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SKM SK Telecom

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As filed with the Securities and Exchange Commission on April 29, 2020

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-F

 

 

(Mark One)

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

     

For the fiscal year ended December 31, 2019

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from            to            

Commission file number1-14418

SK Telecom Co., Ltd.

(Exact name of Registrant as specified in its charter)

 

 

SK Telecom Co., Ltd.

(Translation of Registrant’s name into English)

The Republic of Korea

(Jurisdiction of incorporation or organization)

SKT-Tower

65, Eulji-ro,Jung-gu, Seoul, Korea

(Address of principal executive offices)

Mr. Jae Kyu Kwak

65, Eulji-ro,Jung-gu, Seoul, Korea

Telephone No.:+82-2-6100-2114

Facsimile No.:+82-2-6100-7830

(Name, telephone, email and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which Registered

American Depositary Shares, each representing
one-ninth of one share of Common Stock

 

SKM

 New York Stock Exchange

Common Stock, par value ₩500 per share

 

SKM

 New York Stock Exchange*

* Not for trading, but only in connection with the registration of the American Depositary Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

73,136,448 shares of common stock, par value500 per share (not including 7,609,263 shares of common stock held by the company as treasury shares).

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or an emerging growth company. See definitions of “accelerated filer,” “large accelerated filer” and “emerging growth company” inRule 12b-2 of the Exchange Act.

Large accelerated filer              Accelerated filer              Non-accelerated filer              Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    Yes      No  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP       International Financial Reporting Standards as issued by the International Accounting Standards Board       Other  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17  ☐     Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).    Yes      No  

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

CERTAIN DEFINED TERMS AND CONVENTIONS USED IN THIS ANNUAL REPORT

   1 

FORWARD-LOOKING STATEMENTS

   1 

Part I

   3 

Item 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

   3 

Item 1.A.

 

Directors and Senior Management

   3 

Item 1.B.

 

Advisers

   3 

Item 1.C.

 

Auditors

   3 

Item 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

   3 

Item 3.

 

KEY INFORMATION

   3 

Item 3.A.

 

Selected Financial Data

   3 

Item 3.B.

 

Capitalization and Indebtedness

   6 

Item 3.C.

 

Reasons for the Offer and Use of Proceeds

   6 

Item 3.D.

 

Risk Factors

   6 

Item 4.

 

INFORMATION ON THE COMPANY

   22 

Item 4.A.

 

History and Development of the Company

   22 

Item 4.B.

 

Business Overview

   24 

Item 4.C.

 

Organizational Structure

   48 

Item 4.D.

 

Property, Plants and Equipment

   48 

Item 4A.

 

UNRESOLVED STAFF COMMENTS

   49 

Item 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

   49 

Item 5.A.

 

Operating Results

   49 

Item 5.B.

 

Liquidity and Capital Resources

   67 

Item 5.C.

 

Research and Development, Patents and Licenses, etc.

   72 

Item 5.D.

 

Trend Information

   73 

Item 5.E.

 

Off-Balance Sheet Arrangements

   73 

Item 5.F.

 

Tabular Disclosure of Contractual Obligations

   73 

Item 5.G.

 

Safe Harbor

   74 

Item 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

   74 

Item 6.A.

 

Directors and Senior Management

   74 

Item 6.B.

 

Compensation

   79 

Item 6.C.

 

Board Practices

   81 

Item 6.D.

 

Employees

   82 

Item 6.E.

 

Share Ownership

   83 

Item 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

   84 

Item 7.A.

 

Major Shareholders

   84 

Item 7.B.

 

Related Party Transactions

   85 

Item 7.C.

 

Interests of Experts and Counsel

   85 

Item 8.

 

FINANCIAL INFORMATION

   86 

Item 8.A.

 

Consolidated Statements and Other Financial Information

   86 

Item 8.B.

 

Significant Changes

   88 

Item 9.

 

THE OFFER AND LISTING

   88 

Item 9.A.

 

Offering and Listing Details

   88 

Item 9.B.

 

Plan of Distribution

   88 

Item 9.C.

 

Markets

   88 

Item 9.D.

 

Selling Shareholders

   88 

Item 9.E.

 

Dilution

   88 

Item 9.F.

 

Expenses of the Issue

   88 

Item 10.

 

ADDITIONAL INFORMATION

   88 

Item 10.A.

 

Share Capital

   88 

Item 10.B.

 

Memorandum and Articles of Association

   88 

 

(i)


Table of Contents

Item 10.C.

 

Material Contracts

   94 

Item 10.D.

 

Exchange Controls

   94 

Item 10.E.

 

Taxation

   98 

Item 10.F.

 

Dividends and Paying Agents

   104 

Item 10.G.

 

Statements by Experts

   104 

Item 10.H.

 

Documents on Display

   104 

Item 10.I.

 

Subsidiary Information

   104 

Item 11.

 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   104 

Item 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

   105 

Item 12.A.

 

Debt Securities

   105 

Item 12.B.

 

Warrants and Rights

   105 

Item 12.C.

 

Other Securities

   105 

Item 12.D.

 

American Depositary Shares

   105 

Part II

   107 

Item 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   107 

Item 14.

 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   107 

Item 15.

 

CONTROLS AND PROCEDURES

   107 

Item 16.

 

RESERVED

   108 

Item 16A.

 

AUDIT COMMITTEE FINANCIAL EXPERT

   108 

Item 16B.

 

CODE OF ETHICS

   108 

Item 16C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

   108 

Item 16D.

 EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   109 

Item 16E.

 PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   109 

Item 16F.

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

   109 

Item 16G.

 

CORPORATE GOVERNANCE

   109 

Item 16H.

 

MINE SAFETY DISCLOSURE

   110 

Part III

   111 

Item 17.

 

FINANCIAL STATEMENTS

   111 

Item 18.

 

FINANCIAL STATEMENTS

   111 

Item 19.

 

EXHIBITS

   112 

 

(ii)


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CERTAIN DEFINED TERMS AND CONVENTIONS USED IN THIS ANNUAL REPORT

All references to “Korea” contained in this annual report shall mean The Republic of Korea. All references to the “Government” shall mean the government of The Republic of Korea. All references to “we,” “us,” or “our” shall mean SK Telecom Co., Ltd. and, unless the context otherwise requires, its consolidated subsidiaries. References to “SK Telecom” shall mean SK Telecom Co., Ltd., but shall not include its consolidated subsidiaries. All references to “U.S.” shall mean the United States of America.

All references to “MHz” contained in this annual report shall mean megahertz, a unit of frequency denoting one million cycles per second. All references to “GHz” shall mean gigahertz, a unit of frequency denoting one billion cycles per second. All references to “Mbps” shall mean one million bits per second and all references to “Gbps” shall mean one billion bits per second. All references to “GB” shall mean gigabytes, which is one billion bytes. Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

All references to “Won,” or “₩” in this annual report are to the currency of Korea and all references to “Dollars”, “U.S. dollar” or “US$” are to the currency of the United States of America.

The Ministry of Science and ICT (the “MSIT”) is charged with regulating information and telecommunications, and the Korea Communications Commission (the “KCC”) is charged with regulating the public interest aspects of and fairness in broadcasting. Subscriber information for the wireless and fixed-line telecommunications industry set forth in this annual report are derived from information published by the MSIT unless expressly stated otherwise.

The consolidated financial statements included in this annual report are prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (the “IASB”). As such, we make an explicit and unreserved statement of compliance with IFRS, as issued by the IASB, with respect to our consolidated financial statements as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017 included in this annual report.

Unless expressly stated otherwise, all financial data included in this annual report are presented on a consolidated basis.

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements,” as defined in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “considering,” “depends,” “estimate,” “expect,” “intend,” “plan,” “planning,” “planned,” “project” and similar expressions, or that certain events, actions or results “may,” “might,” “should” or “could” occur, be taken or be achieved.

Forward-looking statements in this annual report include, but are not limited to, statements about the following:

 

  

our ability to anticipate and respond to various competitive factors affecting the telecommunications industry, including new services that may be introduced, changes in consumer preferences, economic conditions and discount pricing strategies by competitors;

 

  

our implementation of fifth generation wireless technology, which we call “5G” technology;

 

  

our plans for capital expenditures in 2020 for a range of projects, including investments to expand and improve our newly implemented 5G network, investments to maintain our fourth generation long-term evolution (“LTE”) network and long-term evolution advanced(“LTE-A”) services, investments to improve and expand ourWi-Fi network, investments to develop our Internet of Things (“IoT”) solutions and

 

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platform services business portfolio, including artificial intelligence (“AI”) solutions, investments in research and development of 5G technology, investments in businesses that can potentially leverage our 5G network, and funding formid- to long-term research and development projects, as well as other initiatives, primarily related to the development of new growth businesses, as well as initiatives related to our ongoing businesses in the ordinary course;

 

  

our efforts to make significant investments to build, develop and broaden our businesses, including developing our next-generation growth businesses in media, security, commerce, IoT solutions and other innovative products and services offered through our platform services, including AI solutions;

 

  

our ability to comply with governmental rules and regulations, including the regulations of the Government related to telecommunications providers, the Mobile Device Distribution Improvement Act (“MDDIA”), rules related to our status as a “market-dominating business entity” under the Korean Monopoly Regulation and Fair Trade Act (the “Fair Trade Act”) and the effectiveness of steps we have taken to comply with such regulations;

 

  

our ability to effectively manage our bandwidth and to timely and efficiently implement new bandwidth-efficient technologies and our intention to participate in, and acquire additional bandwidth pursuant to, frequency bandwidth auctions held by the MSIT;

 

  

our expectations and estimates related to interconnection fees, rates charged by our competitors, regulatory fees, operating costs and expenditures, working capital requirements, principal repayment obligations with respect to long-term borrowings, bonds and obligations under capital leases, and research and development expenditures and other financial estimates;

 

  

the success of our various joint ventures and investments, including SK Hynix, Inc. (“SK Hynix”), a memory-chip maker;

 

  

our ability to successfully attract and retain subscribers of our telecommunications-related businesses and customers of our other businesses; and

 

  

the growth of the telecommunications and other industries in which we operate in Korea and other markets and the effect that economic, political or social conditions have on our number of subscribers and customers and results of operations.

We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. Risks and uncertainties associated with our business include, but are not limited to, risks related to changes in the regulatory environment, technology changes, potential litigation and governmental actions, changes in the competitive environment, political changes, foreign exchange currency risks, foreign ownership limitations, credit risks and other risks and uncertainties that are more fully described under the heading “Item 3.D. Risk Factors” and elsewhere in this annual report. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

 

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PART I

 

Item 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Item 1.A.

Directors and Senior Management

Not applicable.

 

Item 1.B.

Advisers

Not applicable.

 

Item 1.C.

Auditors

Not applicable.

 

Item 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

 

Item 3.

KEY INFORMATION

 

Item 3.A.

Selected Financial Data

You should read the selected consolidated financial and operating data below in conjunction with the consolidated financial statements and the related notes included elsewhere in this annual report. The selected consolidated financial data set forth below as of and for each of the five years ended December 31, 2019 have been derived from our audited consolidated financial statements and related notes thereto, which have been prepared in accordance with IFRS as issued by the IASB.

In addition to preparing consolidated financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance with Korean International Financial Reporting Standards(“K-IFRS”) as adopted by the Korean Accounting Standards Board (the “KASB”), which we are required to file with the Financial Services Commission of Korea (the “FSC”) and the Korea Exchange Inc. (the “Korea Exchange”) under the Financial Investment Services and Capital Markets Act (the “FSCMA”). English translations of such financial statements are furnished to the U.S. Securities and Exchange Commission (the “SEC”) on Form6-K.K-IFRS requires operating profit, which is calculated as operating revenue less operating expense, to be separately presented on the consolidated statement of income.Operating expense represents expenses incurred in our main operating activities and includes cost of goods sold and selling, general and administrative expenses. The presentation of operating profit in our consolidated statements of income prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating profit in the consolidated statements of income prepared in accordance withK-IFRS for the corresponding periods in certain respects. For additional information, see “Item 5.A. Operating Results — Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS.”

 

  Year Ended December 31, 
  2019(20)(21)  2018(21)  2017  2016  2015 
  (In billions of Won, except per share and number of shares data) 

STATEMENT OF INCOME DATA

     

Operating Revenue and Other Income

 17,846.9  16,945.9  17,552.0  17,158.3  17,167.6 

Revenue

  17,743.7   16,874.0   17,520.0   17,091.8   17,136.7 

Other income

  103.2   71.9   32.0   66.5   30.9 

Operating Expense

  16,846.0   16,112.1   16,327.4   15,854.9   15,672.2 

Operating Profit

  1,000.9   833.8   1,224.6   1,303.4   1,495.4 

Profit before Income Tax

  1,162.7   3,976.0   3,403.3   2,096.1   2,035.4 

Profit from Continuing Operations

  861.9   3,132.0   2,657.6   1,660.1   1,515.9 

Profit for the Year

  861.9   3,132.0   2,657.6   1,660.1   1,515.9 

Basic Earnings per Share(1)

  12,144   44,066   36,582   23,497   20,988 

 

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  Year Ended December 31, 
  2019(20)(21)  2018(21)  2017  2016  2015 
  (In billions of Won, except per share and number of shares data) 

Diluted Earnings per Share(2)

  12,144   44,066   36,582   23,497   20,988 

Basic Earnings per Share from Continuing Operations(1)

  12,144   44,066   36,582   23,497   20,988 

Diluted Earnings per Share from Continuing Operations(2)

  12,144   44,066   36,582   23,497   20,988 

Dividends Declared per Share (Won)

  10,000   10,000   10,000   10,000   10,000 

Dividends Declared per Share (US$)(3)

  8.7   9.0   9.4   8.3   8.6 

Weighted Average Number of Shares

  72,064,159   70,622,976   70,609,160   70,609,160   71,551,966 
  As of December 31, 
  2019(20)(21)  2018(21)  2017  2016  2015 
  (In billions of Won) 

STATEMENT OF FINANCIAL POSITION DATA

     

Working Capital (Deficit)(4)

 314.6  1,111.3  (907.3 (447.5 (96.3

Property and Equipment, Net

  12,334.3   10,718.4   10,144.9   10,374.2   10,371.3 

Total Assets

  44,611.6   42,369.1   33,428.7   31,297.7   28,581.4 

Non-current Liabilities(5)

  14,000.4   13,172.3   8,290.4   8,737.1   7,950.8 

Share Capital

  44.6   44.6   44.6   44.6   44.6 

Total Equity

  22,823.5   22,349.3   18,029.2   16,116.4   15,374.1 
  As of December 31, 
  2019(20)(21)  2018(21)  2017  2016  2015 
  (In billions of Won, except percentage data) 

OTHER FINANCIAL DATA

     

Capital Expenditures(6)

   3,375.9    2,792.4    2,715.9    2,490.5    2,478.8 

Research and Development Expense

  391.3   387.7   395.3   344.8   315.8 

Depreciation and Amortization Expense(7)

  3,771.5   3,126.1   3,097.5   2,941.9   2,845.3 

Net Cash Provided by Operating Activities

  3,986.1   4,332.6   3,855.8   4,243.2   3,778.1 

Net Cash Used in Investing Activities

  (3,582.5  (4,047.7  (3,070.6  (2,462.2  (2,880.5

Net Cash Used in Financing Activities

  (636.8  (238.3  (826.6  (1,044.8  (964.6

Margins (% of Operating Revenue and Other Income):

     

Operating Margin(8)

  5.6  4.9  7.0  7.6  8.7

Net Margin(9)

  4.8  18.5  15.1  9.7  8.8

 

  As of or for the year ended December 31, 
  2019  2018  2017  2016  2015 

SELECTED OPERATING DATA

     

Population of Korea (in millions)(10)

  51.8   51.8   51.8   51.7   51.5 

Our Wireless Penetration(11)

  60.8  59.6  58.3  57.2  55.6

Number of Employees(12)

  40,543   39,909   30,608   25,844   25,992 

Our Wireless Subscribers (in thousands)(13)

  31,535   30,882   30,195   29,595   28,626 

Our 5G Subscribers (in thousands)

  2,084             

Our 5G Penetration(14)

  6.6            

Our LTE Subscribers (in thousands)(15)

  25,022   24,796   22,865   21,078   18,980 

Our LTE Penetration(16)

  79.3  80.3  75.7  71.2  66.3

Average Monthly Data Usage per 5G Subscriber(17)

  28.0 GB             

Average Monthly Data Usage per LTE Subscriber(18)

  8.2 GB   7.1 GB   6.0 GB   5.2 GB   3.9 GB 

Average Monthly Churn Rate(19)

  1.2  1.2  1.5  1.5  1.5

Cell Sites

             63,066              54,203              52,132              54,986              55,085 

 

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(1) Basic earnings per share is calculated by dividing profit attributable to owners of SK Telecom by the weighted average number of common shares outstanding during the period. Basic earnings per share from continuing operations is calculated by dividing profit from continuing operations attributable to owners of SK Telecom by the weighted average number of common shares outstanding during the period.

