Logo of jester cap with thought bubble.

Image source: The Motley Fool.

SK Telecom Co Ltd (NYSE:SKM)
Q4 2019 Earnings Call
Feb 8, 2020, 7:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Jeong Hwan Choi -- Investor Relations Officer

[Foreign Speech]

Good morning. I am Jeong Hwan Choi, the IRO of SK Telecom. Today's conference call will consist of the presentation on the earnings results for fiscal year 2019 and the future management plans and strategic direction by Poong Young Yoon, CFO and Head of Corporate Center I and Seong-Ho Hah, Head of Corporate Center II followed by a Q&A session.

[Foreign Speech]

Late last year, the Company adopted a dual operating system in order to optimize the operation of two business areas that were different from one another in nature. The MNO business and the new business arena, consisting of media, security, commerce and etc. MNO is headed by Poong Young Yoon, Head of Corporate Center I and new businesses are headed by Seong-Ho Hah, Head of Corporate Center II and as such, they will be presenting the achievements and strategic plans of their respective divisions for today's conference call.

[Foreign Speech]

Today's conference call will provide consecutive interpretation, and we also have here with us executives from relevant business divisions to help deepen your understanding.

Before we begin, we want to remind you that all forward-looking statements are subject to change depending on the macroeconomic and market situations. Let me now present our CFO.

Poong Young Yoon -- Chief Financial Officer and Head of Corporate Center I

[Foreign Speech]

Good morning. This is Poong Young Yoon, CFO of SK Telecom. Let me first discuss the annual consolidated earnings highlights for 2019.

[Foreign Speech]

Consolidated revenue recorded a record high of KRW17,743.7 billion, a 5.2% increase year-on-year. Larger 5G-related gains minimize the MNO revenue decline while new businesses such as media and security achieved significant growth contributing to the consolidated revenue increase. New business revenue accounted for 36% this year, which was a 5 percentage point year-on-year growth, attesting to SK Telecom's transformation into a new ICT company.

[Foreign Speech]

Operating income recorded KRW1,110 billion, down 7.6% year-on-year. This was mainly due to KRW357.4 billion, a decrease in operating income. But due to the growth of our new ICT portfolio. The decline recorded KRW91.8 billion on a consolidated basis. With new business is now generating stable operating income, we believe that our ICT portfolio has successfully entered into a stable phase.

[Foreign Speech]

Net income decreased by 72.5% year-on-year due to the effect of the equity method income on SK Hynix.

[Foreign Speech]

Let me now move on to major business achievements and strategic plans for each business division.

[Foreign Speech]

Annual non-consolidated MNO revenue of SK Telecom recorded KRW11,416.2 billion, down 2.5% year-on-year. Membership points deducted from revenue and the continued tariff cut affect were among the negative factors that led to a revenue decline, but MNO revenue has picked back up from Q2, when 5G service started in full scale and has been accelerating its growth momentum since.

[Foreign Speech]

MNO operating income recorded KRW950.1 billion, down 27.3% year-on-year, due to 5G-related marketing costs, and depreciation and amortization costs.

[Foreign Speech]

In 2019 MNO launched the world's first commercial 5G service, which was followed by various 5G service offerings including 5G based media and services as well as building a 5G clusters with a premium network and innovative services. As of the end of 2019, the 5G subscriber count stood at $2.08 million and we expect this to reach KRW6 million to KRW7 million by the end of the year. While there were some competition during the initial stages of 5G adoption last year, this year we will make the currently stable market order and execute efficient marketing costs and focus on growing the 5G subscriber base through service competitiveness.

[Foreign Speech]

To achieve this goal, we plan to focus on providing new 5G services this year through partnerships with big players from home and abroad. Following the footsteps of flow and wave, both of which has gained a foothold as a competitive service in their respective fields. We will be launching new subscription-based services actualized 5G-based B2B business models and lay the foundation for new growth through global hybrid collaboration.

[Foreign Speech]

Media business revenue on an IPTV revenue basis recorded KRW1,298.5 billion. Thanks to continued growth of IPTV subscribers, larger share of premium subscribers and growing content revenue resulted in a 10.7% increase year-on-year.

