SK Telecom Co.,Ltd (NYSE:SKM) Q1 2024 Earnings Call Transcript

SK Telecom Co.,Ltd (NYSE:SKM) Q1 2024 Earnings Call Transcript May 8, 2024

SK Telecom Co.,Ltd isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Hee Jun Chung: Good afternoon. I am Hee Jun Chung, IRO of SK Telecom. Thank you for joining SK Telecom’s earnings conference call. Today, we will first deliver a presentation on major events, 2024 Q1 earnings highlights and business performances, which will be followed by the Q&A session. The call is attended by our executives from relevant business divisions, including Yang-Seob Kim, CFO of SK Telecom, and we are 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. Let me now present our CFO.

Yang-Seob Kim: Good afternoon. This is Yang-Seob Kim, CFO of SK Telecom. 2024 is a very meaningful year as it marks the 40th anniversary of SK Telecom. The 40-year history of SK Telecom indeed represents the history of ICT Korea. We have been leading the communications market with innovative services and unparalleled quality competitiveness. Now, SK Telecom is taking on a new challenge to become a global AI company. At MWC 2024 held in Barcelona in February, SK Telecom held an inaugural meeting of the Global Telco AI Alliance, or GTAA, and announced a plan to establish a joint venture for business cooperation, including joint development of telco specific large language model. Going forward, SK Telecom will invite leading telcos in respective regions to expand the GTAA and lead cooperation among diverse companies, thereby positioning itself as a global AI company.

Let me first report on the consolidated financial results for Q1 of 2024. Thanks to the stable growth of SK Telecom and SK Broadband, consolidated revenue posted KRW 4,474.6 billion, up 2.3% year-over-year. Operating income posted KRW 498.5 billion, a similar level year-over-year, thanks to the stabilization of marketing expenses and depreciation costs. Net income posted KRW 361.9 billion. On a non-consolidated basis, revenue posted KRW 3,188.7 billion, up 2.3% year-on-year. Operating income and net income reported KRW 436.4 billion and KRW 492.1 billion, respectively. Let me now turn to business highlights for the first quarter of 2024 and strategic directions in accordance with the AI Pyramid Strategy. First, I’d like to cover the AI Infrastructure domain, which serves as the foundation of the AI Pyramid.

Supported by the continued increase in utilization rates, data center revenue grew 26% year-on-year. At MWC in February, SK Telecom declared a full scale launch of AI data center business, which will be critical infrastructure in the AI domain. The company also announced plans for global business cooperation with Lambda, a cloud server provider powered by Nvidia’s latest GPUs. To be a global leader in the next generation AI data center market, SK Telecom is also planning to mobilize capabilities of SK Group. Specifically, we will cooperate with SK Enmove to speed up the commercialization of liquid immersion technology, capitalize on SK Hynix high bandwidth memory chips, and our subsidiary Sapeon’s AI chip capabilities for data centers, and utilize SK Broadband’s data center operational know-how.

As for LLM, we are pursuing the development and commercialization of telco-specific LLM together with the members of the GTAA, including Deutsche Telekom, e&, Singtel and SoftBank. The GTAA members have a total of 1.3 billion subscribers in 50 countries across the world, which enables them to collect multilingual telco-specific data on a scale larger than any big tech company could ever achieve. Through the GTAA, we will achieve economies of scale and strengthen negotiating power against large tech companies. The GTAA joint venture plans to develop a more advanced telco-specific LLM through training with multilingual telco data and provide locally tailored services. Next is the AIX domain. The MNO business recorded 15.93 million subscribers as of the end of March 2024, which accounts for 70% of the total subscriber base.

SK Broadband’s pay TV subscribers and broadband subscribers reached 9.59 million and 6.99 million, respectively, as of the end of March 2024. While the fixed and mobile industry is maturing, it is meaningful that our subscriber base continues to grow through new market development. We’re also striving to enhance OpEx and CapEx efficiency by actively applying AI technology to our fixed and mobile business. The enterprise business achieved an approximately 10% growth year-over-year. In particular, the cloud business revenue grew nearly 40% year-over-year, mainly thanks to recurring sales, thereby driving the entire enterprise revenue growth. The enterprise AI business, which includes big data, AICC and Vision AI, saw its revenue grow more than 10% year-over-year.

We will further promote the enterprise AI business as a key pillar of our B2B business by continuously developing innovative AI products such as the recently released TransTalker, an AI simultaneous interpretation solution. Next, AI services. The call recording and summary service and real-time call interpretation service of A., which were very popular among iPhone users, are available on Android handsets starting from April. Going forward, A. will continue to add killer services and evolve into a truly personal AI assistant. Our long-term goal is to secure new business models through successful development of global PAA together with the GTAA members. Ass for ifland, thanks to the stable trend of if home and the economic system launched last year, MAU recorded 2.46 million as of the end of March 2024, and the average duration per user on the platform increased to 90 minutes, indicating that ifland has become a meaningful and substantive platform for users.