 

(2) Diluted earnings per share is calculated by dividing profit attributable to owners of SK Telecom adjusted for dilution by the potential dilutive weighted average number of common shares outstanding during the period, taking into account the conversion of outstanding convertible bonds. Diluted earnings per share from continuing operations is calculated by dividing profit from continuing operations attributable to owners of SK Telecom adjusted for dilution by the potential dilutive weighted average number of common shares outstanding during the period, taking into account the conversion of outstanding convertible bonds.

 

(3) The Dollar amounts shown for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 were translated at the rate of Won 1,155.5to US$1.00, Won 1,112.9 to US$1.00, Won 1,067.4 to US$1.00, Won 1,203.7 to US$1.00 and Won 1,169.3 to US$1.00, respectively, the noon buying rates for cable transfers in New York City certified for customs purposes by the Federal Reserve Bank of New York in effect at the end of the respective years.

 

(4) Working capital means current assets minus current liabilities.

 

(5) Our monetary assets and liabilities denominated in foreign currencies are valued at the exchange rates prevailing at the end of each reporting period. See note 4(19) of the notes to our consolidated financial statements.

 

(6) Consists of cash outflows for the acquisition of property and equipment.

 

(7) Derived from our consolidated statements of income.

 

(8) Operating revenue and other income and operating profit used in the calculation of these ratios exclude the operating revenue and other income and operating profit from discontinued operations.

 

(9) Net margin represents profit for the year divided by operating revenue and other income.

 

(10) Population numbers reflect the number of registered residents as published by the Ministry of the Interior and Safety of Korea.

 

(11) Our wireless penetration is determined by dividing our wireless subscribers by total estimated population, as of the end of the period.

 

(12) Includes regular employees and temporary employees. See “Item 6.D. Employees.”

 

(13) Wireless subscribers include those subscribers who are temporarily deactivated, including (i) subscribers who voluntarily deactivate temporarily for a period of up to three months no more than twice a year and (ii) subscribers with delinquent accounts who may be involuntarily deactivated up to two months before permanent deactivation, which we determine based on various factors, including prior payment history. The number of subscribers as of December 31, 2019, 2018, 2017, 2016 and 2015 include 2.9 million subscribers, 3.5 million subscribers,3.4 million subscribers, 3.2 million subscribers and 2.7 million subscribers, respectively, of mobile virtual network operators (“MVNO”) that lease our wireless networks.

 

(14) Our 5G wireless penetration is determined by dividing our 5G subscribers by our total wireless subscribers, as of the end of the period.

 

(15) The number of LTE subscribers as of December 31, 2019, 2018, 2017, 2016 and 2015 include 0.6 million subscribers, 0.6 millionsubscribers, 0.5 million subscribers, 0.3 million subscribers and 0.1 million subscribers, respectively, of MVNOs that lease our LTE network.

 

(16) Our LTE wireless penetration is determined by dividing our LTE subscribers by our total wireless subscribers, as of the end of the period.

 

(17) Average monthly data usage per 5G subscriber is determined by dividing the total GBs of data usage for the last month of the period by the average number of 5G subscribers for such month.

 

(18) Average monthly data usage per LTE subscriber is determined by dividing the total GBs of data usage for the last month of the period by the average number of LTE subscribers for such month.

 

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(19) The average monthly churn rate for a period is the number calculated by dividing the sum of voluntary and involuntary deactivations during the period by the simple average of the number of subscribers at the beginning and end of the period, then dividing that number by the number of months in the period. Churn includes subscribers who upgrade to a next-generation service, such as 5G, by terminating their service and opening a new subscriber account.

 

(20) We adopted IFRS 16,Leases, in the fiscal year beginning on January 1, 2019 using the modified retrospective method by recognizing the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of retained earnings as of such date. The comparative information presented for 2018, 2017, 2016 and 2015 has not been restated. See “Item 5.A. Operating Results — Recently Adopted International Financial Reporting Standards” and note 3 of the notes to our consolidated financial statements.

 

(21) We adopted IFRS 15,Revenue from Contracts with Customers, and IFRS 9,Financial Instruments, in the fiscal year beginning on January 1, 2018. We adopted IFRS 15 and IFRS 9 by recognizing the cumulative effect of initially applying IFRS 15 and IFRS 9 as adjustments to the opening balance of retained earnings as of January 1, 2018. The comparative information presented for 2017, 2016 and 2015 has not been restated. See “Item 5.A. Operating Results — Recently Adopted International Financial Reporting Standards.”

 

Item 3.B.

Capitalization and Indebtedness

Not applicable.

 

Item 3.C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

Item 3.D.

Risk Factors

Risks Relating to Our Business

Competition may reduce our market share and harm our results of operations and financial condition.

We face substantial competition across all our businesses, including our wireless telecommunications business. We expect competition to intensify as a result of the development of new technologies, products and services. We expect that such trends will continue to put downward pressure on the rates we can charge our subscribers.

Historically, there has been considerable consolidation in the telecommunications industry, resulting in the current competitive landscape comprising three mobile and fixed network operators in the Korean market, us, KT Corporation (“KT”) and LG Uplus Corp. (“LG U+”). Each of our competitors has substantial financial, technical, marketing and other resources to respond to our business offerings. The collective market share of KT and LG U+ amounts to approximately 53.6%, in terms of number of wireless subscribers (including an aggregate of 7.2% attributable to MVNOs that lease KT’s and LG U+’s respective networks), as of December 31, 2019.

Our competitors for subscriber activations include MVNOs, including MVNOs that lease our networks. MVNOs generally provide rate plans that are relatively cheaper than similar rate plans of the wireless network providers from which they lease their networks, including us. In addition, other companies may enter the wireless network services market. While new entries into such market have historically required obtaining requisite licenses from the MSIT, pursuant to an amendment to the Telecommunications Business Act that went into effect in June 2019, companies meeting certain regulatory criteria may become a network service provider by registering with the MSIT without a separate license requirement. Although such amendment has not yet resulted in any new entries into the Korean wireless network services market, it may have the effect of encouraging new entries in the future.

We believe that an increase in market share of MVNOs and the entrance of new mobile network operators, if any, in the wireless telecommunications market may further increase competition in the telecommunications sector, as well as cause downward price pressure on the fees we charge for our services, which, in turn, may have a material adverse effect on our results of operations, financial position and cash flows.

Our fixed-line telephone service competes with KT and LG U+, as well as other providers of voice over Internet protocol (“VoIP”) services. As of December 31, 2019, our market share of the fixed-line telephone and VoIP service market was 15.9% (including the services provided by SK Broadband Co., Ltd. (“SK Broadband”) and

 

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SK Telink Co., Ltd. (“SK Telink”)) in terms of number of subscribers compared to KT with 57.2% and LG U+ with 17.5%. In addition, our broadband Internet access and Internet protocol TV (“IPTV”) services provided through SK Broadband compete with other providers of such services, including KT, LG U+ and cable companies. As of December 31, 2019, our market share of the broadband Internet market was 25.6% in terms of number of subscribers compared to KT with 40.9% and LG U+ with 19.6%. As of December 31, 2019, our market share of the pay TV market (which includes IPTV, cable TV and satellite TV) was 14.9% compared to KT with 31.4% (including its IPTV and satellite TV services) and LG U+ with 24.9% (including its IPTV and cable TV services), and the collective market share of other pay TV providers was 28.8%.

Recently, the Korean fixed-line telecommunications industry has been going through significant consolidation involving major pay television service providers. In December 2019, LG U+ acquired a majority equity stake in CJ Hello Co., Ltd. and changed the acquired company’s name to LG HelloVision Co., Ltd. (“LG HelloVision”) to collectively become the second-largest pay TV provider in Korea in terms of number of subscribers. In April 2019, SK Broadband entered into an agreement with Tbroad Co., Ltd., a leading cable television and other fixed-line telecommunication services provider in Korea with consolidated total assets of Won 973.2 billion and consolidated total revenue of Won 655.1 billion as of and for the year ended December 31, 2019, and two of its subsidiaries, Tbroad Dongdaemun Broadcasting Co., Ltd. and Korea Digital Cable Media Center Co. Ltd., (collectively, “Tbroad”), pursuant to which Tbroad will merge with and into SK Broadband. Upon the completion of such merger, we expect to own approximately 74.4% of SK Broadband’s total outstanding shares following the issuance of SK Broadband’s shares to Tbroad’s shareholders. In addition, SK Telecom signed a separate share purchase agreement with Tbroad Co., Ltd. to acquire a 55.0% equity interest in Tbroad Nowon Broadcasting Co., Ltd. (“Tbroad Nowon”), another subsidiary of Tbroad Co., Ltd., for a purchase price of Won 10.4 billion in cash. Both transactions have obtained all requisite regulatory and shareholder approvals and are expected to be completed as of April 30, 2020 and April 29, 2020, respectively. Such transactions, as well as further consolidation in the fixed-line telecommunications industry, may result in increased competition, as the entities emerging from such consolidation and other remaining players in the industry may actively pursue expanding or protecting their respective market shares.

Furthermore, the Government has historically enforced regulations on cable TV and IPTV service providers that prohibited them from having a market share of more thanone-third of the total number of subscribers in the relevant pay TV market on each of their respective platforms. In June 2015, the Government amended the regulation to impose the same limit on the market share of the entire pay TV market, including satellite TV service providers as well. Such amended regulation, however, expired in June 2018. While the expiration of such regulation has prompted the submission of a number of bills in the National Assembly to extend its application, it is uncertain whether any of such bills will be passed. An extension of such regulation may restrict our and our major competitors’ abilities to engage in further consolidation or otherwise significantly increase market share in the pay TV market. In addition, there is a pending bill in the National Assembly which proposes to require IPTV service providers to obtain approvals from the MSIT for any mergers or acquisitions orchange-of-control transactions.

Continued competition from other wireless and fixed-line service providers has also resulted in, and may continue to result in, a substantial level of deactivations among our subscribers. Subscriber deactivations, or churn, may significantly harm our business and results of operations. In 2019, the monthly churn rate in our wireless telecommunications business ranged from 1.0% to 1.4%, with an average monthly churn rate of 1.2%, which remained unchanged from 2018. Intensification of competition in the future may cause our churn rates to increase, which in turn may cause us to increase our marketing expenses as a percentage of sales to attract and retain subscribers.

Our physical security business primarily operated by ADT CAPS Co., Ltd. competes with other large physical security service providers, includingS-1 Corporation(“S-1”) and KT Telecop Co., Ltd. (“KT Telecop”). As of December 31, 2019, our market share of the physical security services market was 32.4% in terms of the aggregate revenue of these three companies, compared toS-1 with 55.9% and KT Telecop with 11.6%. SK Infosec’s information security services compete with other providers of similar products and services, such as Ahnlab, Inc., SECUi Corp. and WINS Co., Ltd.

With respect to thee-commerce business operated by Eleven Street Co., Ltd. (“Eleven Street”), 11st, our marketplace business, faces intense competition from variouse-commerce providers, including online open

 

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marketplaces and social commerce operators such as Gmarket, Auction, Interpark, Coupang, Wemakeprice and TMon. We also face competition from traditional retailers with online and mobile shopping portals such as SSG.com and Lotte.com, home shopping providers with online and mobile shopping portals such as CJ Mall by CJ O Shopping, GS Shop by GS Homeshopping and Hyundai Hmall by Hyundai Homeshopping, and various online marketplaces for specific consumer segments or product groups. Our television shopping(“T-commerce”) business, SK stoa, primarily competes with other home shopping providers such as those listed above, as well as with variouse-commerce providers and traditional retailers. The industries in which 11st and SK stoa compete are evolving rapidly and are intensely competitive, and we face a broad array of competitors domestically and increasingly, internationally.

Our ability to compete successfully in all of the businesses in which we operate will depend on our ability to anticipate and respond to various competitive factors affecting the respective industries, including new services that may be introduced, changes in consumer preferences, economic conditions and discount pricing strategies by competitors.

Inability to successfully implement or adapt our network and technology to meet the continuing technological advancements affecting the wireless telecommunications industry will likely have a material adverse effect on our financial condition, results of operation, cash flows and business.

The telecommunications industry has been characterized by continual improvement and advances in technology, and this trend is expected to continue. We and our competitors have continually implemented technology upgrades from our basic code division multiple access (“CDMA”) network to our wideband code division multiple access (“WCDMA”) network, and subsequently to LTE and 5G technologies. Our business could be harmed if we fail to implement, or adapt to, future technological advancements in the telecommunications sector in a timely manner, such as the continued implementation of 5G technology. We launched wireless service plans using the 5G network in April 2019 following the commencement of sales of the first5G-compatible smartphones, and we are in the process of expanding our 5G network coverage, focusing on major commercial districts and other densely-populated areas in the Seoul metropolitan area and other major cities. KT and LG U+ have also rolled out their respective 5G wireless service plans in April 2019. The more successful operation of a 5G network or development of improved 5G technology by a competitor, including better market acceptance of a competitor’s 5G services, could materially and adversely affect our existing wireless telecommunications businesses as well as the returns on future investments we may make in our 5G network or our other businesses.

In addition to introducing new technologies and offerings, we must phase out outdated and unprofitable technologies and services. For example, as of January 2019, we discontinued our wireless broadband Internet access (“WiBro”) services, and we also plan to phase out our second generation CDMA wireless services upon receipt of the requisite approval from the MSIT. If we are unable to do so on a cost-effective basis, our results of operations could be adversely affected.

Implementation of new wireless technology and enhancement of existing wireless technology have required, and may continue to require, significant capital and other expenditures, which we may not recoup.

We have made, and intend to continue to make, capital investments to develop, launch and enhance our wireless service. In 2019, 2018 and 2017, we spent Won 2,514.3 billion, Won 1,735.6 billion and Won 1,597.0 billion, respectively, in capital expenditures to build and enhance our wireless networks. Our continued implementation and expansion of 5G services, which use a higher frequency spectrum than our LTE services, will require additional cell sites and other infrastructure, which may result in an increase in our capital expenditures in the future.We also plan to make further capital investments related to our wireless services in the future, including services that can potentially leverage our 5G network. In addition, we plan to continue maintaining our LTE network, which we expect will continue to be used broadly by our subscriber base during the near future, as we and our competitors continue to build up 5G networks and services and wireless service users gradually migrate to the 5G network over time. Our wireless technology-related investment plans are subject to change, and will depend, in part, on market demand for 5G and LTE services, the competitive landscape for provision of such services and the development of competing technologies. There may not be sufficient demand for services based on our latest wireless technologies, as a result of competition or otherwise, to permit us to recoup or profit from our wireless technology-related capital investments.

 

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Our businesses are subject to extensive Government regulation and any change in Government policy relating to the telecommunications industry could have a material adverse effect on our results of operations, financial condition and cash flows.

Most of our businesses are subject to extensive governmental supervision and regulation.

