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Presentation

Unidentified Company Representative: Good afternoon. I am Hee Jun Chung , IRO of SK Telecom. Thank you for joining SK Telecom’s Earnings Conference Call. We are providing consecutive interpretation for the call which will consist of a presentation on fiscal year 2022 earnings highlights, future business plans, and strategic directions as well as the Q&A session. The call is attended by our executives from relevant business divisions including Jin-won Kim, CFO and Head of Corporate Planning of SK Telecom. Before we begin I would like to remind you that all forward-looking statements are subject to change depending on market situation. Now, let me present our CFO.

Jin-won Kim: Good afternoon. This is Jin-won Kim, CFO of SK Telecom. As it is my first time greeting you in the new year, I would like to wish all of you a Happy New Year. Around the world, much attention has been paid to artificial intelligence and mobility technology and these future-oriented innovative technologies are expected to be part of our daily lives in the near future. Against this backdrop, SK Telecom announced the vision of becoming a differentiated AI company in November last year. This year will be the first year to achieve our AI company vision in earnest through company-wide transformation and innovation. For more specific strategies and road maps on AI company we plan to share them with the market as soon as possible.

Now, let me report on the consolidated financial results for fiscal year 2022. Consolidated revenue reported KRW17,305 billion, up 3.3% year-on-year and the operating income posted KRW1,612.1 billion, up 16.2% year-on-year. 5G subscriber growth and solid growth of new businesses including B2B business resulted in strong revenue growth, while market stability contributed to improved earnings for 2022. Net income recorded KRW947.8 billion on the back of decrease in equity method gains following the spinoff in 2021. On a non-consolidated basis revenue grew 2.6% year-on-year to KRW12,414.6 billion. Operating income and net income reported KRW1,321.1 billion and KRW869.5 billion respectively. Supported by such solid earnings, we will actively pursue transformation into an AI company that I mentioned earlier and lay a strong foundation for future growth businesses to bear tangible and fruitful results.

SK Telecom has been focusing our capabilities on AI technology for the past several years. Based on these efforts, we are securing points of contact with customers, providing innovative services of cost time and space and leading changes in diverse industries, through which we are preparing ourselves to play a key role in the global AI era. Furthermore, we’re making investments in and forge partnerships with leading domestic and global AI companies to ensure that everyone can benefit from this era-defining technology of AI. Launched as an open data version last year A. is the world’s first GPT-3 model in Korean applied for B2C services. We’re working to enhance the essential service functions of A. such as conversation and UX and planning for an official launch of A.

within this year. Also, we are making continuous efforts to transform A. into a daily digital mate to first achieve the next Internet gateway of our customers. A. is an in-house development based on GPT-3 technology to provide generative language services. We will continue to enhance our own GPT-3 technology in response to the global trend of rapid advancement in AI language. In addition, incorporating diverse third-party conversation generation models, including the new AI technologies is being considered. Through these activities, we aim to lead the super large AI service market in Korea. We will advance A.’s conversation and service levels by applying long-term memory technology that can remember old information and use it for conversations and multimodal technology that can comprehensively infer and communicate like humans based on multiple data types, such as voice, image, gesture and biosignals in addition to text.

Next, with the goal of servicing Korea’s first commercial UAM in 2025, SK Telecom is focusing on the UAM business as its key innovative future service to gain leadership in this area. We have formed the K-UAM Dream Team Consortium and participated in UAM demonstration projects in Korea. For the success of the pilot program in 2025, a target year for UAM commercialization, we will make earnest efforts to secure differentiated competitiveness, including developing a framework for hyper collaboration with Joby Aviation, a global leader in UAM aircraft with which SK Telecom has formed an exclusive partnership. With global expansion started in November last year ifland recorded 21.27 million cumulative downloads as of the end of 2022 and more than 10% of the total MAU in December came from overseas, an encouraging achievement.

This year we plan to strengthen ifland economic system by introducing in-app transactions, which serve as a foundation for building a profit model. We strive to create a global success story through selection and concentration. T Universe became Korea’s leading subscription service with the average MAU of more than 1 million and annual GMV of approximately KRW570 billion in 2022. Going forward T Universe aims to evolve as an AI based subscription commerce platform and build a virtual cycle of the platform by expanding market dominance through securing critical mass and attracting more sellers through the creation of an open market. Moving on to our data center business. Thanks to the increase in the utilization rates of Gasan and Siksa data centers, revenue for 2022 saw more than 30% growth year-over-year.