[Foreign Speech]

Security business revenue including ADT Caps and SK Infosec recorded KRW1,193.2 billion. In 2018, our security business revenue was around KRW300 billion, but in 2019 with ADT Caps included on a full year basis and SK Infosec consolidated as well. We achieved a fourfold growth. Operating income in 2019 recorded KRW153.5 billion, also significantly contributing to consolidated earnings.

[Foreign Speech]

Commerce business revenue including 11th Street and SK stoa recorded KRW791.1 billion, pre-deduction of membership points from revenue. While 11th Street's revenue slightly declined year-on-year in the process of shifting away from destructive competition so prevalent in the e-commerce market and creating a sound profit structure. The rapid growth of SK stoa helped to maintain total commerce revenue similar to that of last year. Above all, we are happy to announce that the commerce business is operating income turned positive, which we had made our commitment early last year.

[Foreign Speech]

Now, the Head of Corporate Center II to Mr. Hah will walk you through the achievements and plans for the new businesses.

Seong-Ho Hah -- Head of Corporate Center II

[Foreign Speech]

Good morning. I am Seong-Ho Hah, Head of Corporate Center II.

[Foreign Speech]

Let me discuss the achievements and plans for the new business division.

[Foreign Speech]

Up first media. In 2019 SK Broadband's IPTV business focused on strengthening its service competitiveness by providing personalized customer experiences through data-based viewing pattern analysis and as a result it recorded an annual net addition of 464,000 subscribers, opening a new era with 5.2 million subscribers in total.

[Foreign Speech]

As per the merger with t-broad, we obtained government approval in January and are currently undergoing the necessary follow-up processes including AGMs for both companies to prepare for the merged entity to launch on April 30 this year. We will successfully conclude PMI within the first half of the year and do our best to transform SK Broadband into a comprehensive media company with 8 million pay TV subscribers.

[Foreign Speech]

Wavve, the result of hyper-collaboration with the three major broadcasters is seeing rapid growth in-service usage rate. As of the end of 2019 the UV recorded KRW2.7 million, the highest in domestic market as well as the near 200% increase compared to April of 2019 when SKT and NSOK [Phonetic] first began joint marketing.

[Foreign Speech]

Wavve was valued at KRW1.2 trillion post money in November last year and secured KRW200 billion in new funds. The funds will be invested in creating original content and sourcing hit content from home and abroad to strengthen content competitiveness thereby accelerating wavve's subscriber growth.

[Foreign Speech]

Moving on to security business. In 2019 ADT Caps achieved the highest subscriber net adds in the industry in the CMS market based on the distribution network synergy created with SK ICT family companies and launched convergent security products that encompass information security with SK Infosec, thereby refreshing the industry.

[Foreign Speech]

In 2020 ADT Caps and SK Infosec will continue to strengthen the leadership in the existing CMS market as well as enhance competitiveness in new business areas such as unmanned part, home security, senior care and convergence security.

[Foreign Speech]

Now, moving onto commerce business. As I mentioned before 2019 was a monumental year for us as we turn to profit amid the battlefield of e-commerce.

[Foreign Speech]

Moving on to commerce business. As I mentioned before, this year 11th Street will differentiate its product competitiveness through external partnerships and become an indisputable advanced commerce portal that brings entertainment to shopping. And through these efforts, we will flexibly operate both the growth target and profitability target and continue to grow in 2020.

[Foreign Speech]

Lastly, let me discuss ONE store and T1. In 2019 ONE store was valued at KRW500 billion post money and attracted KRW100 billion in new funds. T1 was valued at $91 million post money and attracted $41 million and was reborn as the global joint venture, SK Telecom CS T1. Under the single theme of games, the two entities these will attack meaningful growth by utilizing their competitiveness. We ask for your continued interest in our journey.

[Foreign Speech]

And now our CFO will discuss the dividend for 2019 and guidance for 2020. Thank you.