Rate Regulation.The Government has periodically reviewed the rates charged by wireless telecommunications service providers and has, from time to time, released public policy guidelines or suggested rate reductions. Although these guidelines or suggestions were not binding, we have implemented some rate reductions in response to them. For example, under the MDDIA, wireless telecommunications service providers are obliged to provide certain benefits, such as discounted rates, to subscribers who subscribe to their service without receiving subsidies. In June 2017, the State Affairs Planning Advisory Committee of Korea announced that it would encourage wireless telecommunications service providers, including us, to increase the applicable discount rate offered to subscribers from 20% to 25%, which we adopted in September 2017, and to offer additional discounts to low income customers, including those on government welfare programs and senior citizen recipients of the basic pension, which we implemented in December 2017 and July 2018, respectively. See “Item 4.B. Business Overview — Law and Regulation — Rate Regulation” and “Item 5.A. Operating Results — Overview — New Rate Regulations.” Such discounts have contributed to a decrease in the monthly revenue per subscriber of our wireless telecommunications services. See “Item 5.A. Operating Results — Overview — Decrease in Monthly Revenue per Subscriber.” The Government may suggest other rate reductions in the future, including more affordable subscription plans for 5G wireless services, and any further rate reductions we make in response to such suggestion may adversely affect our results of operations.

Technology Standards.The Government also plays an active role in setting the timetable and quality standards for the adoption and implementation of new technologies to be used by telecommunications operators in Korea. For example, the Government provided such guidance in connection with the introduction of LTE and 5G technologies in the past. The Government may provide similar guidance or recommendations in connection with the adoption and implementation of technologies to be used in future telecommunications services, and it is possible that adherence to such guidance or recommendations promoted by the Government in the future may not provide the best commercial returns for us.

Frequency Allocation.The Government sets the policies regarding the use of frequencies and allocates the spectrum of frequencies used for wireless telecommunications. See “Item 4.B. Business Overview — Law and Regulation — Frequency Allocation.” The reallocation of the spectrum to our existing competitors could increase competition among wireless telecommunications service providers, which may have an adverse effect on our business.

MVNOs.Pursuant to the Telecommunications Business Act, certain wireless telecommunications service providers designated by the MSIT, which included only us, were required to lease their networks or allow use of their networks (collectively, a “wholesale lease”) to other network service providers, such as an MVNO, that have requested such a wholesale lease in order to provide their own services using the leased networks until September 2019. The expiration of such requirement has prompted the submission of a bill in the National Assembly to extend its application. While it is uncertain whether such bill will be passed, we plan to continue allowing MVNOs to use our networks. Currently, thirteen MVNOs provide wireless telecommunications services using the networks leased from us. We believe that leasing a portion of our bandwidth capacity to an MVNO impairs our ability to use our bandwidth in ways that would generate maximum revenues and strengthens our MVNO competitors by granting them access and lowering their costs to enter into and operate in our markets. Accordingly, our profitability has and may continue to be adversely affected.

Interconnection.Our wireless telecommunications services depend, in part, on our interconnection arrangements with domestic and international fixed-line and other wireless networks. Our interconnection arrangements, including the interconnection rates we pay and interconnection rates we charge, affect our revenues and operating results. The MSIT determines the basic framework for interconnection arrangements, including policies relating to interconnection rates in Korea. The KCC, which determined such basic framework under the previous Government, changed the basic framework for interconnection arrangements several times. We cannot

 

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assure you that we will not be adversely affected by the MSIT’s interconnection policies and future changes to such policies. See “Item 4.B. Business Overview — Interconnection — Domestic Calls.”

Regulatory Action.The MSIT may revoke our licenses or suspend any of our businesses if we fail to comply with its rules, regulations and corrective orders, including the rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the KCC may levy a monetary penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years. For information about the penalties imposed on us for violating Governmental regulations, see “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings — KCC Proceedings.” Such penalties, which may include the revocation of cellular licenses, suspension of business or imposition of monetary penalties by the KCC, could have a material adverse effect on our business. We believe we are currently in compliance with the material terms of all our cellular licenses.

We are subject to additional regulations as a result of our dominant market position in the wireless telecommunications sector, which could harm our ability to compete effectively.

The Government endeavors to promote competition in the Korean telecommunications markets through measures designed to prevent a dominant service provider from exercising its market power and deterring the emergence and development of viable competitors. We have been designated by the MSIT as the “dominant network service provider” in respect of our wireless telecommunications business. As such, we are subject to additional regulations to which certain of our competitors are not subject. For example, under current Government regulations, we must obtain prior approval from the MSIT to raise our existing rates or introduce new rates. Multiple bills have been proposed to the National Assembly to change the approval requirement to a simple reporting requirement, which is the requirement for our competitors. However, there is no assurance as to which of these bills, if any, will be passed. See “Item 4.B. Business Overview — Law and Regulation — Rate Regulation.” The MSIT could also require us to charge higher usage rates than our competitors for future services or to take certain actions earlier than our competitors, as when the KCC required us to introduce number portability earlier than our competitors, KT and LG U+.

We also qualify as a “market-dominating business entity” under the Fair Trade Act, which subjects us to additional regulations and we are prohibited from engaging in any act of abusing our position as a market-dominating entity. See “Item 4.B. Business Overview — Law and Regulation — Competition Regulation.” The additional regulations to which we are subject has affected our competitiveness in the past and may materially hurt our profitability and impede our ability to compete effectively against our competitors in the future.

The ongoing global pandemic of a new strain of coronavirus(“COVID-19”) and any possible recurrence of other types of widespread infectious diseases may adversely affect our business, financial condition or results of operations.

TheCOVID-19, an infectious disease caused by severe acute respiratory syndrome coronavirus 2 that was first reported to have been transmitted to humans in late 2019 and has since spread globally over the course of 2020 to date, has materially and adversely affected the global economy and financial markets in recent months as well as disrupted our business operations. The World Health Organization declared theCOVID-19 as a pandemic in March 2020. From late February to early April, we implemented remote work arrangements for most of our employees at our headquarters and certain other locations due to an isolated incident of contraction ofCOVID-19 by one of our employees and in light of the Government’s recommendation for social distancing. While we do not believe that such temporary arrangements have had a material adverse impact on our business, a prolonged outbreak ofCOVID-19 may result in further disruption in the normal operations of our business, including implementation of further work arrangements requiring employees to work remotely and/or temporary closures of our facilities, which may lead to a reduction in labor productivity.

Other risks associated with a prolonged outbreak ofCOVID-19 or other types of widespread infectious diseases include:

 

  

an increase in unemployment among, and/or a decrease in disposable income of, our customers, who may not be able to meet payment obligations or otherwise choose to decrease their spending levels, which in turn

 

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may decrease demand for some of our products and services or cause an increase in delinquent subscriber accounts;

 

  

a slowdown in the rate of subscriber migration to our 5G service, which generally entails higher-priced subscription plans and wireless devices;

 

  

disruptions in operations, and/or a decrease in the demand for products and services, of our corporate customers, which in turn may decrease such customers’ demand for our services and products;

 

  

service disruptions, outages and performance problems due to capacity constraints caused by an overwhelming number of people accessing our services simultaneously;

 

  

disruptions in supply of mobile handsets or telecommunications equipment from our vendors as well as in the installation of our network infrastructure;

 

  

unstable global and Korean financial markets, which may adversely affect our ability to meet capital funding needs on a timely and cost-effective basis;

 

  

a decrease in the fair value of our investments in companies that may be adversely affected by the pandemic; and

 

  

depreciation of the Won against major foreign currencies, which in turn may increase the cost of imported equipment necessary for expansion and enhancement of our telecommunications infrastructure.

It is not possible to predict the duration or full magnitude of harm fromCOVID-19. In the event thatCOVID-19 or other types of widespread infectious diseases cannot be effectively and timely contained, our business, financial condition and results of operations may be adversely affected.

Declines in the market value of our equity holdings in SK Hynix and the results of operations of SK Hynix could have a material adverse effect on the market price of our common shares and American Depositary Shares (“ADSs”) as well as our results of operation.

As of December 31, 2019, we held a 20.1% equity interest in SK Hynix, which is listed on the KRX KOSPI Market of the Korea Exchange (the “KRX KOSPI Market”) and is one of the world’s largest memory-chip makers by revenue. As of December 31, 2019, the fair value of our holding in SK Hynix was Won 13,748.0 billion. We received dividend payments of Won 219.2 billion in 2019, Won 146.1 billion in 2018 and Won 87.7 billion in 2017 related to such shareholding.

From time to time, the memory semiconductor industry has experienced significant and sometimes prolonged downturns, which often occur in connection with a deterioration of global economic conditions, and is subject to intense competition. For example, SK Hynix and its subsidiaries, on a consolidated basis, incurred net losses of Won 158.8 billion and Won 56.0 billion in 2012 and 2011, respectively, primarily due to increased supply and weak demand for semiconductor products. Although the memory semiconductor industry has recovered since then and SK Hynix has been reporting net profits since 2013, its consolidated profit decreased significantly from Won 15,540.0 billion in 2018 to Won 2,016.4 billion in 2019, mainly due to adverse market conditions and an overcapacity in the industry. The global memory semiconductor industry, which is sensitive to general conditions in the global economy, is subject to cyclical fluctuations, and we expect that there may be future downturns in the industry. Uncertainty in the global economy has increased in recent years, especially with global financial and capital markets experiencing substantial volatility in light of the ongoing globalCOVID-19 pandemic. Accordingly, SK Hynix’s operating results would be adversely affected if it fails to compete successfully or decrease manufacturing costs at an adequate level. Our share of any net losses incurred by SK Hynix would be reflected in our income statement as share of losses related to investments in associates.

Accordingly, declines in the market value of our equity holdings in SK Hynix and the results of operations of SK Hynix could have a material adverse effect on the market price of our common shares and ADSs as well as our results of operation.

 

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We may fail to successfully complete, integrate or realize the anticipated benefits of our new acquisitions, joint ventures or other strategic alternatives, and such transactions may negatively impact our business.

We continue to seek opportunities to develop new businesses that we believe are complementary to our existing product and service portfolio and expand our global business through selective acquisitions. Accordingly, we are often engaged in evaluating potential transactions and other strategic alternatives, some of which may be significant in size.

For example, in April 2019, SK Broadband entered into an agreement to merge with Tbroad, a leading cable television and other fixed-line telecommunication services provider in Korea, and a separate share purchase agreement to acquire a 55.0% interest in another subsidiary of Tbroad, which transactions have received all requisite regulatory and shareholder approvals and are expected to be completed as of April 30, 2020 and April 29, 2020, respectively. In addition, in June 2019, we acquired a 34.6% interest in Incross Co., Ltd. (“Incross”), a digital advertising company, for an aggregate purchase price of Won 53.7 billion, in light of potential synergies with our media and commerce businesses. Furthermore, in order to strengthen our security business and explore potential synergies with our wireless and fixed-line business portfolio, we acquired a 55.0% interest in Life & Security Holdings Co., Ltd. (“LSH”), which owns 100% of ADT CAPS Co., Ltd., a leading Korean physical security service company, and two sister companies, CAPSTEC Co., Ltd. and ADT SECURITY Co., Ltd. (which subsequently merged with and into ADT CAPS Co., Ltd.) (collectively, “ADT Caps”), for Won 696.7 billion in October 2018; a 100% interest in SK Infosec Co., Ltd. (“SK Infosec”), Korea’s leading information security company, in a share exchange transaction pursuant to which we issued 1,260,668 treasury shares with an aggregate book value of Won 281.2 billion in exchange for all of the outstanding common shares of SK Infosec in December 2018 from SK Holdings Co., Ltd. (“SK Holdings”), our largest shareholder; and additional shares of id Quantique SA (“id Quantique”), a leading provider of quantum cryptography solutions for data security based in Switzerland, in 2018 with Won 55.2 billion in cash and Won 5.7 billion incontribution-in-kind through which we increased our interest in id Quantique to 65.6%. Following our participation in id Quantique’s capital increase in 2019, our equity interest in id Quantique increased to 66.8% as of December 31, 2019.

We have also pursued other strategic alternatives, such as forming a strategic alliance in October 2019 with Kakao Corp. (“Kakao”), a Korean Internet company and the operator of Korea’s most popular mobile messaging application, to collaborate in the information and communication technologies (“ICT”) sector through the sale of 1,266,620 of our treasury shares to Kakao, representing a 1.6% interest, for approximately Won 300.0 billion and a concurrent issuance by Kakao of 2,177,401 of its shares, representing a 2.5% interest, to us for approximately Won 302.3 billion.In addition, in September 2019, in furtherance of our efforts to enhance the competitiveness of our media business and to promote its future growth, we acquired a minority equity stake in Content Wavve Co., Ltd. (formerly known as Content Alliance Platform Inc.) (“Content Wavve”), a joint venture established by the three major terrestrial broadcasters in Korea that operated the mobileover-the-top (“OTT”) service “POOQ,” by investing Won 90.9 billion in cash and transferring our former mobile OTT service business “oksusu” to Content Wavve. Content Wavve combined oksusu and POOQ to launch a new integrated mobile OTT service “wavve” in September 2019. As of December 31, 2019, we held 30.0% of the total outstanding shares of Content Wavve.For a more detailed description of our recent investments in new businesses, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Investments in New Growth Businesses.”

While we are hoping to benefit from a range of synergies from our recent or future acquisitions as well as develop new growth engines for our business, we may not be able to successfully complete or integrate such acquisitions or new businesses and may fail to realize the expected benefits in the near term, or at all. For example, in June 2019, we disposed of our entire interest in our consolidated subsidiaries Shopkick Management Company, Inc. (“SMC”) and Shopkick, Inc. (“Shopkick”), a wholly-owned subsidiary of SMC which operates “shopkick,” a mobile reward points-basedin-store shopping application, which we had acquired in October 2014, following a prolonged period of unprofitability of the shopkick business. Previously in 2018, we also recognized Won 153.4 billion and Won 52.4 billion of impairment losses for goodwill and intangible assets, respectively, in connection with Shopkick. In addition, when we enter into new businesses with partners through joint ventures or other strategic alliances, we and those partners may have disagreements with respect to strategic directions or other aspects of business, or may otherwise be unable to coordinate or cooperate with each other, any of which

 

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could materially and adversely affect our operations in such businesses. Our business may be negatively impacted if we fail to successfully integrate or realize the anticipated benefits of such transactions.

Due to the existing high penetration rate of wireless telecommunications services in Korea, we are unlikely to maintain our subscriber growth rate, which could adversely affect our results of operations.

According to data published by the MSIT and the historical population data published by the Ministry of the Interior and Safety, the penetration rate for the Korean wireless telecommunications industry as of December 31, 2019 was approximately 131.0%, which is relatively high compared to many industrialized countries. Therefore, we expect that the penetration rate for wireless telecommunications service in Korea will remain relatively stable. As a result of the already high penetration rate in Korea for wireless telecommunications services coupled with our leading market share, we expect our subscriber growth rate to decrease.Slowed growth in the penetration rate without a commensurate increase in revenues through the introduction of new services and increased use of our services by existing subscribers would likely have a material adverse effect on our financial condition, results of operations and cash flows.

Our business and results of operations may be adversely affected if we fail to acquire adequate additional frequency usage rights or use our bandwidth efficiently to accommodate subscriber growth and subscriber usage.

One of the principal limitations on a wireless network’s subscriber capacity is the amount of frequency spectrum available for use by the network. We have acquired a number of frequency usage rights to secure bandwidth capacity to provide our broad range of services, for which we typically make an initial payment as well as pay usage fees during the license period. We made frequency usage right fee payments of Won 133.1 billion in 2019, Won 151.7 billion in 2018 and Won 150.3 billion in 2017. For more information regarding the usage right fees for the various bandwidths that we use, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures” and note 16 of the notes to our consolidated financial statements.