We are preparing for additional data centers while closely monitoring macroeconomic situations and changes in market demand. Our cloud business enjoyed a twofold revenue growth year-on-year on the back of growing demand for cloud migration centered on MSP and traffic growth in 2022. We aim to sustain the revenue growth trend through aggressive MSP scale-up and expansion of added value in 2023. As for the enterprise business, we are supporting our clients’ AI transformation using a diverse array of AI technologies and solutions such as robotics and vision AI and reaching out to new customers in the distribution and manufacturing sectors to pursue opportunities for additional growth. Let me now present the performance of the fixed and mobile business, which serve as a foundation for our transformation into an AI company.

As of the end of 2022, the number of 5G subscribers reached 13.39 million accounting for more than 50% of the total subscribers, an indication that we now have the 5G mass market. As the share of 5G subscribers is expected to reach 80% by 2025, we will focus on acquiring quality subscribers through AI-based digital transformation, which will drive sustained earnings improvement. The Pay TV subscribers reached 9.32 million as of the end of 2022. On the back of the strong Pay TV subscriber base supported by the synergies between SK Telecom and SK Broadband, efforts to supply a wide range of content including newly released films are expected to result in revenue growth. In addition, three IPTV providers including SK Broadband decided to make joint investments last year in content worth KRW 300 billion for the next three years to compete with global OTT service providers and strengthen content competitiveness.

This year, we will effectively link our diverse media assets including SK Stoa, Media S and TEAM Studio, and strengthen our portfolio to secure more synergies. The amount of dividend for 2022 was determined by the Board at KRW 3320 including KRW 2,490 that was already paid out and KRW 830 for Q4. It is subject to the approval at the General Meeting of Shareholders in March. Meanwhile, the Board of SK Broadband resolved to pay cash dividend for 2022 based on outstanding growth of business performance and earnings, which is expected to deliver approximately KRW 150 billion of dividend income to SK Telecom. Finally, let me share with you our management guidance for 2023. We project our consolidated revenue to be KRW 17,800 billion up approximately 3% year-on-year supported by overall growth in both new growth businesses and fixed and mobile business through AI-based digital transformation.

We will do our best to exceed the guidance. SK Telecom will continue to accelerate transformation into an AI company that benefits customers with technology and services. We will strive to ensure that such transformation and innovation of SK Telecom will contribute to earnings improvement and tangible results from the new growth businesses to maximize corporate value and shareholder value. We ask for your continued support and encouragement. Thank you.

Unidentified Company Representative: We’ll now begin the Q&A session.

Operator: Now Q&A session will begin. The first question will be provided by Sun Jung Lee from Bank of America. Please go ahead with your question.

Sun Jung Lee: I am Lee Sun Jung from Bank of America. Thank you very much for this opportunity to ask you questions. I do have two questions. The first question is about your MNO business. As you mentioned, the 5G subscribers has reached about 50% of the total subscribers. So there are some concerns that, there will be a slowdown in the revenue growth trend for MNO business. And as your MNO business takes up a large portion of your earnings, I’d like to know, overall outlook for MNO revenue going forward for 2023. In addition, I understand that there was a decreasing trend of marketing expenses which led to improved earnings. And I wonder, if this trend will continue in 2023? The second question has to do with the shareholder return policy.

You announced that, the 2022 dividend payout level is similar to that of the previous year. And what is your outlook for dividend payout for 2023? And I would also like to know, if you are considering other options for shareholder return including share buyback? Thank you.

Jin-won Kim: Thank you for your question. You have asked two questions. The first question was concerned with our dividend guidance and our plans for shareholder buyback and the second question had to do with outlook on MNO revenue and marketing expenses. Let me answer your question regarding the dividend policy first. As for the dividend payout level for 2023, this is something that is subject to the quarterly performance, as well as the year-end performance of our businesses which is also subject to the discussion and resolution by the Board. Therefore, I’m not in a position to give you any specific number as to the 2023 dividend guidance. However, what I can say is that, as you know, very well SK Telecom has been dedicated to shareholder returns and the size of the shareholder return has never decreased in the past.

