SK Telecom Co.,Ltd (NYSE:SKM) Q3 2023 Earnings Call Transcript

SK Telecom Co.,Ltd (NYSE:SKM) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Good morning and good evening. First of all, thank you all for joining this conference call. And now, we will begin the conference of the fiscal year 2023 Third Quarter Earnings Results by SK Telecom. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2023 third quarter earnings results by SK Telecom.

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 our presentation on major events, quarterly earnings highlights, and business performances, which will be followed by a Q&A session. The call is attended by our executives from relevant business divisions, including Jin-won Kim, CFO of SK Telecom, and we are providing some 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.

Jin-won Kim: Good afternoon. This is Jin-won Kim, CFO of SK Telecom. In September, SK Telecom announced the AI Pyramid strategy to become a global AI company. It aims to lead industrial innovation and achieve its vision of a global AI company through efforts to strengthen its own capabilities to deepen customer relationships by advancing its own AI technologies and launching AI services and through cooperation with diverse domestic and foreign partners, including the K-AI Alliance, the global telco AI Alliance, Anthropic, and OpenAI. We ask for your continued interest and support for our new endeavors. Now let me report on the consolidated financial results for Q3 of 2023. Thanks to improved earnings of SK Telecom and SK Broadband, consolidated revenue reported KRW 4,402.6 billion, up 1.4% year-over-year and 2.2% Q-on-Q.

Operating income in Q3 posted KRW 498 billion, up 7% year-over-year and 7.5% Q-on-Q. Net income posted KRW 308.2 billion, up 25.5% year-over-year but down 11.4% Q-o-Q due to the base effect of one-off gains in Q2. On a nonconsolidated basis, revenue posted KRW 3,148.4 billion, thanks to gains in roaming business. Operating income and net income reported KRW 407.1 billion and KRW 250.4 billion, respectively. Let me now turn to Q3 business highlights and strategic directions in accordance with the AI Pyramid strategy. First, serving as the foundation of the AI Pyramid, AI infrastructure is an area where SK Telecom’s technological capabilities are concentrated, including AI Data Centers, AI Semiconductor, and Multi-LLM. Data center revenue continued its growth trend, up more than 30% year-over-year in the third quarter.

Preparations for the opening of new data centers are well underway to meet the growing demand for data centers triggered by the AI market. We plan to introduce energy-saving solutions like emergent cooling system and hydrogen fuel cells and enhanced data center operational efficiency through AI-based data center infrastructure management. Sapeon, an AI semiconductor company established by SK Telecom will launch a next-generation inference AI chip X330 at the end of this year. X330 has approximately twice the computation of performance and 1.3x the power efficiency compared to the latest inference chips in the market. Sapeon will also cooperate with diverse companies to secure competitiveness in software. SK Telecom is also pursuing a multi-LLM strategy where a 2-track approach is taken to secure diverse LLM lineup, an overall platform that encompasses the LLMs. To this end, we’re advancing our own LLM based on our AI technology brand A.X, and high-quality data accumulated over several decades.

Simultaneously, we are collaborating strategically with a wide range of domestic and foreign AI companies, including Anthropic, OpenAI, and Konan Technology. Currently, diverse projects are underway, and during next year, the Global AI Platform Corporation newly established in the U.S. is planning to release an LLM customized for telcos and launch an AI platform to support effective utilization of the multi-LLM. In the area of AIX, which is the middle layer of the AI Pyramid, we will innovate customer experience and boost productivity by applying AI to our internal core businesses such as MNO, broadband, and enterprise, while expanding the use of our AI capabilities to various external business areas such as mobility, AI healthcare, and media to create added value.

Among the internal areas of AIX, our MNO business has an established customer base with 15.15 million 5G subscribers as of the end of September. We will solidify our superb mobile business competitiveness by using AI technology to conduct marketing, establish AI-based mobile networks, and enhance operational efficiency. As of the end of September, the Pay-TV subscribers and broadband subscribers of SK Broadband reached 9.52 million and 6.87 million, respectively. Going forward, SK Broadband’s Pay-TV service will evolve into an AI TV that offers diverse AI services such as AI curation and AI home. As for enterprise business, AICC, big data analytics platforms, and custom and platform-type generative AI models will be major growth drivers of the market.

Here, the multi-LLM will be combined with AI solutions like Vision AI, Language AI, and Big Data AI. The cloud business is on track to meet its annual target with revenue in Q3, growing nearly 40% year-over-year. Moving on to the external areas for AIX. SK Telecom signed a collaboration agreement with Joby Aviation in September to jointly participate in the K-UAM grand challenge, which marks a concrete step to secure a stable supply of UAM aircraft for the first commercialization of UAM service in Korea by 2025. We will combine AI technology and UAM to lead the way in an era of AI mobility that will change the paradigm of mobility. In addition, X-caliber, an AI-based veterinary X-ray analysis solution was launched only a year ago, but it is currently used in over 300 veterinary clinics around over country, making it a representative veterinary AI service.