The growth of our wireless data businesses has been a significant factor in the increased utilization of our bandwidth, since wireless data applications are generally more bandwidth-intensive than voice services. In particular, the increasing popularity of smartphones and data intensive applications among smartphone users has been a major factor for the high utilization of our bandwidth in recent years. Although such trend has been offset in part by the implementation of new technologies that enable more efficient usage of our bandwidth, we expect that the current trend of increased data transmission use by our subscribers will accelerate in the near future as more subscribers migrate to our 5G network and the volume and sophistication of the multimedia content we offer through our wireless data services continue to grow in the 5G environment.While we believe that we can address the capacity constraint issue through system upgrades and efficient allocation of bandwidth, inability to address such capacity constraints in a timely manner may adversely affect our business, results of operations, financial position and cash flows. In the event we are unable to maintain sufficient bandwidth capacity, our subscribers may perceive a general slowdown of wireless telecommunications services. Growth of our wireless telecommunications business will depend in part upon our ability to effectively manage our bandwidth capacity and to implement efficiently and in a timely manner new bandwidth-efficient technologies if they become available. We cannot assure you that bandwidth constraints will not adversely affect the growth of our wireless telecommunications business. Furthermore, we may be required to pay a substantial amount to acquire additional bandwidth capacity in the future in order to meet increasing bandwidth demand or renew the rights to use our existing bandwidth, and we may not be successful in acquiring the necessary bandwidth to meet such demand at commercially attractive terms or at all, which may adversely affect our financial condition and results of operations.

We rely on key researchers and engineers and senior management, and the loss of the services of any such personnel or the inability to attract and retain them may negatively affect our business.

Our success depends to a significant extent upon the continued service of our research and development and engineering personnel, and on our ability to continue to attract, retain and motivate qualified researchers and engineers. In particular, our focus on leading the market in introducing new services has meant that we must aggressively recruit engineers with expertise in cutting-edge technologies. We also depend on the services of

 

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experienced key senior management, and if we lose their services, it would be difficult to find and integrate replacement personnel in a timely manner, or at all.

The loss of the services of any of our key research and development and engineering personnel or senior management without adequate replacement, or the inability to attract new qualified personnel, would have a material adverse effect on our operations.

We need to observe certain financial and other covenants under the terms of our debt instruments, the failure to comply with which would put us in default under those instruments.

Certain of our debt instruments contain financial and other covenants with which we are required to comply on an annual and semi-annual basis. The financial covenants with respect to SK Telecom’s debt instruments include, but are not limited to, a maximum netdebt-to-EBITDA ratio of 3.50 and a minimum interest coverage ratio of 4.00, each as determined on a separate financial statement basis.The debt arrangements also contain negative pledge provisions limiting our ability to provide liens on our assets as well as cross-default and cross-acceleration clauses, which give related creditors the right to accelerate the amounts due under such debt if an event of default or acceleration has occurred with respect to our existing or future indebtedness, or if any material part of our indebtedness or indebtedness of our subsidiaries is capable of being declared payable before the stated maturity date. In addition, such covenants restrict our ability to raise future debt financing.

If we breach our financial or other covenants, our financial condition will be adversely affected to the extent we are not able to cure such breaches or repay the relevant debt.

We may have to make further financing arrangements to meet our capital expenditure requirements and debt payment obligations.

We have had, and expect to continue to have, significant capital expenditure requirements as we continue to build out, maintain and upgrade our networks and invest in businesses that complement our wireless and fixed-line telecommunication businesses. We spent Won 3,375.9 billion for capital expenditures in 2019.We expect to spend a lower amount for capital expenditures in 2020 compared to 2019 for a range of projects, including investments to expand and improve our newly implemented 5G network, investments to maintain our LTE network andLTE-A services, investments to improve and expand ourWi-Fi network, investments to develop our IoT solutions and platform services business portfolio, including AI solutions, investments in research and development of 5G technology, investments in businesses that can potentially leverage our 5G network, and funding formid- to long-term research and development projects, as well as other initiatives, primarily related to the development of new growth businesses, as well as initiatives related to our ongoing businesses in the ordinary course.

In particular, we continue to make significant capital investments to expand and upgrade our wireless networks in response to growing bandwidth demand by our subscribers. Bandwidth usage by our subscribers has rapidly increased in recent years primarily due to the increasing popularity of smartphones and data intensive applications among smartphone users. If heavy usage of bandwidth-intensive services grows beyond our current expectations, we may need to invest more capital than currently anticipated to expand the bandwidth capacity of our networks or our customers may have a suboptimal experience when using our services. Any of these events could adversely affect our competitive position and have a material adverse effect on our business, financial condition, results of operation and cash flow. For a more detailed discussion of our capital expenditure plans and a discussion of other factors that may affect our future capital expenditures, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures.”

As of December 31, 2019, we had Won 2,255.2 billion in contractual payment obligations due in 2020, which mostly involve repayment of debt obligations, payments related to lease liabilities and other short-term leases and leases of low-value assets and payments related to frequency licenses. See “Item 5.B. Liquidity and Capital Resources — Contractual Obligations and Commitments.”

We have not arranged firm financing for all of our current or future capital expenditure plans and contractual payment obligations. We have, in the past, obtained funds for our proposed capital expenditure and payment obligations from various sources, including our cash flow from operations as well as from financings, primarily debt

 

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and equity financings. Any material adverse change in our operational or financial condition could impact our ability to fund our capital expenditure plans and contractual payment obligations. Still volatile financial market conditions may also curtail our ability to obtain adequate funding. Inability to fund such capital expenditure requirements may have a material adverse effect on our financial condition, results of operations and business. In addition, although we currently anticipate that the capital expenditure levels estimated by us will be adequate to meet our business needs, such estimates may need to be adjusted based on developments in technology and markets. In the event we are unable to meet any such increased expenditure requirements or to obtain adequate financing for such requirements, on terms acceptable to us, or at all, this may have a material adverse effect on our financial condition, results of operations and business.

Termination or impairment of our relationship with a small number of key suppliers for network equipment and for leased lines could adversely affect our results of operations, financial position and cash flows.

We purchase wireless network equipment from a small number of suppliers. To date, we have purchased substantially all of the equipment for our networks from Samsung Electronics Co., Ltd. (“Samsung Electronics”),Ericsson-LG Co., Ltd.(“Ericsson-LG”) and Nokia Corporation (“Nokia”). We believe Samsung Electronics currently manufactures more than half of the wireless handsets sold to our subscribers. Although other manufacturers sell the equipment we require, sourcing such equipment from other manufacturers could result in unanticipated costs in the maintenance and enhancement of our wireless networks. Inability to obtain the equipment needed for our networks in a timely manner may have an adverse effect on our business, financial condition, results of operations and cash flows.

We cannot assure you that we will be able to continue to obtain the necessary equipment from one or more of our suppliers. Any discontinuation or interruption in the availability of equipment from our suppliers for any reason could have an adverse effect on our results of operations. In addition, inability to lease adequate lines at commercially reasonable rates may impact the quality of the services we offer and may also damage our reputation and our business.

Our business relies on technology developed by us, and our business will suffer if we are unable to protect our proprietary rights.

We own numerous patents and trademarks worldwide, and have applications for patents pending in many countries. In addition to active research and development efforts, our success depends in part on our ability to obtain patents and other intellectual property rights covering our services.

We may be required to defend against charges of infringement of patent or other proprietary rights of third parties. Although we have not experienced any significant patent or other intellectual property disputes, we cannot be certain that any significant patent or other intellectual property disputes will not occur in the future. Defending our patent and other proprietary rights could require us to incur substantial expense and to divert significant resources of our technical and management personnel, and could result in our loss of rights to employ certain technologies to provide services.

Malicious and abusive Internet practices could impair our services and we may be subject to significant legal and financial exposure, damage to our reputation and a loss of confidence of our customers.

Our business involves the storage and transmission of large amounts of confidential information, and cybersecurity breaches expose us to a risk of loss of this information, which may lead to improper use or disclosure of such information, ensuing potential liability and litigation, any of which could harm our reputation and adversely affect our business.

Our cybersecurity measures may also be breached due to employee error, malfeasance or otherwise. Instituting appropriate access controls and safeguards across all our information technology infrastructure is challenging. Furthermore, outside parties may attempt to fraudulently induce employees to disclose sensitive information in order to gain access to our data or our customers’ data or accounts, or may otherwise obtain access to such data or accounts. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these

 

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techniques or to implement adequate preventative measures. If an actual or perceived breach of our cybersecurity occurs or the market perception of the effectiveness of our cybersecurity measures is harmed, we may incur significant legal and financial exposure, including legal claims and regulatory fines and penalties, damage to our reputation and a loss of confidence of our customers, which could have an adverse effect on our business, financial condition and results of operations.

In addition, our wireless and fixed-line subscribers increasingly utilize our network to access the Internet and, as a consequence, we or they may become victim to common malicious and abusive Internet activities, such as unsolicited mass advertising (i.e., “spam”), hacking of personal information and dissemination of viruses, worms and other destructive or disruptive software. These activities could have adverse consequences on our network and our customers, including degradation of service, excessive call volume to call centers and damage to our or our customers’ equipment and data. Significant incidents could lead to customer dissatisfaction and, ultimately, loss of customers or revenue, in addition to increased costs to us to service our customers and protect our network. Any significant loss of our subscribers or revenue due to incidents of malicious and abusive Internet practices or significant increase in costs of serving those subscribers could adversely affect our business, financial condition and results of operations.

Labor disputes may disrupt our operations.

Although we are not experiencing any significant labor disputes, there can be no assurance that we will not experience labor disputes in the future, including protests and strikes, which could disrupt our business operations and have an adverse effect on our financial condition and results of operation.

Every two years, the union and management negotiate and enter into a new collective bargaining agreement that has atwo-year duration, which is focused on employee benefits and welfare. Employee wages are separately negotiated on an annual basis. Although we consider our relations with our employees to be good, there can be no assurance that we will be able to maintain such a working relationship with our employees and will not experience labor disputes resulting from disagreements with the labor union in the future.

Concerns that radio frequency emissions may be linked to various health concerns could adversely affect our business and we could be subject to litigation relating to these health concerns.

In the past, allegations that serious health risks may result from the use of wireless telecommunications devices or other transmission equipment have adversely affected share prices of some wireless telecommunications companies in the United States. In May 2011, the International Agency for Research on Cancer (the “IARC”), a part of the World Health Organization, announced that it has classified radiofrequency electromagnetic fields associated with wireless phone use as possibly carcinogenic to humans, based on an increased risk for glioma, a malignant type of brain cancer. The IARC conducts research on the causes of human cancer and the mechanisms of carcinogenesis and aims to develop scientific strategies for cancer control. We cannot assure you that these health concerns will not adversely affect our business. Several class action and personal injury lawsuits have been filed in the United States against several wireless phone manufacturers and carriers, asserting product liability, breach of warranty and other claims relating to radio transmissions to and from wireless phones. Certain of these lawsuits have been dismissed. We could be subject to liability or incur significant costs defending lawsuits brought by our subscribers or other parties who claim to have been harmed by or as a result of our services. In addition, the actual or perceived risk of wireless telecommunications devices could have an adverse effect on our business by reducing the number of our subscribers or the usage per subscriber.

Our ability to deliver services may be disrupted due to a systems failure, shutdown in our networks or natural disaster.

Our services are currently carried through our wireless and fixed-line networks, which could be vulnerable to damage or interruptions in operations due to fires, floods, earthquakes, power losses, telecommunication failures, network software flaws, unauthorized access, computer viruses and similar events, which may occur from time to time. The occurrence of any of these events could impact our ability to deliver services, we may be liable for damages to our customers caused by such interruptions, our reputation may be damaged and our customers may lose confidence in us, which could have a negative effect on our results of operations.

 

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Depreciation of the value of the Won against the Dollar and other major foreign currencies may have a material adverse effect on our results of operations and the market value of our common shares and ADSs.

Substantially all of our revenues are denominated in Won. Depreciation of the Won may materially affect our results of operations because, among other things, it causes:

 

  

an increase in the amount of Won required by us to make interest and principal payments on our foreign currency-denominated debt; and

 

  

an increase, in Won terms, of the costs of equipment that we purchase from overseas sources which we pay for in Dollars or other foreign currencies.

Fluctuations in the exchange rate between the Won and the Dollar will affect the Dollar equivalent of the Won price of the our common shares on the KRX KOSPI Market. These fluctuations also will affect:

 

  

the amounts a registered holder or beneficial owner of ADSs will receive from the American Depositary Receipt (“ADR”) depositary in respect of dividends, which will be paid in Won to the ADR depositary and converted by the ADR depositary into Dollars;

 

  

the Dollar value of the proceeds that a holder will receive upon sale in Korea of our common shares; and

 

  

the secondary market price of our ADSs.

If SK Holdings causes us to breach the foreign ownership limitations on our common shares by being deemed to be a foreign entity, we may experience a change of control.

The Telecommunications Business Act currently sets a 49.0% limit on the aggregate foreign ownership of our issued shares. Under the Telecommunications Business Act, as amended, a Korean entity, such as SK Holdings, is deemed to be a foreign entity if its largest shareholder (determined by aggregating the shareholdings of such shareholder and its related parties) is a foreigner and such shareholder (together with the shareholdings of its related parties) holds 15.0% or more of the issued voting stock of the Korean entity. As of December 31, 2019, SK Holdings owned 21,624,120shares of our common stock, or 26.8%, of our issued shares. SK Holdings is currently not deemed to be a foreign entity. However, should SK Holdings be considered to be a foreign shareholder in the future, then its shareholding in us would be included in the calculation of our aggregate foreign shareholding and our aggregate foreign shareholding (based on our foreign ownership level as of December 31, 2019, which we believe was 37.2%) would exceed the 49.0% ceiling on foreign shareholding. As of December 31, 2019, the two largest foreign shareholders of SK Holdings each held a 3.5% stake therein.

If our aggregate foreign shareholding limit is exceeded, the MSIT may issue a corrective order to us, the breaching shareholder (including SK Holdings if the breach is caused by an increase in foreign ownership of SK Holdings) and the foreign shareholder which owns in the aggregate 15.0% or more of SK Holdings. Furthermore, if SK Holdings is considered a foreign shareholder, it will be prohibited from exercising its voting rights with respect to the shares held in excess of the 49.0% ceiling, which may result in a change in control of us. In addition, the MSIT will be prohibited from granting us licenses or permits necessary for entering into new telecommunications businesses until our aggregate foreign shareholding is reduced to below 49.0%. For a description of further actions that the MSIT could take, see “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements.”

Risks Relating to Korea

Unfavorable financial and economic developments in Korea may have an adverse effect on us.

We are incorporated in Korea, and a substantial portion of our operations and assets are located in Korea. As a result, we are subject to political, economic, legal and regulatory risks specific to Korea. The economic indicators in Korea in recent years have shown mixed signs, and future growth of the Korean economy is subject to many factors beyond our control, including developments in the global economy.

In recent years, adverse conditions and volatility in the worldwide financial markets, fluctuations in oil and commodity prices, increases in interest rates globally and the general weakness of the global economy have

 

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contributed to the uncertainty of global economic prospects in general and have adversely affected, and may continue to adversely affect, the Korean economy. The value of the Won relative to major foreign currencies has fluctuated significantly. Furthermore, as a result of adverse global and Korean economic conditions, there has been volatility in the stock prices of Korean companies in recent years. Future declines in the Korea Composite Stock Price Index (known as the “KOSPI”) and large amounts of sales of Korean securities by foreign investors and subsequent repatriation of the proceeds of such sales may continue to adversely affect the value of the Won, the foreign currency reserves held by financial institutions in Korea and the ability of Korean companies to raise capital. Any future deterioration of the Korean or global economy could adversely affect our business, financial condition and results of operations.