So, I would like to assure you that, we will like to maintain that level. Moving on to our plans €“ future plans for share buyback or treasury shares, I would like to say that, SK Telecom has been implementing shareholder return policies on par with global standards. And in the process of the spinoff, we canceled treasury shares worth KRW 2 trillion in the past, and we have introduced a quarterly dividend payout and a stock split as well. And we have maintained the overall dividend size after the spin-off. As a result, we were able to increase the dividend per share from KRW 2000 to KRW 3300, which is about 65% increase. So in terms of the dividend payout ratio and the dividend yield, you can say that our dividend return policy is the best in the industry.

But considering that our earnings continue to improve and our cash flow continues to improve, we believe that we need to return more to the shareholders. When we take a look at the overall situations in the financial market, we can see that there’s still a lot of macroeconomic uncertainty and we’re no longer in the low interest rate environment as interest rates have been continuing to increase. Therefore, it is true that dividend income is not as appealing as in the past to the shareholders. And we see that the current stock price of SK Telecom is way undervalued considering the potential value that we’re aiming for. So against this backdrop, when it comes to our shareholder policy, we can consider seriously the option of shareholder — the option of share buyback.

Our performance continues to improve. Our cash flow continues to improve. And starting from this year, we have been enjoying the new dividend income coming from SK Broadband. In addition Hana Financial Holding, with which we swapped shares have been continuing to pay out dividends on a yearly basis. So we can consider using these resources and these gains as financial resources for share buyback. But once again, we are now considering various options for shareholder return policies for 2023, including share buybacks, so I cannot give you any definite answer. But we will continue to consider and deliberate on various options for shareholder returns and we will go through the internal processes including the deliberation at the Board. And as soon as we have a specific idea, we will share them with you.

Moving on to your question on the MNO outlook, as we mentioned, the portion of 5G subscribers has reached more than 50%. So, we now have the 5G mass market. However, we still see a lot of potential for growth in the MNO business, because there are more price options available for customers and there’s increasing trend from migration from LTE to 5G going forward. In addition, as restrictions related to COVID-19 are being lifted, we see recovery of the roaming revenue as well. So given these various positive factors, we will do our best to maintain the growth trend of MNO business in the future as well. Now regarding your question on the marketing expense outlook Mr. Keun-joo Hwang Head of Integrated Marketing Strategy Office will answer this question.

Unidentified Company Representative: Hello I’m Keun-joo Hwang in charge of Integrated Marketing Strategy. Recently the market has been quite stable. Currently in the entire market we have more than 30 million 5G subscribers. So the 5G market has become more mature and there’s an increasing number of subscribers switching from one 5G to another 5G. So we do not see any high potential for subscriber acquisition competition. While we’ll continue to make sure that the market will stay stable we will employ various options to increase cost efficiency including the strengthening of online distribution competitiveness. Thank you.

Operator: The following question will be presented by Soojin Kim from Mirae Asset Securities. Please go ahead with your question.

Soojin Kim: I’m Kim Soojin from Mirae Asset. Thank you for this opportunity. I have two questions. The first question is related to the MVNO market. Recently even a financial institution and entered the MVNO market and the MVNO market size continues to grow. So I would like to know how you are going to respond to the potential decline in the market share in the MNO business? The second question has to do with ChatGPT and your A. business. Globally and also in Korea there is a growing attention and interest in ChatGPT and we are saying that €“ they’re saying that there will be a new era of generative AI. SK Telecom already has A., which as far as I know is based on GPT-3. So how are you going to utilize A. and how are you going to pursue the growth of A. going forward?

Jin-won Kim: Regarding your first question there has been some media reports on the increasing market share of MVNO businesses. And I understand that there are some concerns over MNO businesses in the market. So regarding this question Mr. Keun-joo Hwang, Head of Integrated Marketing Strategy Office will explain the current market situation and our responses.