SK Telecom is further enhancing the performance of X-caliber and pursuing global expansion by entering a partnership with Anicom Holdings, the largest provider of pet insurance in Japan in October. In the AI service area located at the top of the AI Pyramid, we will continue to promote A. (A dot) service, which was officially launched in September and pursue global expansion through the development of personal AI assistance or PAIs for the global market. We believe that PAIs and metaverse services will be integrated in the future, and the next commerce services, including subscription will ultimately be part of the AI service domain. AI A. will evolve into a personal AI assistant by innovating customers’ communications experience and expanding the use of AI services for daily lives.

Capitalizing on our know-how and domestically proven AI services, including call recording and summary, sleep management, and real-time interpretation during a call, which will be launched soon, we will localize and advance these services through cooperation with the global telco AI alliance members. Then we will launch PAIs in many parts of the global markets simultaneously to quickly gain leadership in the AI service market. ifland has attracted nearly 50% of MAU from overseas and global cooperation with various partners, including Deutsche Telekom and T-Mobile U.S. is on track. The large subscriber base of ifland will begin to use the in-app transaction-based economic system that was introduced in October, which will facilitate the creation of a virtual cycle of premium content production and consumption as well as monetization, thereby contributing to the expansion of the Metaverse platform.

Within the list of impactful partners such as YouTube Premium and preparing to include Nasform, also, T Deals’ GMV in the first half of 2023 surpassed KRW 100 billion. We are preparing for next-generation commerce. Finally, the Board determined the third quarter EPS to be the same as the previous quarter at KRW 830. In addition, as we are well underway, we will complete the share buyback within the 6 months of the Trust contract [Technical Difficulty] –to do our best to ensure that corporate value and shareholder value will be maximized through a transformation into a global AI company. [Technical Difficulty] –continued support and encouragement. Thank you.

Hee Jun Chung: We will now begin the Q&A session.

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Q&A Session

Operator: [Operator Instructions] The first question will be provided by Soojin Kim from Mirae Asset Securities.

Soojin Kim: I’m Kim Soojin from Mirae Asset. Thank you for the opportunity. I would like to ask 2 questions. The first question has to do with your about promoting AI businesses and can you share with you with us. [Technical Difficulty] –and is to be able to generate revenue in the near term among various AI-related businesses? The second question has to do with the A. service. A. was official [Technical Difficulty] — so if you can, please share with us specific numbers, including the number of subscribers and the MAU. Also, I’d like to know if there are any specific business…

Jin-won Kim: [Technical Difficulty] As you know, at the AI Pyramid strategy that SK Telecom is going to pursue. And the AI Pyramid strategy includes largely AI infrastructure, AI infra, which is the largest profit source, but also new growth businesses, which may not necessarily generate significant revenue at this time. In addition to our existing fixed and mobile business, AI, its revenue contribution was roughly 9% in 2022, but our ambitious goal is to increase this number to 36% by 2028. These tangible results in the near term, I would say, first of all, that we have data center business and AI semiconductor business, which is being pursued by Sapeon with a new X330. In addition, we have many businesses as part of the AI service area, which is the top of the AI platform, AI Pyramid, they include personal AI assistant and AI-based subscription commerce platform, and we are planning to evolve our subscription service utilizing AI.

In addition, we will continue to use AI to strengthen customer engagement. Now as for specific details by each category or each domain, Mr. Choi Hwan-seok, Head of the Corporate Strategy Office, will provide more details. In addition, we launched the iPhone call recording service recently, and it is gaining good response in the market. And regarding this, Mr. Kim Ji Hoon, Head of Growth, will provide more details.

Choi Hwan-seok: Hello, I am Choi Hwan-seok, the Head of Corporate Strategy Office. As the CFO just mentioned, among the AI businesses and areas, we are expecting high growth from several businesses, including the data center business, AI semiconductor, enterprise solutions, and subscription commerce business model that is linking AI and other services. First of all, with respect to data centers, we expect a big growth in demand for GPU data centers with the advent of the AI era, and SK Telecom will scale up the data center business through AI DCIM for operational efficiency and emergent cooling system for energy efficiency and expanding sites and partnering with other industries and expanding into the global market. Next, Sapeon, our AI semiconductor company will launch X330, an inference AI accelerator chip soon, and after securing diverse references, such as the use in global hyperscale data centers, we expect to generate more meaningful sales starting from 2025.

The enterprise market is expected to grow and change dramatically due to AI, and we will utilize our own Vision AI and LLM technology capabilities to expand a specialized AI enterprise solution business targeting various industries like the public sector, finance, and manufacturing. For AI service, we are getting positive responses regarding A., which was officially launched at the end of September, thanks to its many useful features related to phone calls. And so we will drive growth by linking AI-based new business models with the subscription commerce service model. Other than new businesses related to AI, our fixed and mobile business, our existing business, will continue to account for a significant portion of the company’s earnings. And for these existing businesses, we will use AI technology to deepen customer relations and focus on improving profitability, and we will strengthen AI marketing through AICC and reduce expenses by improving network operation efficiency also using AI.

Thank you.