Poong Young Yoon -- Chief Financial Officer and Head of Corporate Center I

[Foreign Speech]

Dividends for 2019 has been decided by the board at KRW10,000 including the paid out KRW1,000 interim dividend. The amount will be confirmed after the approval of the March AGM.

[Foreign Speech]

While the decision was made to maintain the dividend as the amount of the previous year to meet the trust of our shareholders. We do believe that we are at a time that calls for a new dividend policy considering where SK Telecom stands today and where it is headed. Going forward, we plan to hold an in-depth discussion at the meeting of the Board of Directors from a viewpoint of maximizing shareholder value. Once details are made concrete. We will communicate with the market.

[Foreign Speech]

Annual consolidated revenue is expected to exceed KRW19 trillion for the first time ever to reach KRW19.2 trillion based on MNO achieving growth yet again and 5G, with 5G and accelerated growth momentum of media, security and commerce businesses.

[Foreign Speech]

While much like last year, it is difficult to provide you an accurate capex guidance due to flexible and efficient capex rolling, our goal is for it to be less than that of last year. By active capex cutting efforts in areas outside of 5G, we will do our best to achieve both 5G leadership and improved earnings.

[Foreign Speech]

For the past three years SK Telecom has been creating a new future and not only MNO but also in new businesses such as media, security and commerce. We now stand at a new starting point. With MNO growing once again and new business is growing more than ever, we will make this year the starting point of SK Telecom being rightly valued for the enterprise value that we have been building and will continue to be increasing in the future.

[Foreign Speech]

We ask for the continued interest and support from our investors and analysts. Thank you.

Questions and Answers:

Operator

[Operator Instructions] The first question will be provided by Hoi Jae Kim from Daishin Securities. Mr. Kim, please go ahead, sir.

Hoi Jae Kim -- Daishin Securities -- Analyst

[Foreign Speech]

Hello. I have two question. The first question is, ever since you began commercial launch of 5G service, due to marketing cost and your depreciation and amortization. We've seen a negative impact on the profit, taking into consideration. Your outlook in terms of the 5G subscriber growth, as well as capex rollout, when we'll be able to see MNO profit turnaround?

My second question is, we know that you went through some reorganizing internally and divided it into a dual operating system of MNO and new ICT portfolio. Does this -- is this directly related in any way to your governance restructuring and can we also get an update on your plans regarding the governance restructuring?

Poong Young Yoon -- Chief Financial Officer and Head of Corporate Center I

[Foreign Speech] Thank you Mr. Kim for your question. [Foreign Speech] Let me first talk about MNO turnaround that you asked. [Foreign Speech] As all of you know when we adopt a new network, new generation network because initial capex proceeds subscriber acquisition, the initial profitability of the service can be not up to standards, but as we go on with the subscriber base growth, profitability is enhanced. [Foreign Speech] We believe that the continued subscriber growth for 5G subscribers as well as the according data usage growth will gradually bring positive contribution to our profit. [Foreign Speech] We have seen the market stable a lot more beginning from Q4 last year and we expect the stabilizing trend to continue into this year. So, we believe that the negative impact that it has had on our MNO profit will stop. And also, with media and new business is generating greater revenue. We believe that we are looking forward to the MNOs revenue turning around.

[Foreign Speech] By utilizing our efficient investment strategies and marketing cost spending, we expect the MNO profit to indeed improve and we are expecting the profit to turnaround within the second half of 2020 and we hope for a more accelerated growth in terms of the MNO profit beginning from next year.

[Foreign Speech] Let me now address your second question regarding our plans in terms of the governance restructuring. [Foreign Speech] As you said last year, at the end of late last year, we created a dual operating system in terms of our internal business operation, and this was a part of the companywide strategy to make sure that not just our MNO business but the value of our new business is rightly valued in the market. [Foreign Speech] And this was a part of our efforts regarding our goal of optimizing the operation, so by that we mean the target setting, operation of resources, evaluation and compensation of two very different business areas, namely MNO and that of the new businesses encompassing media, security and commerce. So, this is not in any way directly related to governance restructuring.