Unidentified Company Representative: First of all, I would like to mention that the market share that was mentioned in the media reports include IoT lines and auto control lines as well. And starting from 2020, the IoT lines for auto control have been recognized as part of MVNO. That is why there was an increase in the market share for them. However, the handset accounts cater to the earnings or profitability of the MNO business. And as of the end of December last year, our market share is 42%. And since 2018, the change in our market share has been less than 1%. Also our 5G market share was 48% as of the end of last year. So since the launch of 5G, our market share has been continuing to increase. To respond to competition from MVNO, we will continue to strengthen services and products that cater to specific needs of our customers and we’re going to continue to offer new and additional benefits including subscription that SK Telecom has and we’re going to strengthen trending membership benefits for our customers.

And in doing so, we will be able to offer differentiated customer experiences and benefits that cannot be provided by MVNO providers. And at the same time, we will continue to make efforts to find a good and fine balance between the retention of MNO subscribers and co-growth with those smaller MVNO players. Thank you. And your second question regarding ChatGPT, as we all know there has been a flood of news reports on ChatGPT recently and there has been a report that the number of subscribers to ChatGPT has exceeded more than 100 million very quickly. So — and even this morning, there was a news about MS, one of the big tech companies announcing a new approach to ChatGPT for their Bing search engine and there was also a report about a new initiative using ChatGPT by Google.

So you can see that there are many news reports about ChatGPT. SK Telecom launched A. last year and I believe it is very meaningful for us to share with you how we’re going about A. development and what kinds of characteristics we have for A. technology. So for that we have Mr. Son Yun Heok and Mr. Kim Yong Jon who are in charge of the A. project and they’re going to give you some more details.

Unidentified Company Representative: Hello. I am Son Yun Heok, Head of Project Management Office. As was announced before SK Telecom was able to launch the first the world’s first commercial B2C services using Korean GPT-3 which is a super large language model that we developed in our own and this was faster than other global big-tech companies because it was released in May last year. And SK Telecom was able to launch an AI conversation service much faster than ChatGPT, which has been receiving a lot of attention these days. It’s thanks to our long-term commitment to AI and the AI technologies and platforms and data base that we have been accumulating for many years. Since the launch of A. in May last year, we have been implementing a total of nine updates in order to identify and offer the necessary services that are demanded by our customers.

So we have been quickly expanding the domain of services including A.game A.photo and A.tv. Furthermore, currently we’re in the process of strengthening, not only the services, but also AI technology itself, in order to gain fundamental competitiveness of the A.service. So in this regard we will continue to improve our UX to be more customer-friendly based on user feedback and we’re going to expand to AI-based daily services and telco services. And through partnerships with external partners, we’re going to build a relevant ecosystem by using various characters and in collaboration with technology and services. So in line with this A., will continue to add new and meaningful functions based on AI so that A. can become a daily mate for our customers.

And we’re planning to launch A. as an official service and no longer an open data version and we will consider various monetization business models. Next, I would like to invite Mr. Kim Yong Joon Head of A. conversation to share with you some details about AI technology and conversation technology.

Unidentified Company Representative: I’m Kim Yong Joon , Head of A. Conversation. In February, so this month, we’re going to apply the long-term memory technology, which is able to store customer information in a separate memory. In addition, we’re planning to adopt the multimodal technology so that A. can understand not only text but also photos and voice and other types of information. And in doing so A. will be able to offer an interface that is more natural and more friendly for users. And moving on to ChatGPT, we already have the GPT-3 in A.service. So we have accumulated a large amount of customer data. So by using this data we are advancing the ChatGPT-type technology. So there is fierce competition with big tech companies globally.

So in order to ensure rapid upgrades and improvement of A. we are considering various options and solutions including those from the overseas. And the direction of advancing our technology will be in line with the kinds of services that we want to offer to our customers. So, the adoption of long-term memory technology, and the multimodal technology are very much in line with this direction. In doing so, we will be able to offer differentiated services to our customers, based on a differentiated conversation and AI technology. Thank you.

Operator: The following question will be presented by Seyon Park from Morgan Stanley. Please go ahead with your question.

Seyon Park: I’m Park Seyon, from Morgan Stanley. I also have a question related to GPT. It’s not directly related to A. per se, but it has to do with the demand outlook for data center. According to some analyst reports, it seems that ChatGPT requires much more computing, than other engines so it may incur more costs. And so if we assume that in the future there will be more utilization of GPT and other AI engines and solutions, then it may lead to higher demand for data centers. So what is your view, on the potential increase of data center demand going forward? And also, as you are already using GPT engine for your A., I wonder if it has any specific technical requirements compared to other regular Internet services including any need for a specific server or more CPU. So I wonder it has to do with your CapEx requirement as well.

