finished off during the second quarter, I anticipate. [Korean] And in addition to the point that I have made, I believe that the government's ongoing market monitoring and also a move by the government to somehow embed into the regulation regarding clauses about subsidies and also introducing penalties for the cancellation of price plans that have been fixed, I believe that these are all going to lead to the more efficient and healthy self-imposed efforts on the part of the operators. So I believe that as we move into the second half of the year, the market will be stabilizing even further. [Korean] Let me answer your second question regarding ARPU. [Korean] For your information, during the fourth quarter of last year, thanks to the robust growth of the LTE subscriber numbers, our ARPU has grown by about 1.9% quarter-on-quarter and 3.6% year-on-year, marking the KRW 33,761. [Korean] Leveraging our LTE-related migration efforts as well as the differentiated competitiveness and services offered by the company, we have been making efforts to secure high ARPU subscribers to date and we will continue to do so. And the fact that we will be focusing more on the retention-based acquisition of our existing customers, we believe that our ARPU going forward will be showing additional upward trend. [Korean] According to our estimation, we believe that the Q4 ARPU for year 2013 will be going up by 8% compared to Q4 of 2012. [Korean] Of course, as we look ahead into 2014, we believe that the ARPU upward trajectory will persist going forward as well.

[Operator:]

[Korean] The next question will be presented by Seyon Park from Barclays and the following question will be presented by Hongseek Kim from NH Investment Securities.

[Seyon Park:]

I have 2 questions. First, on CapEx. Can you give a little bit more breakdown as to how that is consisted of? And in particular, does that include potential investments in spectrum? And my second question would be regarding your shareholder returns, given where the foreign ownership limit is, is management considering potentially any share buyback and cancellation? [Korean]

[Seung Yun Ahn:]

[Korean] To address your question regarding the CapEx-related breakdown, as I told you before, the anticipated annual guidance for CapEx for the entire year amounts to about KRW 2.1 trillion, of which the network-related allocation would be around KRW 1.6 trillion while the nonnetwork-related CapEx will be around KRW 500 billion. [Korean] And you also asked whether this particular amount contains the spectrum-related expenses possibly. If we are to incur extra expenses for the spectrum allocation, we will actually put up [ph] the bill within the overall CapEx guidance of KRW 2.1 trillion by reallocating different breakdowns in -- among the overall CapEx amount. [Korean] And regarding the shareholder buyback issue, I believe that this is something that we have to review more comprehensively, looking at the total picture of the financial status.

[Operator:]

[Korean] The next question will be presented by Hongseek Kim from NH Investment Securities. And the following question will be presented by Neale Anderson from HSBC.

[Hongseek Kim:]

[Korean] I also have 2 questions. First of all, SKT has also introduced the unlimited data price plan for the LTE subscribers. Of course, if you simply look at the ARPU perspective, this is not entirely bad. However, we do have some regulatory considerations to make, I believe. And within the market, there is an anticipation that SK Telecom will be introducing price plans linked to the traffic of growth and traffic flow overall. So against that backdrop, we wonder whether introduction of the unlimited data price plan is a good decision. So what is your view on this? And the second question is the following

[Seung Yun Ahn:]

[Korean] To answer your question regarding the LTE unlimited data price plan that has been launched, let me remind you that this was an unavoidable price plan related decision that we had to make amidst the heated competition that is ongoing at the moment. And also, let me remind you that this price plan introduction is intended to be there for 3-months period. So during those 3-months period, I'm sure we will be able to identify various potential issues. So after reviewing such issues, I'm sure that we will be able to introduce much more improved and enhanced price plans into the market. [Korean] And if you recall, within the 3G customer base, all-in-one, 52 or above customers were given the unlimited data usage right, whereas in the LTE arena, the unlimited data price plan is only available from the very top price plan, which is above KRW 100,000 per month. So considering the excessive usage of data for those LTE 100 and over subscribers and also if you look at the average data usage of these users, I don't think that the traffic growth impact will be that significant. [Korean] You also asked about the relationship between the ongoing decline possibly on the handset prices and how that will impact the overall price plan policies of the company. But frankly speaking, I see very low correlation between the price of the handset with the service -- price plan related policies of the company. [Korean] And frankly speaking, when the smartphones were first introduced into the market, it was set at such a high price to begin with. So in order to proliferate the wider adoption of the smartphones in the market as soon as possible, as an operator's perspective, we had to provide special discounts so that we could encourage more adoption. [Korean] And to elaborate a little bit, I believe that at the end of October period, that's when we were introducing various special discounts, such as special discounts and special subsidy discounts for the LTE subscribers as well. But starting from the month of November last year, we introduced the fixed price plan-related special discount program which actually significantly aligns the price plan, characteristics and also the subscriber opted price plan level and providing the relevant services according to the price plan that they chose, and we eliminated unnecessary discounts in the process. So rather than actually aligning to the pricing of the handset itself, already, we are aligning price plan-related policies to the quality of those subscribers involved. So because we are implementing such efficient strategies as we speak, we do not anticipate any major changes going forward.