[Foreign Speech] So, regarding any plans for the governance restructuring, at this particular juncture, no details or schedules has been set yet. So, once we have the optimal method as well as environment for such endeavors. We will be sure to communicated with the market with a package that can be satisfying for all stakeholders.

Operator

The next question will be presented by Jungsoo Kim [Phonetic] from KB Securities. Mr. Kim, please go ahead, sir.

Jungsoo Kim -- KB Securities -- Analyst

[Foreign Speech] Thank you for the opportunity. I have two questions. The first question is regarding your media strategy. We are facing the merger of SK Broadband and t-broad at the end of April this year, and we're seeing a lot of new global OTTs in the market. So, I would like to hear about SK Telecom's media strategy regarding the M&A.

And my second question is, it seems to me that a lot of investors are getting more and more interested in your IPO plans for your subsidiary companies. What is your outlook in terms of the IP, planned IPOs and as shareholders of SK Telecom? What can we look forward to in terms of the IPO plans?

Seong-Ho Hah -- Head of Corporate Center II

[Foreign Speech] This is the Head of Corporate Center II, Seong-Ho Hah, and I want to thank you for your questions. [Foreign Speech] Let me first address your question regarding the M&A of t-broad. [Foreign Speech] We have obtained government approval regarding the merger and acquisition of t-broad and after we go through the AGM for SK Broadband, we plan to have the merged entity launch on April 30 of 2020. [Foreign Speech] The merged entity for 2020 is expected to have a subscriber base of 8 million, over 8 million pay TV subscribers and we expect the revenue to reach over KRW4 trillion. [Foreign Speech] We look forward to utilizing the platform and content competitiveness as well as successful M&A synergy to pursue with continued growth in the pay TV subscriber base as well as growing share of high-value subscribers. And based on this to create, to creating a growing revenue and profit.

[Foreign Speech] After merging with t-broad, we expect to enhance our investment efficiency due to larger growing coverage as well as doing away with redundant investments and also we expect a growing subscriber base utilizing the integration synergy of the distribution channels and also we expect a larger platform business model opportunity which may include ad sales, which can utilize the pay TV subscriber base. So, we are expecting a lot of synergies to be generated. [Foreign Speech] And let me now move on to discuss some of the more higher overarching media strategy for the company, including wavve.

[Foreign Speech] Wavve, which is the result of hybrid collaboration with the three terrestrial broadcasters, it reached you 2.7 million in unique visitors by the end of December last year, which was the highest in domestic markets and that's actually a threefold growth compared to last April when SK Telecom went into joint marketing for the first time with NSOK.

[Foreign Speech] And also wavve was valued at KRW1.2 trillion post money this past November and successfully raised KRW200 billion in new funds with the newly acquired funds, we will be investing more in original content and thereby enhancing our premium content competitiveness. In terms of the investment size in original content, it will grow from KRW10 billion in 2019 to KRW50 billion this year so in 2020. And then by 2023, we plan to invest in accumulated total of KRW300 billion in original content.

[Foreign Speech] Wavve is targeting KRW500 billion in revenue by the year 2023 and through partnerships and collaborations with overseas OTT players as well, thereby seeking global and market entrants. We will continue to enhance its enterprise value. [Foreign Speech] So, as such the media strategy for SK Telecom is utilizing the 10 million paid subscribers of SK Broadband, t-broad and wavve to evolve into a comprehensive media player that encompasses content and platform.

[Foreign Speech] Let me now move on to address your second question regarding IPOs of our subsidiaries. [Foreign Speech] Our overarching strategy and goal is to make sure that we pursue both each growth for each new business area but also create synergy with the SKT ICT family companies, thereby maximizing the total enterprise value. [Foreign Speech] IPO is a major milestone in a businesses mid to long-term growth strategy. So, we have to take into consideration not just the earnings of each businesses or each entity, but also the macroeconomic market situation in a comprehensive manner. So, by doing so, we will find the optimal point in time, so that we can maximize the value of each entity. [Foreign Speech] As for the IPO candidates that we have among our subsidiaries we're looking at 11th Street, ADT Caps, SK Broadband and ONE store and wavve. [Foreign Speech] And in the process of preparing our IPOs, we will be sure to constantly communicate with capital markets, both at home and abroad, regarding the value of each of our growth businesses and by doing so, we will see to it that the result of our IPO not only directly contribute to improved enterprise value, but also translate into actual gains for our shareholders.