Developments that could have an adverse impact on Korea’s economy include:

 

  

adverse conditions or developments in the economies of countries and regions that are important export markets for Korea, such as China, the United States, Europe and Japan, or in emerging market economies in Asia or elsewhere, including as a result of deteriorating economic and trade relations between the United States and China as well as increased uncertainties resulting from the United Kingdom’s exit from the European Union on January 31, 2020;

 

  

increased sovereign default risks in select countries and the resulting adverse effects on the global financial markets;

 

  

adverse changes or volatility in foreign currency reserve levels, commodity prices (including oil prices), exchange rates (including fluctuation of the U.S. dollar, Euro or Japanese Yen exchange rates or revaluation of the Chinese Renminbi), interest rates, inflation rates or stock markets;

 

  

the occurrence of severe health epidemics in Korea and other parts of the world (such as the ongoingCOVID-19 pandemic);

 

  

a continuing rise in the level of household debt and increasing delinquencies and credit defaults by retail or small-and medium-sized enterprise borrowers in Korea;

 

  

declines in consumer confidence and a slowdown in consumer spending;

 

  

the continued growth of the Chinese economy, to the extent its benefits (such as increased exports to China) are outweighed by its costs (such as competition in export markets or for foreign investment and the relocation of the manufacturing base from Korea to China);

 

  

investigations of large Korean conglomerates and their senior management for possible misconduct;

 

  

social and labor unrest;

 

  

decreases in the market prices of Korean real estate;

 

  

a decrease in tax revenues or a substantial increase in the Government’s expenditures for fiscal stimulus measures, unemployment compensation and other economic and social programs that would lead to an increased Government budget deficit;

 

  

financial problems or lack of progress in the restructuring of Korean conglomerates, other large troubled companies, their suppliers or the financial sector;

 

  

loss of investor confidence arising from corporate accounting irregularities and corporate governance issues concerning certain Korean conglomerates;

 

  

increases in social expenditures to support an aging population in Korea or decreases in economic productivity due to the declining population size in Korea;

 

  

the economic impact of any pending or future free trade agreements or changes in existing free trade agreements;

 

  

geo-political uncertainty and the risk of further attacks by terrorist groups around the world;

 

  

natural or man-made disasters that have a significant adverse economic or other impact on Korea or its major trading partners;

 

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deterioration in economic or diplomatic relations between Korea and its trading partners or allies, including deterioration resulting from territorial or trade disputes or disagreements in foreign policy (such as the ongoing trade disputes with Japan);

 

  

political uncertainty or increasing strife among or within political parties in Korea;

 

  

hostilities or political or social tensions involving oil producing countries in the Middle East (including a potential escalation of hostilities between the U.S. and Iran) and North Africa and any material disruption in the global supply of oil or sudden increase in the price of oil;

 

  

increased reliance on exports to service foreign currency debts, which could cause friction with Korea’s trading partners;

 

  

political or social tensions involving Russia and any resulting adverse effects on the global supply of oil or the global financial markets; and

 

  

an increase in the level of tensions or an outbreak of hostilities between North Korea and Korea or the United States.

Escalations in tensions with North Korea could have an adverse effect on us and the market value of our common shares and ADSs.

Relations between Korea and North Korea have been tense throughout Korea’s modern history. The level of tension between the two Koreas has fluctuated and may increase abruptly as a result of future events. In particular, there have been heightened security concerns in recent years stemming from North Korea’s nuclear weapon and ballistic missile programs as well as its hostile military actions against Korea. Some of the significant incidents in recent years include the following:

 

  

North Korea renounced its obligations under the NuclearNon-Proliferation Treaty in January 2003 and has conducted six rounds of nuclear tests since October 2006, including claimed detonations of hydrogen bombs, which are more powerful than plutonium bombs, and warheads that can be mounted on ballistic missiles. Over the years, North Korea has also conducted a series of ballistic missile tests, including missiles launched from submarines and intercontinental ballistic missiles that it claims can reach the United States mainland. In response, the Government has repeatedly condemned the provocations and flagrant violations of relevant United Nations Security Council resolutions. In February 2016, the Government also closed the inter-Korea Gaesong Industrial Complex in response to North Korea’s fourth nuclear test in January 2016. Internationally, the United Nations Security Council has passed a series of resolutions condemning North Korea’s actions and significantly expanding the scope of sanctions applicable to North Korea, most recently in December 2017 in response to North Korea’s intercontinental ballistic missile test in November 2017. Over the years, the United States and the European Union have also expanded their sanctions applicable to North Korea.

 

  

In March 2010, a Korean naval vessel was destroyed by an underwater explosion, killing many of the crewmen on board. The Government formally accused North Korea of causing the sinking, while North Korea denied responsibility. Moreover, in November 2010, North Korea fired more than one hundred artillery shells that hit Korea’s Yeonpyeong Island near the Northern Limit Line, which acts as the de facto maritime boundary between Korea and North Korea on the west coast of the Korean peninsula, causing casualties and significant property damage. The Government condemned North Korea for the attack and vowed stern retaliation should there be further provocation.

North Korea’s economy also faces severe challenges, which may further aggravate social and political pressures within North Korea. Although bilateral summit meetings were held between Korea and North Korea in April, May and September 2018 and between the United States and North Korea in June 2018, February 2019 and June 2019, there can be no assurance that the level of tensions affecting the Korean peninsula will not escalate in the future. Any increase in tensions, which may occur, for example, if North Korea experiences a leadership crisis, high-level contacts between Korea or the United States and North Korea break down or military hostilities occur, could have a material adverse effect on our business, results of operations and financial condition and the market value of our common shares and ADSs.

 

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Korea’s legislation allowing class action suits related to securities transactions may expose us to additional litigation risk.

The Securities-related Class Action Act of Korea enacted in January 2004 allows class action suits to be brought by shareholders of companies (including us) listed on the KRX KOSPI Market for losses incurred in connection with purchases and sales of securities and other securities transactions arising from (1) false or inaccurate statements provided in the registration statements, prospectuses, business reports, audit reports, semi-annual or quarterly reports and material fact reports and omission of material information in such documents, (2) insider trading, (3) market manipulation and (4) unfair trading. This law permits 50 or more shareholders who collectively hold 0.01% of the shares of a company to bring a class action suit against, among others, the issuer and its directors and officers. Because of the relatively recent enactment of the act, there is not enough judicial precedent to predict how the courts will apply the law. Litigation can be time-consuming and expensive to resolve, and can divert management time and attention from the operation of a business. We are not aware of any basis upon which such suit may be brought against us, nor are any such suits pending or threatened. Any such litigation brought against us could have a material adverse effect on our business, financial condition and results of operations.

There are special risks involved with investing in securities of Korean companies, including the possibility of restrictions being imposed by the Government in emergency circumstances.

As we are a Korean company and operate in a business and cultural environment that is different from that of other countries, there are risks associated with investing in our securities that are not typical for investments in securities of companies in other jurisdictions.

Under the Korean Foreign Exchange Transactions Act, if the Government deems that certain emergency circumstances, including a significant disruption in the international balance of payments and international financial markets or extreme difficulty in carrying out currency, exchange rate or other macroeconomic policies due to the movement of capital between Korea and other countries, are likely to occur, it may impose any necessary restriction such as requiring Korean or foreign investors to obtain prior approval from the Ministry of Economy and Finance (the “MOEF”) for the acquisition of Korean securities or for the repatriation of interest, dividends or sales proceeds arising from Korean securities or from disposition of such securities or other transactions involving foreign exchange. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

Risks Relating to Securities

Sales of our shares by SK Holdings and/or other large shareholders may adversely affect the market value of our common shares and ADSs.

Sales of substantial amounts of our common shares, or the perception that such sales may occur, could adversely affect the prevailing market value of our common shares or ADSs or our ability to raise capital through an offering of our common shares.

As of December 31, 2019, SK Holdings owned 26.8% of our total issued common shares and has not agreed to any restrictions on its ability to dispose of our shares. See “Item 7.A. Major Shareholders.” We can make no prediction as to the timing or amount of any sales of our common shares. We cannot assure you that future sales of our common shares, or the availability of our common shares for future sale, will not adversely affect the prevailing market value of our common shares or ADSs from time to time.

If an investor surrenders his or her ADSs to withdraw the underlying shares, he or she may not be allowed to deposit the shares again to obtain ADSs.

Under the deposit agreement, holders of our common shares may deposit those shares with the ADR depositary’s custodian in Korea and obtain ADSs, and holders of ADSs may surrender ADSs to the ADR depositary and receive our common shares. However, under the terms of the deposit agreement, as amended, the depositary bank is required to obtain our prior consent to any such deposit if, after giving effect to such deposit, the total number of our common shares represented by ADSs, which was 7,982,904 shares as of March 31, 2020, exceeds a specified maximum, which was 24,321,893 shares as of March 31, 2020, subject to adjustment under certain

 

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circumstances. In addition, the depositary bank or the custodian may not accept deposits of our common shares for issuance of ADSs under certain circumstances, including (1) if it has been determined by us that we should block the deposit to prevent a violation of applicable Korean laws and regulations or our articles of incorporation or (2) if a person intending to make a deposit has been identified as a holder of at least 4.0% of our common shares. It is possible that we may not give the consent. Consequently, an investor who has surrendered his or her ADSs and withdrawn the underlying shares may not be allowed to deposit the shares again to obtain ADSs.

An investor in our ADSs may not be able to exercise preemptive rights for additional new shares and may suffer dilution of his or her equity interest in us.

The Korean Commercial Code and our articles of incorporation require us, with some exceptions, to offer shareholders the right to subscribe for new shares in proportion to their existing ownership percentage whenever new shares are issued. If we offer a right to subscribe for additional new common shares or any other rights of similar nature, the ADR depositary, after consultation with us, may make the rights available to an ADS holder or use reasonable efforts to dispose of the rights on behalf of the ADS holder and make the net proceeds available to the ADS holder. The ADR depositary, however, is not required to make available to an ADS holder any rights to purchase any additional shares unless it deems that doing so is lawful and feasible and:

 

  

a registration statement filed by us under the Securities Act is in effect with respect to those shares; or

 

  

the offering and sale of those shares is exempt from, or is not subject to, the registration requirements of the Securities Act.

We are under no obligation to file any registration statement with respect to any ADSs. If a registration statement is required for an ADS holder to exercise preemptive rights but is not filed by us, the ADS holder will not be able to exercise his or her preemptive rights for additional shares. As a result, ADS holders may suffer dilution of their equity interest in us.

Short selling of our ADSs by purchasers of securities convertible or exchangeable into our ADSs could materially adversely affect the market price of our ADSs.

SK Holdings, through one or more special purpose vehicles, has engaged and may in the future engage in monetization transactions relating to its ownership interest in us. These transactions have included and may include offerings of securities that are convertible or exchangeable into our ADSs. Many investors in convertible or exchangeable securities seek to hedge their exposure in the underlying equity securities at the time of acquisition of the convertible or exchangeable securities, often through short selling of the underlying equity securities or similar transactions. Since a monetization transaction could involve debt securities linked to a significant number of our ADSs, we expect that a sufficient quantity of ADSs may not be immediately available for borrowing in the market to facilitate settlement of the likely volume of short selling activity that would accompany the commencement of a monetization transaction. This short selling and similar hedging activity could place significant downward pressure on the market price of our ADSs, thereby having a material adverse effect on the market value of ADSs owned by you.

A holder of our ADSs may not be able to enforce a judgment of a foreign court against us.

We are a corporation with limited liability organized under the laws of Korea. Substantially all of our directors and officers and other persons named in this document reside in Korea, and all or a significant portion of the assets of our directors and officers and other persons named in this document and substantially all of our assets are located in Korea. As a result, it may not be possible for holders of our ADSs to effect service of process within the United States, or to enforce against us any judgments obtained from the United States courts based on the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated on the United States federal securities laws.

 

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We are generally subject to Korean corporate governance and disclosure standards, which may differ from those in other countries.

Companies in Korea, including us, are subject to corporate governance standards applicable to Korean public companies, which may differ in some respects from standards applicable in other countries, including the United States. As a reporting company registered with the SEC and listed on the New York Stock Exchange (the “NYSE”), we are subject to certain corporate governance standards as mandated by the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). However, foreign private issuers, including us, are exempt from certain corporate governance requirements under the Sarbanes-Oxley Act or under the rules of the NYSE. There may also be less publicly available information about Korean companies, such as us, than is regularly made available by public ornon-public companies in other countries. Such differences in corporate governance standards and less public information available could result in corporate governance practices or disclosures that are perceived as less than satisfactory by investors in certain countries.

 

Item 4.

INFORMATION ON THE COMPANY

 

Item 4.A.

History and Development of the Company

As Korea’s first wireless telecommunications service provider, we have a recognized history of leadership and innovation in the domestic telecommunications sector. Today, we remain Korea’s leading wireless telecommunications services provider and have continued to pioneer the commercial development and implementation ofstate-of-the-art wireless technologies. We had 31.5 million wireless subscribers, including MVNO subscribers leasing our networks, as of December 31, 2019, representing a market share of 46.4%, the largest market share among Korean wireless telecommunications service providers. We believe we are also a leader in developing new products and services that reflect the increasing convergence of telecommunications technologies, as well as the growing synergies between the telecommunications sector and other industries, and are well-positioned to become Korea’s leading platform service provider through our next-generation growth businesses in media, security, commerce, IoT solutions and other innovative products offered through our platform services, including AI solutions.

In February 2012, we acquired an equity stake in SK Hynix, one of the world’s largest memory-chip makers by revenue, for an aggregate purchase price of Won 3.4 trillion, and became its largest shareholder. As of December 31, 2019, we held a 20.1% equity interest in SK Hynix.

On March 31, 2020, we had a market capitalization of approximately Won 14.3 trillion (US$11.7 billion, as translated at the noon buying rate of March 31, 2020) or approximately 1.2% of the total market capitalization on the KRX KOSPI Market, making us the 15th largest company listed on the KRX KOSPI Market based on market capitalization on that date. Our ADSs, each representingone-ninth of one share of our common stock, have traded on the NYSE since June 27, 1996.

We are a corporation with limited liability organized under the laws of Korea.We established our telecommunications business in March 1984 under the name Korea Mobile Telecommunications Co., Ltd. We changed our name to SK Telecom Co., Ltd., effective March 21, 1997. In January 2002, we merged with Shinsegi Telecom Co., Ltd. (“Shinsegi”), which was then the third-largest wireless telecommunications service provider in Korea. Our registered office is at SKT-Tower, 65,Eulji-ro,Jung-gu, Seoul 04539, Korea and our telephone number is+82-2-6100-2114. Our website address is http://www.sktelecom.com.

The SEC maintains a website (http://www.sec.gov), which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Korean Telecommunications Industry

Established in March 1984, we became the first wireless telecommunications service provider in Korea. We remained the sole provider of wireless telecommunications services until April 1996, when Shinsegi commenced cellular service. The Government began to introduce competition into the fixed-line and wireless telecommunications services markets in the early 1990’s. During this period, the Government allowed new competitors to enter the fixed-line sector, sold a controlling stake in us to the SK Group, and granted a cellular

 

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license to our first competitor, Shinsegi. In October 1997, three additional companies began providing wireless telecommunications services under Government licenses to provide wireless telecommunications services. In 2000 and 2001, the Korean wireless telecommunications market experienced significant consolidation. In January 2002, Shinsegi was merged into us. Additionally, two of the other wireless telecommunications services providers merged.

There are currently three mobile network operators in Korea: our company, KT and LG U+. As of December 31, 2019, the market share of the Korean wireless telecommunications market, in terms of number of subscribers, of KT and LG U+ was approximately 31.6% and 22.0%, respectively (compared to our market share of 46.4%), each including MVNO subscribers leasing the respective networks. As of December 31, 2019, MVNOs had a combined market share of 11.4%, of which MVNOs leasing our networks represented 4.2%, MVNOs leasing KT’s networks represented 5.6% and MVNOs leasing LG U+’s networks represented 1.6%.

Telecommunications industry growth in Korea has been among the most rapid in the world, with fixed-line penetration being under five lines per 100 population in 1978 and increasing to 47.9 lines per 100 population as of December 31, 2006 before decreasing to 26.2 lines per 100 population as of December 31, 2019, and wireless penetration increasing from 7.0 subscribers per 100 population in 1996 to 131.0 subscribers per 100 population as of December 31, 2019. The table below sets forth certain subscription and penetration information regarding the Korean telecommunications industry as of the dates indicated:

 

   As of December 31, 
   2019   2018   2017   2016   2015 
   (In thousands, except for per population amounts) 

Population of Korea(1)

   51,850    51,826    51,779    51,696    51,529 

Wireless Subscribers(2)

   67,937    65,360    62,651    60,287    57,937 

Wireless Subscribers per 100 Population

   131.0    126.1    121.0    116.6    112.4 

Telephone Lines in Service

   13,600    14,334    15,039    15,746    16,341 

Telephone Lines per 100 Population

   26.2    27.7    29.0    30.5    31.7 

 

 

(1)

Source: The Ministry of the Interior and Safety.