Jin-won Kim: Okay. Thank you, very much Mr. Park Seyon, for your question. And when it comes to the link between the use of ChatGPT and demand for data center, as you know, ChatGPT has been recently receiving attention — only recently. So, we don’t have any specific information as to how such utilization of ChatGPT, will lead to demand for our data center services in the short-term or medium or long term. And I also heard from a seminar this morning that ChatGPT will have a direct impact on the business performance of companies like NVIDIA, because it will lead to more demand for CPU. So that is going to be the first line of impact. But going forward as we get to use more AI engines and AI services, it is definitely going to increase demand for cloud services, which will have a positive impact on the demand for data centers.

And as you mentioned the demand outlook for data centers in generally speaking cloud market is rapidly growing and there is a requirement for platform companies to increase redundancy and backup for data centers as well as in the case of the incident of Kakao. So, overall, I can say that there will be increase in the demand for data centers going forward. Now I would like to invite Mr. Kim Yong Joon , Head of A.Conversation to discuss the potential impact of ChatGPT utilization and demand for data centers.

Unidentified Company Representative: As you mentioned GPT-3 and ChatGPT they require specific GPU servers and other technological environment for development. So I can say that SK Telecom has a large-scale high-performing computing service that may be equivalent to those possessed by other porter companies or other big tech companies. And of course in the future if there is growing demand for more computing resources we may need to increase our CapEx, but I would like to say that with more utilization of technology and popularization of such technologies, there will be cost reduction drives in the market which will lead to lower costs for these developments.

Operator: The following question will be presented by Joonsop Kim from KB Securities. Please go ahead with your question.

Joonsop Kim: I’m Kim Joonsop from KB Securities. Thank you for this opportunity. I can see that your data center business growth and the cloud business growth are quite impressive. And I would like to know more about your target customers for data centers and cloud businesses and your overall outlook for the revenue growth for these businesses.

Jin-won Kim: Thank you for the question. When you look at our enterprise business as was in the case of last year, it can be broken down into lease lines, IoT lines, and data center business, and cloud business. So, as for the entire enterprise business, growth has been driven by data center business and cloud business. As for data center, the utilization rates of data centers increased which led to higher revenue. And for cloud, traffic increase led to higher revenue from the cloud business. So, on a quarterly basis, the enterprise business division’s revenue was KRW400 billion, which is a 10% growth Y-o-Y. And the — for the entire year, the enterprise business division revenue is KRW1.5 trillion, which represents 12.5% growth year-over-year. As for the guidance for revenue for enterprise business, we will do our best to make sure that our revenue growth is on par with that of last year. Thank you.

Operator: The last question will be presented by Hoi-Jae Kim from Daishin Securities. Please go ahead with your question.

Hoi-Jae Kim: I’m Kim Hoi-Jae from Daishin Securities. I have one question. I can see that SK Telecom is dedicated to pursuing the UAM business with a target of commercializing the UAM service in 2025. So, when it comes to a business model, I can see that there will be income coming from network usage fee, but you can also consider other business models. So, I wonder what kind of business models you have in mind for the UAM business? Thank you.

Jin-won Kim: Thank you for your question. We have been communicating with the analysts about the progress and plans for the UAM business. So I’m sure you’re well aware of what we have been doing. And as for more details, I’d like to invite Mr. Han Mi Nyong , Head of Corporate Development for more information.

Unidentified Company Representative: Your question was about a potential business model for UAM. Currently, we are in the process of carrying out demonstration projects in line with the time line of the Ministry of Land, Transport and Infrastructure. And we will be able to have some more specific ideas about business models, as we have more networks and communications with the ground control centers and securing of further reports. And we will have conversations and consultations with various partners in order to decide on specific routes for UAM services and the pricing plans these are components of the business model. So after such reviews, we will be able to share with you more details in the future. Thank you.

Unidentified Company Representative: Thank you for your question. This concludes the Earnings Conference Call for Fiscal Year 2022.