[Operator:]

[Korean] The next question will be presented by Neale Anderson from HSBC. And the following question will be presented by John Kong (sic) [Kim] from Deutsche Securities Korea.

[Neale Anderson:]

Two questions for me, please. Firstly on your M&A strategy this year, it seems the SK Planet and also verticals such as healthcare are your main new business priorities. But would the company consider large acquisitions in these areas in 2013 or will debt repayment be the focus? Secondly, in the past, SKT has had a clearly defined subscriber market share target. Does the company still hold this target or do you now focus on a different metric? [Korean]

[Seung Yun Ahn:]

[Korean] As you are well aware, in our new growth business areas, our companies [indiscernible] -- in our new growth business areas, if necessary, we have been pursuing both internal capability development as well as inorganic acquisition of capabilities necessary depending on the situation. So under that big umbrella of policies, last year, although these M&As have been not too large in size but in a couple of areas, we have conducted a couple of M&As. [Korean] With regard to our plans for M&As in the future, we will be quite flexible and quite proactive whenever opportunities arise in the future. But at this particular juncture, we do not have any clear plan as to a particular M&A that we will be pursuing this year. [Korean] Regarding the targeting of the subscriber-related strategy for the company, we still believe that maintaining a certain level of market share is quite critical and quite -- much of a prerequisite for us to maintain future revenue foundation. Therefore, we will continue to maintain such policies when it comes to the targeting but focusing on the LTE subscribers as well as subscriber qualities in the process. [Korean] As you are well aware, the 3 telcos in Korea are subject to the suspension of new subscriber acquisition at the moment consecutively. So as this implementation continues within the first quarter, in between certain periods, we will see some fluctuations as to the market share of the market, temporarily. But by the end of Q1, when all 3 telcos complete their allocated suspension period for new subscriber acquisition, I believe that the market share equilibrium will be going back to the previous level. [Korean] And we believe that the level of market share held by SK Telecom is only the result of the competitive edge that we have from the fundamental competitiveness.

[Operator:]

[Korean] The next question will be presented by John Kong (sic) [Kim] from Deutsche Securities Korea. And the following question will be presented by Josh Bae from UBS.

[John H. Kim:]

[Korean] Yes, my first question has to do with your subsidiaries. So for year 2013, with regards to your subsidiaries, including SK Planet and SK Broadband, do you have any earnings guidance that you could provide to us? And secondly, my question has to do with the more detailed breakdown or the detailed numbers of the gain on the sale of your assets. Could you be more specific about the size of the gain? And also, regarding the remainder of your residual assets, such as Posco shares, do you have any immediate plans to sell such holdings?

[Seung Yun Ahn:]

[Korean] The only guidance that I could share with you regarding next year that involves subsidiaries, what I could tell you is the following

[Operator:]

[Korean] The next question will be presented by Josh Bae from UBS. And the following question will be presented by Kevin Kwok from Turiya Capital Hong Kong.

[Josh J. Bae:]

My first question is on your LTE subscribers. You mentioned 8% higher ARPU in fourth quarter this year versus fourth quarter last year. If you could let us know what your LTE subscriber targets are for this year and to achieve this, that would be very helpful. My second question is on your marketing cost sales. It was good to see a meaningful decline in the fourth quarter. If you could give us some indication on what we should expect in the coming quarters or for the full year 2013, that'd be helpful. My third question is on your Hynix stake. There were some press reports recently that you have first rights to acquire remaining stake of the creditors and that these rights would expire this month. If you could let us know what your thoughts are on increasing your stake in Hynix. [Korean]

[Seung Yun Ahn:]

[Korean] Let me first address your question regarding the current status of LTE subscribers and our outlook for the rest of the year. [Korean] After actually exceeding 7.53 million subscribers at the end of last year, as of January, the number of subscribers increased to 8.3 million. [Korean] So if you look at the outlook for 2013, I believe that because the adoption of LTE smartphones is becoming so proliferated and wide throughout the country, I believe that the subscriber migration to LTE will persist for the rest of the year. Although we do not have any set target, per se, regarding the subscriber number by the year end this year, we anticipate at least about 14 million subscribers by the end of this year, however. [Korean] To address your second question regarding our marketing expenses trend. As you're well aware in 2012, there was an overheated competition to gain an upper hand in the LTE arena among all the operators. And because of that, there has been quite a bit of marketing expenses. However, going forward, due to market stabilization and marketing spend decrease, we anticipate a lot more stabilization in terms of the marketing expenditure. However, we can't quite share with you right now just exactly how much reduction in marketing expense that we could anticipate because we have to look at the market dynamics. However, what I could share with you is that SK Telecom will do its best to lead the overall market sentiment towards market stabilization, thereby reducing the marketing expenses further. [Korean] To answer your third question briefly, we do not have any plans to further accumulate shares of Hynix at the moment.