(2)

Includes subscribers ofnon-mobile phone wireless services, including services for tablet computers, wearable devices, IoT devices and others.

Since the introduction of short text messaging in 1998, Korea’s wireless data market has grown rapidly. This growth has been driven, in part, by the rapid development of wireless Internet service since its introduction in 1999 and the implementation of LTE technology providing for fast data transmission speeds and large data transmission capacity. As of December 31, 2019, approximately 58.8 million Korean wireless subscribers owned Internet-enabled handsets capable of accessing wireless Internet services, including 51.1 million subscribers that own smartphones that have direct access to the Internet using mobile Internet technology.The table below sets forth certain penetration information regarding the number of Internet-enabled handsets, smartphones and wireless subscribers in Korea as of the dates indicated:

 

   As of December 31, 
   2019  2018  2017  2016  2015 
   (In thousands, except for percentage data) 

Number of Wireless Internet-Enabled Handsets

   58,812   58,074   56,576   55,085   53,737 

Number of Smartphones

   51,132   49,442   48,660   46,418   43,668 

Total Number of Wireless Subscribers(1)

   67,937   65,360   62,651   60,287   57,937 

Penetration of Wireless Internet-Enabled Handsets

   86.6  88.9  90.3  91.4  92.8

Penetration of Smartphones

   75.3  75.6  77.7  77.0  75.4

 

 

(1)

Includes subscribers ofnon-mobile phone wireless services, including services for tablet computers, wearable devices, IoT devices and others.

In addition to its well-developed wireless telecommunications sector, Korea has one of the largest Internet markets in the Asia Pacific region. From the end of 2010 to the end of 2019, the number of broadband Internet

 

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access subscribers increased from approximately 17.2 million to approximately 21.9 million.In connection with such growth in broadband Internet usage, the number of IPTV subscribers has also increased rapidly. The table below sets forth certain information regarding broadband Internet access subscribers and IPTV subscribers as of the dates indicated:

 

   As of December 31, 
   2019   2018   2017   2016   2015 
   (In thousands) 

Number of Broadband Internet Access Subscribers(1)

   21,906    21,286    20,989    20,349    19,818 

Number of IPTV Subscribers

   18,021    16,599    15,381    11,850    10,991 

 

 

(1)

Includes subscribers accessing Internet service using digital subscriber line, or xDSL, connections; cable modem connections; local area network, or LAN, connections;fiber-to-the-home, or FTTH, connections and satellite connections.

 

Item 4.B.

Business Overview

Overview

We are Korea’s leading wireless telecommunications services provider and continue to pioneer the commercial development and implementation ofstate-of-the-art wireless and fixed-line technologies and services as well as develop our next-generation growth businesses in media, security, commerce, IoT solutions and other innovative products offered through our platform services, including AI solutions.Our operations are reported in five segments:

 

  

cellular services, which include wireless voice and data transmission services, sales of wireless devices, IoT solutions and platform services;

 

  

fixed-line telecommunication services, which include fixed-line telephone services, broadband Internet services, advanced media platform services (including IPTV) and business communications services;

 

  

security services, which include physical security services and information security services;

 

  

commerce services, which include our open marketplace platform, 11st, ourT-commerce business, SK stoa, and related ancillary services; and

 

  

other businesses, which include our portal service, marketing platform business and certain other miscellaneous businesses.

Our Business Strategy

We believe that the current trends in the Korean telecommunications industry are characterized by technological change, evolving consumer needs and increasing digital convergence. Against the backdrop of these industry trends, we aim to maintain our leading position in the Korean market for wireless telecommunications services and actively develop our next-generation growth businesses in media, security, commerce, IoT solutions and other innovative products offered through our platform services. We plan to further utilize our big data analysis capabilities to create products and services that are tailored to our customers’ evolving needs, as well as incorporate AI capabilities directly into many of the products and services we offer. By doing so, we strive to become a socially respected “New ICT Leader” as universally recognized by our customers, business partners and shareholders. To take advantage of evolving industry trends and further realize our corporate vision to become a “New ICT Leader,” we have undertaken the following strategic initiatives:

 

  

Maintain our leadership in the wireless services business by offering innovative 5G services and customer-oriented products and services. We plan to maintain our leadership in the wireless services business by offering innovative 5G services that provide differentiated subscriber experiences, such as our “5G Clusters.” We also plan to promote the proliferation of 5G services by offering services and content that are specialized for the 5G environment, such as cloud gaming, hands-on experience services and e-sports. In addition, we will continue to analyze the needs of our subscribers leveraging our AI technology and provide

 

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products and services that meet such needs. We also plan to strengthen our customer relationships with our diverse range of offerings that integrate our wireless services with our products and services in our media, security and commerce businesses.

 

  

Develop our next-generation growth businessesthrough hyper-collaboration. We believe that we have evolved from being a domestic telecommunications provider in Korea to possessing the fundamental capabilities that enable us to pursue a broad range of collaboration in the field of ICT with both domestic and international partners. We have formed strategic partnerships with industry leaders to create synergies in various areas, such as 5G cloud gaming, mobile edge computing (“MEC”) and e-sports, and we are continually expanding the areas for collaboration. We aim to create an environment for “hyper-collaboration” to develop and foster our next-generation growth businesses.

 

  

Develop our technological capabilities and new products and services to support our 5G network.We aim to continue developing cutting-edge technologies that will be adopted as the technological standard for 5G services. In addition, we will seek to apply our 5G infrastructure and capabilities to our various other key businesses such as media, security and commerce to create unique new products and services geared to serve evolving customer needs. Furthermore, we aim to collaborate with various partners to identify new business opportunities that can potentially leverage our 5G network.

 

  

Pursue sustainable management to seek mutual growth with the broader society. The SK Management System, which is the business philosophy and foundation of corporate culture of the SK Group, includes as a key component the goal of growing together with the broader society by contributing to its economic growth and creating social value. Based on a socially accountable governance system led by the Corporate Citizenship Committee of our board of directors, we aim to pursue the “double bottom line” of achieving long-term shareholder value as well as creating social value by leveraging our business capabilities, thereby contributing to the well-being of all stakeholders and the enhancement of our corporate value in the long-term. We have also amended our articles of incorporation at our annual general meeting of shareholders held on March 26, 2020 to incorporate such goal as a core business purpose.

Cellular Services

We offer wireless voice and data transmission services, sell wireless devices and provide IoT solutions and innovative platform services through our cellular services segment. Our wireless voice and data transmission services are offered through our backbone networks that collectively can be accessed by approximately 99.0% of the Korean population. We had 31.5 million wireless subscribers, including MVNO subscribers leasing our networks, as of December 31, 2019, representing a market share of 46.4%, the largest market share among Korean wireless telecommunications service providers.We launched our wireless services using our 5G network in April 2019, and we are continually expanding our 5G network coverage and enhancing service quality. The table below sets forth the number of subscribers, including subscribers of MVNOs that lease our wireless networks, using our various digital wireless networks as of the dates indicated:

 

   As of December 31, 
   2019   2018   2017   2016   2015 
   (in thousands) 

Network

          

5G

   2,084    —      —      —      —   

LTE

   25,022    24,796    22,865    21,078    18,980 

WCDMA

   3,986    5,174    5,842    6,491    7,008 

CDMA(1)

   443    912    1,488    2,026    2,638 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   31,535    30,882    30,195    29,595    28,626 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)

In November 2019, we submitted an application to the MSIT to terminate our second generation wireless services using our CDMA network, which is pending approval by the MSIT.

 

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In 2019, 2018 and 2017, our cellular services segment revenue was Won 12,172.4 billion, Won 12,378.9 billion and Won 13,262.1 billion, respectively, representing 68.6%, 73.4% and 75.7%, respectively, of our consolidated revenue.

Wireless Services

We offer wireless voice transmission and data transmission services to our subscribers through our backbone networks. Our wireless telecommunications services are available to our subscribers receiving service under the SK Telecom brand. In addition, customers can obtain wireless telecommunications services that operate on our network from MVNOs that lease our wireless networks. We derive revenues from our wireless telecommunications service principally through monthly plan-based fees as described in “— Rate Plans” below.

We provide avoice-over-LTE service, known as our “HD Voice” service, to all of our LTE and 5G subscribers featuring high-quality voice transmission, fast call connection,voice-to-video call switching and digital content sharing during calls. We also offer our subscribers a wide range of wireless data transmissions services. Our messaging service allows our subscribers to send and receive text, graphic, audio and video messages. In addition, our subscribers can access a wide variety of digital content and services through mobile applications providing music, video, gaming, news, commerce and financial services as well as solutions that enable subscribers to access the Internet ande-mail. We intend to continue to build our wireless data services as a platform for growth, extending our portfolio of wireless data services and developing new content for our subscribers.

Through service agreements with various foreign wireless telecommunications service providers, we offer cellular global roaming services, branded as our“T-Roaming” service. Global roaming services allow subscribers traveling abroad to make and receive calls using their regular mobile phone numbers. In addition, we provide global roaming service to foreigners traveling to Korea. In such cases, we generally receive a fee from the traveler’s local wireless telecommunications service provider.

Through SK Telink, we also operate our MVNO business under the brand “SK 7Mobile,” which we believe offers excellent quality at reasonable rates utilizing SK Telecom’s wireless networks. SK Telink is focused on developinglow-cost distribution channels and targeting niche customer segments that have a lower average revenue per user than that of SK Telecom’s subscriber base.

In addition, we provide interconnection service to connect our networks to domestic and international fixed-line and other wireless networks. See “— Interconnection” below.

Wireless Device Sales

We offer several categories of wireless devices, including smartphones and basic phones, tablets and other Internet access devices and wearable devices that are sold through an extensive distribution network, which consists of authorized exclusive dealers and independent retailers, as well as branch offices and stores directly operated by us through our wholly-owned subsidiary, PS&Marketing Co., Ltd. (“PS&Marketing”). As of December 31, 2019, approximately 23.6 million, or 74.8%, of our subscribers (including MVNO subscribers leasing our networks) owned smartphones that have direct access to the Internet compared to approximately 23.1 million subscribers, or 74.7%, as of December 31, 2018. We purchase a substantial majority of our wireless devices from Samsung Electronics, Apple and LG Electronics.

Smartphones and Basic Phones.    We offer smartphones that are enabled to utilize our digital wireless networks and run on various operating systems, such as Apple iOS and Google Android. We also offer basic phones that have the ability to access wireless Internet services.

Tablets and Other Internet Devices.    We offer tablets which can access the Internet via our digital wireless networks and aWi-Fi connection. The tablets run primarily on the Apple iOS and Google Android operating systems. In addition, we also offer “TPocket-Fi” devices that provide a mobile LTE connection and are capable of connecting multipleWi-Fi enabled devices to the Internet at one time. We offer targeted rate plans for our TPocket-Fi device. See “— Rate Plans” below.

Wearable Devices.    We offer various wearable devices including smart watches and “T kids’ phone-Joon.” These devices utilize our digital wireless networks and have specific features for the relevant target customer.For

 

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example, T kids’ phone-Joon is a wearable phone targeted towards children and provides simple calling, messaging and chat services as well as global positioning system (“GPS”) tracking capabilities. We offer targeted rate plans that are specific to these wearable devices. See “— Rate Plans” below.

IoT Solutions

Through our IoT solutions business, we provide network access and enhanced services to support telemetry-type applications, which are characterized bymachine-to-machine (“M2M”) wireless connections, to business customers. In order to promote the growth of our IoT solutions business, we deployed networks nationwide that are designed to support IoT devices, namely our high-speedLTE-M network in March 2016 and ourlow-costLow-Power Wide-Area network based on LoRa technology (our “LoRa network”) in July 2016. In April 2018, we increased the battery efficiency of our IoT devices by launching our LTE Cat.M1 technology and further enhanced our competitiveness in this business.

We provide network access and customized IoT solutions to our business customers. Our M2M services support devices that are used in a variety of market segments, including retail, utilities, security, automotive, agriculture and data analytics. For example, our Cloud Energy Management Solution (“Cloud EMS”) business provides aone-stop cloud computing-based energy management platform that collects and analyzes energy usage data from business customers and offers solutions to optimize and reduce their energy consumption. As of December 31, 2019, Cloud EMS had approximately 210 customers, mostly from energy-intensive industries such as the petrochemical and cement industries.

Platform Services

Through our platform services business, we seek to provide innovative products and services that meet our customers’ evolving needs in an increasingly connected world. For example, we provide location-based services such as T map, which we provide to our and our competitors’ wireless subscribers free of charge. T map uses GPS technology to transmit driving directions, real-time traffic updates and emergency rescue assistance to wireless devices. As of December 31, 2019, there were approximately 12.5 million monthly average users of our T map service. In September 2017, we also integrated NUGU, described in more detail below, into our T map service enabling users to use voice commands to operate their mobile devices while driving. In May 2018, we added calling and text messaging functions to the NUGU capabilities available on T map to enhance the convenience and safety of T map users. In January 2019, we formed Grab Geo Holdings PTE. LTD., a joint venture in which we hold a 30.0% interest, with Grab, the leading ride-hailing service provider in Southeast Asia. Through this joint venture, we plan to launch a navigation service for Grab drivers based on T map’s key technologies, including big data analysis algorithms and ultra-precise GPS solutions.

T map also offers a taxi-hailing service called “T map Taxi,” as well as “T map Parking,” a parking service launched in June 2019 that combines our ICT technology with ADT Caps’ parking management and security solutions to provide users with real-time information related to parking lot locations, availability, rates and discounts, in addition to automatic payment services in the case of select parking lots, including those operated by ADT Caps, through a dedicated mobile application. As of December 31, 2019, T map Taxi and T map Parking had approximately 0.8 million and 0.2 million monthly active users, respectively.

We also offer AI solutions through our platform services business. For example, in September 2016, we launched NUGU, the first intelligent virtual assistant service launched in Korea with Korean language capabilities based on advanced voice recognition technologies. NUGU currently offers a wide range of services including music streaming, connectivity with “Smart Home” and other IoT solutions for the home, educational contents for children, food deliveries, and informational and other personal assistance services, and we plan to continually enhance its functionalities through software updates. Through cloud-based deep-learning technology, NUGU is designed to evolve on its own as it collects more data about its users over time. We have integrated NUGU into our T map service as discussed above as well as our B tv service as further discussed in “— Fixed-line Telecommunication Services — Advanced Media Platform (including IPTV).”

We offer a variety of smart devices based on NUGU, such as “NUGU candle,” an AI light that offers NUGU-based services and changes its color and brightness based on the user’s needs and preferences, “NUGU nemo,” a

 

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smart speaker with a touchscreen, “NUGU CHIPS,” a wireless charging dock compatible with certain Samsung Galaxy smartphones that automatically launches a mobile application converting the smartphone being charged into a NUGU-capable device, and “albert AI,” an educational device that teaches children how to code.

In October 2018, we launched “NUGU developers,” a platform on which third-party developers can create and launch new services based on NUGU technology. Through NUGU developers, we provide the “NUGU SDK” service, which enables third-party developers to incorporate NUGU capabilities into their applications or devices. We continue to explore ways in which we can leverage our NUGU technology to enhance our existing products and services.

We also provide a “T phone” service, which offers our customers a number of convenient call functions, such as a spam-call blocking function and a search function that informs customers of the phone numbers of shops, hospitals and other facilities closest to the customer’s current location.

Other New Businesses

We are preparing to launch integrated cloud services based on our advanced 5G MEC technology and platform for business customers that require secure andultra-low latency communications, focusing on the media, logistics, healthcare, finance and manufacturing industries. In connection with such preparation, we have entered into strategic partnerships with Amazon Web Services and other leading cloud service providers to pursue collaboration onMEC-based cloud services. We also plan to provide smart factory solutions that can leverage our 5G technology andMEC-based cloud services, beginning with SK Hynix, which we expect to result in enhanced efficiency for its semiconductor manufacturing process.

