SK Telecom Benefits from 'Untact', Q2 Operating Profit Up 11.4% (Comprehensive)

[Asia Economy Reporter Joselgina] SK Telecom recorded double-digit growth in operating profit in the second quarter despite the impact of the novel coronavirus disease (COVID-19). So-called 'untact (contactless)' services attracted attention, with the New Biz. sectors such as media, security, and commerce achieving record-high sales, and the core mobile network operator (MNO) segment also entering a phase of improvement. SK Telecom expects a turnaround in the MNO segment within the year due to the increase in 5G subscribers. The company also plans to expand collaboration with Samsung Electronics, Microsoft, and others.

SK Telecom announced on the 6th that it posted consolidated financial results for the second quarter with sales of KRW 4.6028 trillion and operating profit of KRW 359.5 billion. These figures represent increases of 3.7% and 11.4% respectively compared to the same period last year, exceeding market expectations. Net profit for the same period rose 66.8% to KRW 432.2 billion, influenced by equity method gains from SK Hynix.

◆Untact Demand Boost... New Biz Achieves Record-High Sales

SK Telecom's results, surpassing market expectations, are analyzed as a result of proactively responding to customer demand in the untact era. Total sales in the New Biz sectors?media, security, and commerce?increased by 13.4% compared to a year ago, marking an all-time high. The proportion of subsidiary profits in consolidated operating profit also expanded significantly from about 15% in Q2 last year to approximately 25% this year. SK Telecom explained, "Despite prolonged COVID-19 and increased investment in 5G networks, we have established various untact-specialized new businesses as growth engines."

In particular, the media business recorded sales of KRW 918.4 billion, up 16.2% year-on-year, driven by an increase in IPTV subscribers and the merger with 티브로드 (T-Broad) completed on April 30. Synergies from the merger are expected to fully materialize in the second half of the year.

Ha Hyung-il, Corporate 2 Center Head, said during the afternoon conference call, "With the completion of the merger with 티브로드, two months of performance have been reflected in SK Broadband. Sales exceed KRW 95 billion," adding, "The 티브로드 merger accounts for 10% of SK Broadband's consolidated sales and more than 20% of operating profit." He explained, "SK Broadband's enterprise business sales have been steadily generated," and "We plan to expand the Internet Data Center (IDC) aiming to start next year, which will significantly increase sales thereafter."

Sales in the security business, consisting of ADT Caps and SK Infosec, reached KRW 323 billion, an 8.7% increase year-on-year. ADT Caps and SK Infosec plan to accelerate the development of new ICT-based businesses such as intelligent thermal imaging cameras, walkthrough access security solutions tailored for untact services, and cloud and convergence security.

The commerce business recorded sales of KRW 192.6 billion, up 8.5% year-on-year, supported by the expansion of transactions on 11st and the strong performance of SK Stoa. 11st is actively responding to the untact consumption culture by expanding partnerships, and SK Stoa plans to achieve the top position in the T-commerce industry this year by strengthening product sourcing capabilities and sales channels.

Center Head Ha said, "We are considering IPOs for major subsidiaries such as One Store, ADT Caps, Wave, SK Broadband, and 11st," adding, "We will actively review in a way that benefits shareholders by considering individual company performance and financial market conditions." He added, "Each investment company is currently preparing IPO plans, and we will proceed with those ready first." One Store, mentioned first, has recorded eight consecutive quarters of growth recently, supported by the revitalization of the gaming industry.

◆Turnaround Expected in Mobile Communications Segment

Performance improvement is also notable in the core mobile communications segment. Wireless sales in the second quarter reached KRW 2.9398 trillion, a 3.2% increase compared to the same period last year.

Sales of the Galaxy A Quantum, a dedicated 5G smartphone utilizing quantum security, performed well, and the number of 5G subscribers increased by 700,000 from the previous quarter to 3.35 million. SK Telecom focused on untact sales instead of offline sales, which were sluggish due to COVID-19. Supported by this, the increase in 5G subscribers, which had slowed to 550,000 in Q4 last year and 560,000 in Q1 this year, is now on the rise again.

However, the average revenue per user (ARPU) was KRW 30,158, down 0.6% year-on-year and 0.2% quarter-on-quarter. Operating profit in Q2 remained similar to the previous year. Due to the heavy burden of large-scale 5G investments and prolonged COVID-19 impact, the operating profit margin fell from 9.7% in Q2 last year to 9.2%.

Due to 5G network investments, SK Telecom's capital expenditure (CAPEX) in Q2 was KRW 917.8 billion, a 56.7% increase compared to a year ago. The cumulative investment in the first half of the year totaled KRW 1.2244 trillion, up 33.5% year-on-year. Marketing expenses decreased to KRW 754 billion compared to the previous quarter.

SK Telecom expects a turnaround in the MNO segment as well. CFO Yoon Poong-young said, "Overall ARPU slightly declined in 2020 due to an increase in Internet of Things (IoT) lines, but handset-based ARPU rose more than 3% year-on-year," adding, "Subscriber and line numbers are generally increasing, and revenue growth will strengthen going forward."

He said, "Although the increase in 5G subscribers was lower than expected due to COVID-19, there was no excessive competition like last year. Stable market conditions will continue after Q3, and revenue growth from increased 5G subscribers is expected," adding, "We will achieve an MNO operating profit turnaround in the second half and further expand the growth rate of consolidated operating profit compared to last year."

Although the launch of 5G smartphones is scheduled to continue in the second half starting with the Galaxy Note20 last night, the possibility of a marketing price war similar to last year is considered low.

◆Expanded Cloud Collaboration with MS... Full-Scale B2B

SK Telecom continues ultra-collaboration with global companies, including the official launch of Xbox Cloud Gaming in September in cooperation with Microsoft (MS). As the sole operating partner in Korea, it will provide a subscription-based 'Xbox Game Pass' service. Center Head Yoon explained, "We plan to implement a high-efficiency marketing policy that maximizes marketing synergy and reduces costs together with MS and Samsung partners."

Through future 5G cloud-based B2B business, it is expected to create business opportunities exceeding KRW 200 billion in three years. SK Telecom plans to commercialize 5G Mobile Edge Computing (MEC) by the end of this year after pilot services targeting corporate customers in the second half. The company is also accelerating the discovery of new B2B models by negotiating the construction of dedicated 5G networks with SK Hynix, Samsung Electronics, POSCO, and others.

In the content sector, attention is focused on whether ultra-collaboration among native OTTs led by SK Telecom will take place. SK Telecom, which launched the joint OTT Wave with the three terrestrial broadcasters, has recently been signaling the launch of 'K-OTT' to counter global OTT giants like Netflix. Center Head Ha Hyung-il said, "We are confident about Wave's growth prospects," but added, "We need to achieve economies of scale through so-called K-OTT in the global content market. We will approach this with an open attitude."

Center Head Ha said, "Wave's user trend showed weakness in the first half but is expected to rise," and "We maintain the goal of 5 million paid subscribers by 2023." He added, "We are preparing for global market entry in cooperation with NBCUniversal and others," and "We will disclose details as soon as preparations are complete."