[Operator:]

[Korean] The next question will be presented by Kevin Kwok from Turiya Capital Hong Kong.

[Kevin Kwok:]

I have 4 questions. I think the first question would be on the data usage per 4G subs so I would like to know the data usage per 4G subs in terms of the trend and the amount from first quarter 2012 to fourth quarter 2012, whether it's still going up or not. So that's the first question. The second question would be on the subscriber acquisition cost. So I think the marketing or the competition level has been cooling down in fourth quarter, so I would like to know how much it went down in terms of the SAC costs in the fourth quarter 2012 and how the management will view on the SAC cost going forward in 2013. The third question would be on the 4G ARPU. So I understand that the fourth quarter 2012 4G ARPU is going down from KRW 52,000 to KRW 50,000. So based on the fact that the new subscriber is 30% of the average 4G subscriber for fourth quarter 2012. So the implied ARPU in fourth quarter for the new subscriber is coming down quite significantly in fourth quarter. So I just want to get some highlights on what actually happens on the tariff plan offering in the fourth quarter, like whether there is a like-for-like plan tariff cuts or not in the fourth quarter. So the fourth question would be on the overall mentality of the subscriber additions. So I would like to know the management's mentality on how they're going to balance between declining in the marketing cost versus the ARPU decline, the like-for-like 4G ARPU decline. So how would that work? So is it going to be lower marketing cost? And you -- at the same time, you actually forego some of the ARPU for the new subscriber in 2013. Is that right picture to expect? So those are the 4 questions. [Korean]

[Seung Yun Ahn:]

[Korean] Let me first answer your question regarding the 4G data usage traffic-related question. [Korean] If I may share with you the trend of the data usage traffic for 4G LTE subscribers. As of the end of December 2011, the average usage was about 1 gig, whereas it increased to 1.6 gig or 1.7 gig by mid-2012 and by the year end last year which was 2012, it actually grew to 1.8 gig. [Korean] And regarding the SAC-related question, if I may compare Q3 and Q4 of last year, between those 2 quarters, the SAC actually decreased in addition by about KRW 80,000. [Korean] And then you'd also asked about the ARPU trend within the realm of 4G. [Korean] Of course, compared to the very beginning adoption period for the LTE service in the beginning, as the overall number of LTE subscribers grows in the market, it is true that we are seeing a slightly downward trend in terms of the average ARPU. [Korean] Of course, it is true that the LTE-related ARPU will be going down slightly in the future, but you have to also consider the overall inflow of new LTE subscribers. And as I told you before, our current penetration rate of LTE subscribers currently stands at 30%, and we anticipate this number to increase to 50% by the year end. So as I told you before, between this time period from now until the end of the year, we believe that the overall average ARPU will be going up about 8% year-on-year. [Korean] If I may elaborate, as I told you before, at the end of last year, our average ARPU stood at KRW 33,761. So compared to that average amount, as we have a bigger inflow of the higher ARPU LTE subscribers into the total subscriber group, we believe that, that much increase in the ARPU number will take place. [Korean] And let me, also, address your fourth question, actually. [Korean] First of all, I believe that seeking both marketing cost reduction as well as ARPU increase will be the right direction to maximize profitability of our company. [Korean] To achieve this goal, we will be focusing on the LTE-driven marketing transformation in a very continuous and a very accelerated basis so that we could innovate the entire process. [Korean] First of all, by preemptively introducing price plans that is more data oriented, we want to, first of all, further enhance the subscriber experience, overall. [Korean] By offering such differentiated services, I believe that we will be able to maintain relatively high level of price plans for those heavy data using subscribers going forward. [Korean] And also our joint T service, which is a part of our RCS, rich communications suite, endeavors, we will be offering the next-generation integrated communications platform. And on that, we will be offering additional specialized services and additional services so that we could ensure further heads up in terms of the revenue increase potential. [Korean] Not only that, aside from the price plans themselves, we will make sure that we offer the most differentiated data usage experience itself so that we could continue to differentiate ourselves in the service category. [Korean] The plans introduce various new services, including the lifestyle innovation services, including shopping and movie experiences as well as data-related membership services.

[Young-Gyu Park:]

[Korean]

[Operator:]

[Korean]

[Young-Gyu Park:]

[Korean] With that, we will conclude the Q&A session and invite our CFO for his closing remarks.

[Seung Yun Ahn:]

[Korean] I would like to thank you once again for your participation in today's earnings call. All of your valuable comments and interest will help enrich our management activities. [Korean] As mentioned earlier, SK Telecom will continuously challenge itself to fortify our competitiveness while doing its best to achieve both consistent growth and shareholder value enhancement. [Korean] Thank you.

[Operator:]

[Korean] This concludes the earnings conference call for Q4 2012. Thank you very much.