Rate Plans

We offer our wireless telecommunications services on both a postpaid and prepaid basis. Approximately 94.7% of our subscribers received our wireless telecommunications services on a postpaid basis as of December 31, 2019. Postpaid accounts primarily represent retail subscribers under contract with SK Telecom under which a subscriber is billed in advance a monthly fixed rate in return for a monthly network service allowance and usage for outgoing voice calls and wireless data services beyond the allowance is billed in arrears, where payment of the total amount of the bill is due at the end of the month. The standard contract period for our rate plans is 24 months, although our subscribers have the option to enter into shorter term contracts or no fixed-term contract at all. We provide various subsidies and discounts, including handset subsidies, depending on the length of the contract and the subscriber’s chosen rate plan. Our prepaid service enables individuals to obtain wireless telecommunications services without a fixed-term contract by paying for all services in advance according to expected usage. We do not charge our customers for incoming calls, although we do receive interconnection charges from KT and other companies for calls from the fixed-line network terminating on our networks and interconnection revenues from other wireless network operators. See “— Interconnection” below.

We also charge our customers a 10.0% value-added tax, which is included in the price of all of our rate plans. We can offset the value-added tax we collect from our customers against value-added tax refundable to us by the Korean tax authorities. We remit taxes we collect from our customers to the Korean tax authorities. We record revenues in our financial statements net of such taxes.

Basic Rate Plans.    We offer various postpaid account plans for smartphones and basic phones that are designed to meet a wide range of subscriber needs and interests. Our 5G services are provided through the “5GX” plans, which offer unlimited domestic voice minutes and text messaging and a fixed or unlimited data transmission allowance per month and range from Won 55,000 to Won 125,000 per month. As of December 31, 2019, approximately 2.1 million subscribers have subscribed to the “5GX” plans. Our representative smartphone rate plans for our LTE services are the “T” plans, which feature unlimited domestic voice minutes and text messaging and a fixed or unlimited data transmission allowance per month and range from Won 33,000 to Won 100,000 per month.In 2019, a majority of our new LTE subscribers have subscribed to the “T” plans. Our “Voice Free” plans are available for our basic phones and feature a fixed allowance of voice minutes and 50 text messages per month with rates that range from Won 20,900 to Won 103,400 per month.We also offer a standard rate plan for Won 12,100 per month, through which the subscriber is charged per usage amount, other than on text message usage up to 50 messages per month.

 

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In addition, we provide a variety of differentiated rate plans for our customer segments such as our “0” plans for smartphone users who are 24 years old or younger featuring greater data allowance and premium benefits tailored for younger demographics, our “ZEM” plan for children who are 12 years old or younger, our “T Global” rate plans for foreigners featuring unlimited domestic voice minutes and text messaging, a fixed allowance of international voice minutes and data transmission per month and our “Weekend Ting” rate plans for teenagers featuring more data transmission allowance on weekends.

For our TPocket-Fi device, we provide a fixed monthly data transmission allowance of 10 GB for Won 16,500 per month and 20 GB for Won 24,750 per month.With respect to the wearable devices that we offer, we offer targeted rate plans for smart watches that range from Won 11,000 to Won 12,100 per month, and the “ZEM” rate plans for our T kids’ phone-Joon devices that range from Won 8,800 to Won 19,800 per month.

DataAdd-on Rate Plans.    We offer a variety of optional“add-on” rate plans that are designed to meet a wide range of subscriber needs with respect to increased data usage that followed the widespread use of smartphones and faster transmission speeds made possible by LTE technology. For example, we offer data plans that offer unlimited data based on time, place and occasion such as our “Subway Free” plan, which offers unlimited wireless data usage on subway platforms and inside subways and our “Commuter Free” plan, which offers unlimited wireless data usage during rush hour, each for a fixed rate of Won 9,900 per month. For certain rate plan subscribers, we also offer unlimited access to wavve through our “wavve and Data Plus” plan at no additional cost or for Won 2,400 or Won 12,300 per month, depending on the subscribers’ basic rate plan. “Safe Option Premium” offers an additional daily data transmission allowance of 50 MB to subscribers who have used the maximum data transmission on their existing plan without incurring additional data transmission fees for a fixed rate of Won 8,800 per month. We also offer “T Data Coupons,” through which subscribers can purchase a fixed amount of data for a fixed price and can also be sent as “gifts” to family and friends that need additional data allowance. We believe that our dataadd-on rate plan offerings have contributed to the increase in data usage to 8.2 GB of average monthly data usage per LTE subscriber as of December 31, 2019 from 7.1 GB as of December 31, 2018.

Roaming Plans.    Our representative international roaming service plans include our “baro OnePass 300” and “baro OnePass 500” plans, which are fixed rate plans that provide data roaming of 300 MB for Won 9,900 per day and 500 MB for Won 16,500 per day, respectively, and are available in 175 countries. We also offer our “baro OnePass VIP” and “baro OnePass Data VIP” plans, which provide unlimited data roaming, 30 minutes of voice calls and 30 text messages per day for Won 19,000 per day and unlimited data roaming for Won 17,600 per day, respectively, in 89 countries, as well as our “baro” plans, which provide fixed data transmission allowances of 3 GB, 4 GB or 7 GB that can be used over a specified number of days in approximately 110 countries, ranging from Won 29,000 to Won 59,000. Our “baro” plans include free high-quality data voice calls to Korea through our T phone application. We also provide an automatic roaming service called “Safe Automatic T Roaming,” which provides 30 minutes of voice calls per day (including three minutes of free voice calls) for a maximum of Won 10,000 (with voice calls in excess of 30 minutes per day incurring additional charges) and data transmission at a rate of Won 563 per MB with a daily data transmission charge ceiling of Won 5,000. With respect to international calls placed by a subscriber, unless the subscriber uses one of our fixed-rate international roaming plans, we bill the subscriber the international rate charged by the Korean international telephone service provider through which the call is routed. We remit to that provider the international charge less our usage charges. See “— Interconnection” below.

Digital Wireless Network

We offer wireless voice and data transmission services throughout Korea using digital wireless networks, primarily consisting of our 5G network, LTE network, WCDMA network, CDMA network,Wi-Fi network and LoRa network.We continually upgrade and increase the capacity of our wireless networks to keep pace with advancements in technology, the growth of our subscriber base and the increased usage of voice and wireless data services by our subscribers. For more information about our capital expenditures relating to our wireless networks, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures.”

5G Network.    5G is the next generation wireless network that enables data to be transmitted at speeds faster than our LTE network with lower latency. We began the operation of our 5G network in December 2018 on a

 

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limited basis for business customers, beginning with a few major commercial districts in Seoul and other metropolitan areas. In April 2019, we launched wireless service plans using the 5G network following the commencement of sales of the first5G-compatible smartphones, and we are in the process of expanding our 5G network coverage, focusing on major commercial districts and other densely-populated areas in the Seoul metropolitan area and other major cities. As part of this coverage expansion, as of December 31, 2019, we have established approximately 70 “5G Clusters” with high 5G connectivity at strategic locations where customers are able to experience the full potential of our 5G network through augmented reality and virtual reality services, cloud gaming and other ICT products. Our 5G services provide a maximum data transmission speed of 2.7 Gbps, and our 5G penetration was 6.6% as of December 31, 2019.

LTE Network.    LTE technology has become widely accepted globally as the standard fourth generation technology and enables data to be transmitted at speeds faster than our CDMA and WCDMA networks. Since first commencing our LTE services in July 2011 andLTE-A services, which use carrier aggregation technology that combines spectrum frequencies to improve data transmission speeds, in June 2013, we have developed and launched various upgraded LTE networks and services providing faster network speeds, enhanced connectivity and broader coverage areas. In February 2018, we launched four-bandLTE-A services utilizing 4x4 multiple-input multiple-output (“MIMO”) technology providing for data transmission speeds of up to 1 Gbps, and in March 2019, we commenced five-bandLTE-A services using 4x4 MIMO technology that provide data transmission speeds of up to 1.2 Gbps.With these developments in LTE technology, our LTE penetration increased to 79.3% as of December 31, 2019 compared to 49.3% as of December 31, 2013. We expect that wireless services based on LTE technology will continue to be used broadly by our users in the near future, as we and our competitors continue to build up 5G networks and services and wireless service users gradually migrate to the 5G network over time, and plan to continue to deploy improvedLTE-A technology to increase the maximum data transmission speed of our services.For M2M connections relating to our IoT solutions, we launched ourLTE-M services at speeds of up to 10 Mbps in March 2016, as well as our LTE Cat.M1 services at speeds of up to 0.03 Mbps in April 2018. Upgrades to our LTE technology in recent years have enabled even faster data transmission speeds, as shown below.

 

Wireless network technology

  Date of commencement of services  Maximum data transmission speed 

LTE

  July 2011   75 Mbps 

LTE-A

  June 2013   150 Mbps 

WidebandLTE-A

  June 2014   225 Mbps 

Tri-bandLTE-A

  December 2014   300 Mbps 

Five-bandLTE-A

  June 2017   700 Mbps 

Tri-bandLTE-A with 4x4 MIMO

  June 2017   900 Mbps 

Four-bandLTE-A with 4x4 MIMO

  February 2018   1 Gbps 

Five-bandLTE-A with 4x4 MIMO

  March 2019   1.2 Gbps 

We believe that our advanced LTE technology and dense network infrastructure enable us to provide the fastest LTE data transmission network nationwide. In December 2019, the MSIT announced that our LTE network provided the fastest upload and download speeds among the three mobile network operators, KT, LG U+ and us. The nationwide average download speed of our LTE network was 211.4 Mbps compared to 153.6 Mbps for KT’s LTE network and 110.6 Mbps for LG U+’s LTE network.

The faster data transmission speed of our LTE network has allowed us to offer significantly improved wireless data transmission services, providing our subscribers with faster wireless access to multimedia content. We have been building new access networks and evolved packet cores for our LTE network, while we utilize our existing WCDMA network for other parts of our LTE network.

CDMA and WCDMA Networks.    CDMA technology is a continuous digital transmission technology that accommodates higher throughput than analog technology by using various coding sequences to allow concurrent transmission of voice and data signals for wireless communication. In January 1996, we launched our first wireless network based on CDMA technology and became the world’s first to commercialize second generation cellular services using the CDMA network. As a result of declining usage and the increasing difficulty of maintaining the network, we submitted an application to the MSIT in November 2019 to terminate our second generation CDMA wireless services, which is pending approval by the MSIT.

 

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WCDMA technology enables us to offer significantly faster and higher-quality voice and data transmission and supports more sophisticated wireless data transmission services than is possible through our CDMA network. Since first commencing our WCDMA services in Seoul in 2003, we have expanded our WCDMA network nationwide and implemented various technologies to improve data transmission speeds within our WCDMA network.

Wi-Fi Network.    Wi-Fi technology enables our subscribers withWi-Fi-capable devices such as smartphones, laptops and tablet computers to access mobile Internet. We started to buildWi-Fi access points in 2010 and, as of December 31, 2019, we had more than 112,000Wi-Fi access points in public areas such as shopping malls, restaurants, coffee shops, subways and airports where, generally, the demand for high-speed wireless Internet service is high. While eachWi-Fi access point typically has a radius of approximately20-30 meters, some of ourWi-Fi hot zones, which have multipleWi-Fi access points, including those installed at public transportation facilities and amusement parks, have much wider service areas.

LoRa Networks.    ALow-Power Wide-Area network based on LoRa technology is a type of telecommunications network designed to support communication among IoT devices. It can transmit data over tens of kilometers while consuming much less power than LTE networks, lowering costs for connectivity as well as lowering battery power usage. We completed the nationwide deployment of our LoRa network in July 2016. We expect that our LoRa network will provide the infrastructure necessary for the growth of not only our own IoT solutions business but also the IoT industry as a whole.

Network Infrastructure

The principal components of our wireless networks are:

 

  

cell sites, which are physical locations equipped with transmitters, receivers and other equipment that communicate by radio signals with wireless handsets within range of the cell (typically a 3 to 40 kilometer radius);

 

  

switching stations, which switch voice and data transmissions to their proper destinations, which may be, for instance, a mobile phone of one of our subscribers (for which transmissions would originate and terminate on our wireless networks), a mobile phone of a KT or LG U+ subscriber (for which transmissions would be routed to KT’s or LG U+’s wireless networks, as applicable), a fixed-line telephone number (for which calls would be routed to the public switched telephone network of a fixed-line network operator), an international number (for which calls would be routed to the network of a long distance service provider) or an Internet site; and

 

  

transmission lines, which link cell sites to switching stations and switching stations with other switching stations.

As of December 31, 2019, our 5G, LTE, WCDMA and CDMA networks had an aggregate of 63,066 cell sites. As we continue to expand our 5G network coverage, the number of our cell sites is expected to increase accordingly.

We have purchased substantially all of the equipment for our networks from Samsung Electronics, Ericsson–LG and Nokia.Most of the transmission lines we use, including virtually all of the lines linking switching stations, as well as a portion of the lines linking cell sites to switching stations, comprise optical fiber lines that we own and operate directly. However, we have not undertaken to install optical fiber lines to link every cell site and switching station. In places where we have not installed our own transmission lines, we have leased lines from KT and LG U+.We intend to increase the efficiency of our network utilization and provide optimal services by internalizing transmission lines.

We use a wireless network surveillance system. This system oversees the operation of cell sites and allows us to monitor our main equipment located throughout the country from one monitoring station. The automatic inspection and testing provided to the cell sites lets the system immediately rebalance to the most suitable setting, and the surveillance system provides for automatic dispatch of repair teams and quick recovery in emergency situations.

 

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Marketing, Distribution and Customer Service

Marketing.    Our marketing strategy is focused on offering solutions tailored to the needs of our various customer segments, promoting our brand and leveraging our extensive distribution network. Our marketing plan includes a coordinated program of television, print, radio, outdoor signage, Internet andpoint-of-sale media promotions designed to relay a consistent message across all of our markets. We market our wireless products and services under the “T” brand, which signifies the centrality of “Telecommunications” and “Technology” to our business and also seeks to emphasize our commitment to providing “Top” quality, “Trustworthy” products and services to our customers.

We have implemented certain information technology improvements in connection with our marketing strategy, including customer management systems, as well as more effective information security controls. We believe these upgrades have enhanced our ability to process and utilize marketing- and subscriber-related data, which, in turn, has helped us to develop more effective and targeted marketing strategies. We currently operate a customer information system designed to provide us with an extensive customer database. Our customer information system includes a billing system that provides us with comprehensive account information for internal purposes and enables us to efficiently respond to customer requests. Our customers can also change their rate plans, verify the charges accrued on their accounts, receive their bills online and send text messages to our other subscribers through our website at www.tworld.co.kr and through our “T world” mobile application.

We strive to improve subscriber retention through our T Membership program, which is a membership service available to our wireless subscribers. Our T Membership program provides various membership benefits to its members such as discounts with our membership partners for dining, shopping, entertainment and travel, access to our online membership shopping mall and invitations to various promotional events. Although our competitors also have similar membership programs, we believe that our T Membership program has a competitive advantage over our competitors’ membership programs due to our large subscriber base and breadth of membership benefits.

Distribution.    We use a combination of an extensive network, including branch offices and stores, directly operated by us through our subsidiary, PS&Marketing, more than 3,300 authorized exclusive dealers and an extensive network of independent retailers in order to increase subscriber growth while reducing subscriber acquisition costs.

As part of our initiative to provide a differentiated customer service experience, we operate T Premium Stores that allow our potential and existing subscribers to experience certain of our services such as services that are available through our IoT solutions and platform services. As of December 31, 2019, we operated more than 560 T Premium Stores.

In addition, we operate an online distribution channel, “T World Direct,” through which subscribers can conveniently purchase wireless devices and subscribe to our services online. We also operate a dedicated online shop on 11st, oure-commerce marketplace. We intend to continue to develop our online distribution channel to leverage our offline distribution capabilities to provide convenience and additional value to our subscribers. For example, subscribers purchasing wireless devices through T World Direct can opt to pick up their devices at one of our offline stores.