[Foreign Speech] And 2020 we will be a year that where we focus on making the business operation of all of our invested subsidiaries more sound and a year where we devised our plans for the IPO as well as detailed value up strategies. So, that the value of our new business portfolio can be fairly -- can gain a fair evaluation.

Operator

[Foreign Speech] The next will be presented by Jaemin Ahn from NH Securities. Mr. Ahn, please go ahead, sir.

Jaemin Ahn -- NH Securities -- Analyst

[Foreign Speech] Thank you for the opportunity. I have two questions. So, the first is regarding your 2020 outlook for ARPU. Your ARPU in Q4 looked pretty good. So, what is the outlook on ARPU going forward and also can you tell us a little bit about your outlook in terms of competition. The second question is, I think we heard you talk briefly about a possibility of changing your dividend policy. So, could you give us a little more detail on that?

Poong Young Yoon -- Chief Financial Officer and Head of Corporate Center I

[Foreign Speech] Thank you, Ahn for your questions. [Foreign Speech] First of all regarding ARPU, yes, we have been seeing the ARPU pickup again since the commercial launch of 5G and we are looking at about a mid-single digit growth this year. [Foreign Speech] And as for the competition outlook, we are seeing the market stable a lot more since September of last year and we believe that this stabilizing trend will continue into the new year, as well. [Foreign Speech] And as I briefly talked about in terms of the dividend policy, nothing -- discussion hasn't yet taken place at the Board of Directors. However, I said what I said in the context that the current DPS was more adequate or it was more be fitting to and business operation were MNO was the main business.

[Foreign Speech] Until now, we have successfully made investments and grown or diversified our business models to really be able to call ourselves a evolved company that shifted from MNO being the core business function to a wider ICT -- to having a wider or more diverse ICT portfolio and as such, I do believe that it is the right time to possibly review a change to our dividend policy. And so, we will be looking at all options and a very multifaceted way in order to enhance shareholder value and once it is determined we will communicate it with the market.

Operator

[Foreign Speech] The next question will be presented by Chunpu Yang [Phonetic] from J.P. Morgan. Mr. Yang, please go ahead, sir.

Chunpu (Luke) Yang -- J.P. Morgan -- Analyst

[Foreign Speech] I have two questions, the first is, we saw your marketing cost rise quite substantially in Q4. Can you tell us why this happened? And does this mean that our concerns in terms of your marketing costs, continuing to increase in order to maintain your net addition levels, is that valid or is it to say that if you lowered your marketing costs, we will see your MNO net adds actually reverse. So in a nutshell, I think I would like to hear about your 2020 marketing cost outlook. And secondly, if you could give us an outlook in terms of the net adds MNO smartphones as well please?

Poong Young Yoon -- Chief Financial Officer and Head of Corporate Center I

[Foreign Speech] Thank you, Mr. Yang for your questions. [Foreign Speech] And I will hand the mic over to Mr. Han Myung-jin, Head of the MNO Marketing Group to address your questions.

Han Myung-jin -- SK Telecom Co Ltd -- Vice President and Head of MNO

[Foreign Speech] First of all the marketing cost for 2019 on a quarter-on-quarter basis and a cash spending basis have actually decreased. [Foreign Speech] However, due to the initial market adoption related competition, it did increase slightly. [Foreign Speech] And as we did mentioned before, we have been seeing the market be a lot more stable, begin to become a lot more stable from September of last year and the trend continued into Q4, as well as into the New Year. So, we expect this trend to last for the meantime. [Foreign Speech] Going forward, we plan to continue to shift away from price competition and focus on maintain, enhancing our efficiency in our marketing efforts as well as pursue cluster-based marketing endeavors and differentiate our services and products as well as find new 5G business models in our marketing efforts.