T Universe achieved MAU of more than 2.6 million as of the end of the first quarter of 2024, driven by the popularity of the YouTube premium package. In the first half of the year, we plan to turn T Universe into a subscription market to expand partnerships and solidify its position as a leading subscription service in Korea. Finally, let me turn to shareholder returns. SK Telecom recently announced a medium-term shareholder return policy of returning to shareholders more than 50% of the adjusted net income on a consolidated basis. The decision is driven by our commitment to enhance shareholder returns in line with earnings improvement by leveraging resources, including subsidiary results on a consolidated basis and eliminating caps on shareholder returns.

The DPS for the first quarter was determined at KRW 831, the same as the first quarter of last year. As we mentioned at the shareholders’ meeting, SK Telecom will produce tangible results as an AI company. We will further solidify our strong fixed and mobile business foundation, improve the business fundamentals in terms of profitability and efficiency and produce concrete results by fully executing the AI Pyramid Strategy. We will continue on this journey to achieve our grand vision of becoming a global AI company. We ask for your continued support and encouragement. Thank you. We will now begin the Q&A session.

See also 15 Most Competitive Countries in Europe and 15 African Countries with the Lowest English Proficiency.

Q&A Session

Operator: [Operator Instructions] The first question will be presented by Hoi Jae Kim from Daishin Securities.

Hoi Jae Kim: I am Kim Jae from Daishin Securities. I would first like to ask a question regarding your new shareholder return policy. You mentioned that you are planning to return to shareholders more than 50% of the net adjusted income on a consolidated basis. But when we take a look at the past dividend payout trend, the overall payout trend was — payout ratio was about 70% in real terms. And now you’re mentioning that it will be more than 50% of the adjusted net income. Does that mean that there is a likelihood for your dividend payments to decline going forward? And until recently, you mentioned about the specific amount of dividends that you’re planning to pay to shareholders. But this time, it was not included in your presentation.

So would it be appropriate for us to expect that this year’s dividend payout will be similar to that of last year? And I would also like to understand if you have any plans for share buyback and cancellation in the near future. Secondly, I would like to ask a question about your capital allocation plan. I can see that you need resources for shareholder returns, but at the same time you need resources for investments. And as you mentioned, you are going to pursue your AI strategy in full swing starting from this year, which means that you will have to make investments. While the MNO revenue trend is not very improving, I’d like to understand how you are planning to allocate your capital resources. And what is the size of AI investment that you’re expecting this year?

Yang-Seob Kim: I am CFO, Yang-Seob Kim of SK Telecom. Thank you for your questions. I would first like to comment on our new shareholder return policy. As you may know very well, for the past 3 years, our dividend policy was based on 30% to 40% of the EBITDA minus CapEx amount on a non-consolidated basis, and that was the basis for our shareholder return. And so far, we have received a lot of input from shareholders and investors and we’ve been trying to accommodate them as much as possible. We believe that this new shareholder return policy is quite differentiated from the previous ones in that, first of all, there is no limit or cap on resources available for shareholder returns and that it is on a consolidated basis so that we can share results of the subsidiaries with shareholders.

And you also asked a question regarding why we have set the baseline as 50% while we actually use more than 70% of the net income for dividends in the previous years. I’d like to comment on your point. The 50% is just the minimum baseline. As we are announcing the 3-year shareholder return policy 3 years is a rather long term in this regard. So we wanted to have some cushion against risks around future management environment. So I like to once again ask you to see that this does not mean that we will only return 50% of the net income, it is just the minimum level. We will do our best to elevate the baseline by continuing to improve our business fundamentals, and we will make sure that we can return more to the shareholders going forward. While the actual size of shareholder returns for each year will be determined through discussions at the Board, what I can say to the shareholders is that the level of dividends paid out to the shareholders will be similar to that of last year, and we will make sure to achieve that.

As for potential plans for share buyback and retirement, given the recent interest rate trends, we still believe that it is meaningful to buy back and retire shares when the stock price is undervalued. As for means of shareholder return, we will, of course, consider both cash dividends and share buyback. But our priority is to maintain a stable cash dividend trend, and we will continue to consider diverse factors such as valuation, financial structure, investment for growth and foreign investors stake in deciding whether to proceed with additional share buyback and cancellation in the future. Next, I’d like to comment on our cash — our capital allocation plans. While there have been some fluctuations, consolidated EBITDA of SK Telecom is around KRW 5 trillion to KRW 5.5 trillion and we spend about KRW 3 trillion of CapEx and KRW 1 trillion to KRW 1.5 trillion of recurring expenses, including frequencies and interest payments.

Then we have about KRW 1 trillion of free cash flow. While you may think that KRW 1 trillion of cash — free cash flow is a large amount, but considering about KRW 700 billion of cash dividends each year, it’s true that we do not have much room to maneuver around investments for growth and loan management. While we have maintained a relatively high level of shareholder returns, corporate value is not just determined by the size of shareholder returns, but I’m sure that investors understand that we need further growth to be able to enhance our corporate value. Of course, as we are currently positioned as a telecom stock, we fully understand that dividend is what supports our valuation in the market. But it is important to achieve balance between investment for growth and shareholder returns for the purpose of valuation enhancement.