[Foreign Speech] And through these efforts, we do believe that we will be, we will be able to maintain a certain level of net additions with our cost efficient marketing efforts and as for the very detailed numbers of, I hope that you can understand that we cannot disclose the details.

Operator

[Foreign Speech] The next question will be presented by Neale Anderson from HSBC. Mr. Anderson, please go ahead, sir.

Neale Anderson -- HSBC -- Analyst

Thank you, and good morning. I have questions related to the IPO candidates you identified earlier. So, my first question relates to 11th Street. Now, I understand given high competition in the market 11th Street has focused more on breakeven, rather than JMV or revenue growth. So, you've got, relatively slow, top-line growth and breakeven. Do you think that the market needs to change, before that changes for 11th Street or is there something that SKT can do to drive an improvement in the revenue, profitability there?

Second question is on ADT Caps, and it's really similar question. So, profitability has been quite steady but there hasn't been a step change. So, I was wondering if there are more synergies to come in terms of the relationship with other SKT group companies or whether it's the possibility of 5G services that you think is the main potential growth driver for ADT count? Thank you.

Seong-Ho Hah -- Head of Corporate Center II

[Foreign Speech] This is Seong-Ho Hah, Head of Corporate Center II and I want to Mr. Anderson, for your questions. [Foreign Speech] Let me first address your question regarding 11th Street.

[Foreign Speech] SK Telecom continues to stand by our principal in targeting both growth and profitability. However, considering the situation of the e-commerce market, we are taking a flexible manner, in terms of focusing on the growth and profitability piece.

[Foreign Speech] So, while maintaining our BEP operating profit, we will continue to focus on strengthening our subscriber base. This is not to say that we have given up on profitability, but rather it is a strategic choice that we are taking in terms of the current strategy for 11th Street. [Foreign Speech] 11th Street will focus on strengthening the commerce portal competitiveness as well as expanding our external partnerships, so that we move away from pricing competition, including issuing discount coupons, to one that focuses on the core fundamentals. [Foreign Speech] We will provide more purchase, more sales content as well as and the search engines efficiency and so, we will be providing further services to increase the competitiveness of 11th Street as a commerce portal. [Foreign Speech] And as for expanding our partnerships with external partners, we will work with both domestic top brands as well as global players, so that we can expect growing JMV both at home and abroad.

[Foreign Speech] Let me now move on to talk about the outlook for our security business. [Foreign Speech] We expect to reach a security business revenue of KRW1.3 trillion for the year 2020 based on our technological leadership. [Foreign Speech] And as for ADT Caps revenue target, we're looking at KRW1 trillion as ADT Caps continues to solidify its CMS leadership as well as strengthen its other business areas including home security, unmanned parking and personal care.

[Foreign Speech] We expect 2020 to be the beginning year for SK Infosec and ADT Caps to really create significant synergies. [Foreign Speech] in the major five technology areas including AI and DT we will continue pursue innovation, thereby sophisticating our services and we expect new offerings of sophisticated services as such. [Foreign Speech] And as for SK Infosec we expect continued growth in its partnership collaboration as well as remote management, utilizing it's a cloud service thereby excelling in the area of convergent security, which will lead to the first ever the information security industry for a company to exceed KRW300 billion in revenue consulting.

Jeong Hwan Choi -- Investor Relations Officer

[Foreign Speech] This concludes the earnings conference call for the fiscal year 2019. Thank you.

Duration: 57 minutes

Call participants:

Jeong Hwan Choi -- Investor Relations Officer

Poong Young Yoon -- Chief Financial Officer and Head of Corporate Center I

Seong-Ho Hah -- Head of Corporate Center II

Hoi Jae Kim -- Daishin Securities -- Analyst

Jungsoo Kim -- KB Securities -- Analyst

Jaemin Ahn -- NH Securities -- Analyst

Chunpu (Luke) Yang -- J.P. Morgan -- Analyst

Han Myung-jin -- SK Telecom Co Ltd -- Vice President and Head of MNO

Neale Anderson -- HSBC -- Analyst

More SKM analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.