Currently, authorized dealers are entitled to an initial commission for each new subscriber registered by the dealer, as well as an average ongoing commission calculated as a percentage of that subscriber’s monthly plan-based rate for the first five years. In order to strengthen our relationships with our exclusive dealers, we offer a dealer financing plan, pursuant to which we provide to each authorized dealer a loan of up to Won 4.0 billion with a repayment period of up to three years.As of December 31, 2019, we had an aggregate of Won 65.7 billion outstanding in loans to authorized dealers.

Customer Service.    We provide high-quality customer service directly through our two subsidiaries, Service Ace Co., Ltd. and Service Top Co., Ltd., rather than rely on outsourcing. Network O&S Co., Ltd. operates our switching stations and related transmission and power facilities and offers quality customer service primarily to our business customers. We have held the top position with respect to our telecommunications service and retail sales service in Korea’s leading three customer satisfaction indices, the National Customer Satisfaction Index, the Korean Customer Satisfaction Index and the Korean Standard Service Quality Index, for 23 years, 22 years and 20 years, respectively.

 

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Fixed-line Telecommunication Services

We offer fixed-line telephone, broadband Internet and advanced media platform services (including IPTV) and business communications services through our fixed-line telecommunication services segment. Our fixed-line telecommunications services are provided by our subsidiaries, SK Broadband and SK Telink. The following table sets forth historical information about our subscriber base for our fixed-line telecommunication services for the periods indicated:

 

   As of December 31, 
   2019   2018   2017 

Fixed-Line Telephone (including VoIP)(1)

   3,913,274    4,132,265    4,322,767 

Broadband Internet

   5,613,200    5,404,866    5,232,648 

IPTV(2)

   5,193,329    4,729,238    4,370,416 

 

 

(1)

Includes subscribers to VoIP services of SK Broadband and SK Telink.

 

(2)

Includes subscribers to SK Broadband’s B tv service andvideo-on-demand only service subscribers.

In 2019, 2018 and 2017, our fixed-line telecommunication services segment revenue was Won 2,948.2 billion, Won 2,822.3 billion and Won 2,719.4 billion, respectively, representing 16.6%, 16.7% and 15.5%, respectively, of our consolidated revenue. Following the entry into an agreement to transfer SK Broadband’s 100% equity interest in SK stoa Co., Ltd. (“SK Stoa”) to SK Telecom in April 2019 (which transaction was completed in January 2020), theT-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunications services segment in 2018 and 2017, were reclassified as part of our commerce services segment for 2019. See “— Commerce Services.”

As part of our efforts to enhance our capabilities and increase our market share in the fixed-line business, in April 2019, we entered into an agreement with Tbroad, a leading cable television and other fixed-line telecommunication services provider in Korea, pursuant to which Tbroad will merge with and into SK Broadband. Upon the completion of such merger, we expect to own approximately 74.4% of SK Broadband’s total outstanding shares. In addition, SK Telecom signed a separate share purchase agreement with Tbroad Co., Ltd. to acquire a 55.0% equity interest in Tbroad Nowon. The transactions have obtained all requisite regulatory and shareholder approvals and are expected to be completed as of April 30, 2020 and April 29, 2020, respectively.

Fixed-line Telephone Services

Our fixed-line telephone services comprise local, domestic long distance, international long distance and VoIP services. VoIP is a technology that transmits voice data through an Internet Protocol network. As of December 31, 2019, we had approximately 3.9 million fixed-line telephone subscribers (including subscribers to VoIP services of SK Broadband and SK Telink). Our fixed-line telephone services are primarily offered under the “B phone” brand name. SK Telink also provides affordable international calling services under the brand name “00700.”

Broadband Internet Access Services

Our broadband Internet access network covered more than 86% of households in Korea as of December 31, 2019.As of December 31, 2019, we had approximately 5.6 million broadband Internet access subscribers. We offer broadband Internet access products with various throughput speeds, ranging from “Giga Premium,” which is up to 10 times faster than data transmission speeds on networks utilizing FTTH technology and allows for data transmission at a maximum speed of 1 Gbps, to “Giga Premium×10,” which provides data transmission speeds of up to 10 Gbps.

Advanced Media Platform (including IPTV)

As part of our initiative to be the leading next-generation platform provider, we aim to provide an advanced media platform with various media content and service offerings.

We have offeredvideo-on-demand services since 2006 and launched real-time IPTV services in 2009. We currently offer IPTV services under the brand name “B tv” with access to as many as 260 high definition channels

 

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depending on the subscription service as of December 31, 2019, as well asvideo-on-demand service providing a wide range of media content, including recent box office movie releases, popular U.S. and other foreign TV shows and various children’s TV programs. We also offer “B tv UHD,” which is an ultra-high definition IPTV service and has a resolution that is four times as high as the standard high definition broadcasting service in the IPTV industry. As of December 31, 2019, we had approximately 5.2 million IPTV subscribers. In January 2018, we launched B tv NUGU, which is anall-in-one set top box that incorporates NUGU voice recognition technology and can search for and play media content as well as connect to our Smart Home service through voice commands. In July 2019 and August 2019, respectively, we launched an updated set top box called “Smart 3” set top box, which provides Google Assistant capabilities in addition to our NUGU technology, and “AI 2,” which integrates a stereo system with enhanced audio quality and improved NUGU voice recognition capabilities using beam forming technology.

In September 2019, we acquired a minority equity stake in Content Wavve, which operated the mobile OTT service “POOQ,” and transferred our former mobile OTT service business “oksusu” to Content Wavve. Content Wavve combined oksusu and POOQ to launch a new integrated mobile OTT service “wavve” in September 2019. See “— Other Investments and Relationships — Wavve” below.

We continue to expand the scope of our media services and content offerings to provide our subscribers with a vast library of high-quality content that can be accessed through our wireless networks and our fixed-line network.

Business Communications Services

We offer other business communications services to our business customers, including corporations and government entities. Our business communications services include leased line solutions, Internet data center solutions and network solution services.

Our leased line solutions are exclusive lines that allowpoint-to-point connection for voice and data traffic between two or more geographically separate points. We hold a license to operate leased line services on a nationwide basis in Korea and also use international transmission lines to provide leased line services to other countries. Our leased line services enable high volumes of data to be transmitted swiftly and reliably. We also provideback-up storage for transmitted data. Through our Internet data center, we provide our business subscribers with server-based support includingco-location, dedicated server hosting and cloud computing services. Our network solution service utilizes our network infrastructure and voice platform to provide24-hour monitoring and control of our customers’ networks. Through this service, we conduct remote monitoring of our customers’ data and voice communications infrastructure and network and traffic conditions, and carry out preventive examinations andon-site visits.

Rate Plans

For our residential customers, we offer both bundled rate plans for a combination of our fixed-line service offerings as well as individual rate plans for each separate service offering. Bundled rate plans are offered at a discount compared to subscribing to the same services through individual rate plans. Approximately 77% of subscribers to our fixed-line services subscribe to two or more of our services through our bundled rate plans. Bundled rate plans for a combination of fixed-line telephone, broadband Internet access and IPTV services, which are subject to a contract of one to three years, range from Won 30,800 to Won 123,750 per month, depending on the services included and the length of the contract. We also offer bundled rate plans combining our fixed-line communication services with our wireless services and physical security services, respectively.

Our “Unlimited Home Phone” plan for subscribers to our fixed-line telephone service features unlimited domesticland-to-land voice minutes for a fixed rate and range from Won 7,700 to Won 11,550 per month depending on whether or not the subscriber opts for a contract and if so, the length of the contract period. We offer individual fixed-rate plans for our broadband Internet access service that range from Won 36,300 to Won 82,500 per month depending on the data throughput speed and existence and length of a contract. We offer individual fixed-rate plans for our IPTV service that range from Won 11,000 to Won 16,500 per month depending on the number of channels provided and existence and length of a contract. In addition, subscribers can purchase individual videos on demand or subscribe to certain paid content on a periodic basis.

 

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With respect to our business communications services, we offer rates that are tailored to the specific needs of our business customers. We also charge certain installation fees and equipment rental fees as well as other ancillary fees with respect to certain of our fixed-line telecommunications services.

Marketing, Distribution and Customer Service

We focus on bringing our fixed-line telephone, broadband Internet and advanced media platform services (including IPTV) to residential users, and various business communications services to corporate users. We market our fixed-line telecommunications products and services under the “B” brand. Our “B” brand signifies the centrality of “Broadband” to our business and also seeks to emphasize our commitment to providing the “Best” quality products and services to our customers that go “Beyond” expectations, leading to a “Bravo” response. Our “B” brand also strengthens our shared identity with our wireless service’s “T” brand.

We currently outsource a significant portion of our retail sales force needs. We market our services and provide after-sales service support to customers through more than 70 customer centers and a network of more than 170 authorized exclusive dealers located throughout Korea. In addition, SK Telecom’s direct retail stores and authorized dealers for wireless telecommunications services also market our fixed-line telephone, broadband Internet and advanced media platform services (including IPTV), which we believe has contributed to the increase in the number of subscribers to such services.We have contracts with our customer centers to sell our services exclusively. These centers receive a commission for each service contract and installation contract secured. In addition, we pay these centers for the maintenance and repair work that they perform for our subscribers. Customer and service centers often enter intosub-contracts with smaller distribution outlets within their area to increase their sales coverage and engage in telemarketing efforts. Authorized dealers are entitled to an initial commission for each new subscriber registered by the dealer.

Sales to business subscribers are handled through ourin-house sales group. Our sales teams focus on securing contracts with large commercial complexes, allowing us to install our remote terminals at their premises. After installation, sales teams direct their attention to individual business clients within these premises. Sales teams that have secured contracts with business clients remain the primary contacts for all aspects of the client’s needs, including further installation and customer andfollow-up service.

Security Services

Our security business consists of physical security services provided by ADT Caps and information security services provided by SK Infosec. In 2019, 2018 and 2017, our security services segment revenue was Won 1,109.5 billion, Won 284.3 billion and Won 92.0 billion, respectively, representing 6.3%, 1.7% and 0.5%, respectively, of our consolidated revenue.

Our security services businesses, which were previously part of our other businesses segment in 2018 and 2017, were reclassified as a new security services segment in 2019.

Physical Security

ADT Caps provides a variety of physical security services utilizing its flagship unmanned surveillance and dispatch platform called the Central Monitoring Services (“CMS”).CMS-based services, which accounted for approximately 71% and 70% of ADT Caps’ revenues in 2019 and 2018, respectively, are tailored for residential and commercial needs and operate through a centralized monitoring system that provides offsite surveillance through cameras, sensors and emergency alarms. Upon detecting any suspicious activity through such system or upon request, security personnel is dispatched to the relevant subscriber location to provide further onsite manned security.

Following our acquisition of ADT Caps, we have explored and continue to explore synergies between our security business and other key business segments. For example, we launched “T Safe Security,” aCMS-based video surveillance and security guard dispatch service offered through the distribution channels for our wireless services, in October 2018. In addition, we introduced our bundle-based discounted rate plans “T&Caps” in November 2018 and “B&Caps” in January 2019, which bundle our wireless service and broadband Internet service,

 

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respectively, with ADT Caps’ security service. Beginning in June 2019, with the launch of T map Parking, ADT Caps also operates a parking management and security solutions business. See “— Cellular Services — Platform Services” above.

We acquired ADT Caps in October 2018 by acquiring a 55.0% interest in LSH, which owns 100% of ADT Caps, for Won 696.7 billion. In December 2018, we merged NSOK Co., Ltd. (“NSOK”), which became our consolidated subsidiary in 2014 and provided residential and small business electronic security and other related alarm monitoring services, with and into ADT CAPS Co., Ltd.

Information Security

We offer information security solutions through our subsidiary SK Infosec. SK Infosec provides information security consulting services, managed security services as well as cyber threat intelligence solutions. SK Infosec’s representative product is “Secudium IoT,” a convergence security service that combines information, physical and operational technology security services into a single platform.

We acquired SK Infosec from SK Holdings, our largest shareholder, in a share exchange transaction in December 2018, pursuant to which we transferred 1,260,668 treasury shares with an aggregate book value of Won 281.2 billion to SK Holdings in exchange for all of the issued and outstanding common shares of SK Infosec.

Commerce Services

Our commerce services segment consists primarily of “11st,” our online marketplace business operated by Eleven Street, and “T stoa,” our interactiveT-commerce network. In 2019, 2018 and 2017, our commerce services segment revenue was Won 710.7 billion, Won 728.4 billion and Won 651.8 billion, respectively, representing 4.0%, 4.3% and 3.7%, respectively, of our consolidated revenue. Following the entry into an agreement to transfer SK Broadband’s 100% equity interest in SK Stoa to SK Telecom in April 2019 (which transaction was completed in January 2020), theT-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunications services segment in 2018 and 2017, were reclassified as part of our commerce services segment for 2019.

E-Commerce

11st is an online open marketplace that offers a wide range of products through an online and mobile platform. Individual consumers can buy a vast array of products such as clothes and accessories, beauty products, groceries, baby products, books, office supplies, furniture, home goods, outdoor and sporting goods, appliances, electronics, travel packages, entertainment tickets and local deals for restaurants and other services from small- tolarge-sized retailers that operate “mini malls” on the 11st platform. Eleven Street also operates SK Pay, a convenient and secure payment service through which users can register their credit card to simplify payments for online and mobile purchases for many of our services, including 11st.

As of December 31, 2019, 11st was the leading commerce platform in terms of the total number of unique visitors to its mobile and desktop versions, according to Nielsen Koreanclick. The mobile version of 11st is continuing to grow with an increase in the percentage of annual gross merchandise volume, which represents the total annual monetary value of customer purchases of goods and services, net of estimated refunds, derived from the mobile platform to 68% in 2019 from 65% in 2018 and 61% in 2017.We intend to continue our efforts to increase usage of the mobile version of 11st, enhance the convenience of our 11st mobile and web user interface and create synergies with our other products and services.

Eleven Street wasspun-off as our new consolidated subsidiary from SK Planet Co., Ltd. (“SK Planet”) in September 2018. In connection with suchspin-off, Eleven Street received a Won 500 billion equity investment in the form of redeemable convertible preferred shares from a group of financial investors led by H&Q Korea Partners, LLC, pursuant to which such financial investors held an 18.2% equity interest in Eleven Street as of December 31, 2019.

T-Commerce

We also operate aT-commerce network, “SK stoa,” through our consolidated subsidiary SK Stoa, which offers a broad assortment of goods and services throughpre-recorded television programming. The goods and services

 

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promoted on SK stoa’sT-commerce programming can be purchased through telephone orders, SK stoa’s mobile application or online open marketplace, or a virtual application appearing on the television screen using the viewer’s remote controller. In March 2019, SK Stoa launched “SK stoa ON,” which offers searchable shopping programming that is available to viewers at their convenience by utilizingvideo-on-demand capabilities. In September 2019, SK Stoa launched “Hellen Karen,” its own private fashion brand. SK stoa also acts as the exclusiveT-commerce distributor for certain products and services of SK Group companies, such as food, electronics, home appliances and car rentals.

Other Businesses

We strive to continually diversify our products and services and develop new growth engines that we believe are complementary to our existing products and services, such as our portal service and other miscellaneous businesses, which we include in our other businesses segment. In 2019, 2018 and 2017, our other businesses segment revenue was Won 802.9 billion, Won 660.1 billion and Won 794.7 billion, respectively, representing 4.5%, 3.9% and 4.5%, respectively, of our consolidated revenue.

Portal Service

We offer a portal service under our “Nate” brand name through SK Communications. Nate can be accessed through its website, www.nate.com, or through its mobile application. Nate offers a wide variety of content and services, including Nate Search, an Internet search engine, Nate News, which provides a library of articles about current events, sports, entertainment and culture, Nate Pann, a user-generated content service as well as access to freee-mail accounts through Nate Mail.

Miscellaneous Businesses

Marketing Platform Business.    We provide marketing platform services through SK Planet, which include the following:

 

  

Syrup Wallet, a mobile wallet service that is the successor to our Smart Wallet service, allows users to conveniently manage membership card points and payment methods such as coupons, credit cards and gift vouchers on their mobile devices for both online and offline purchases and provides shopping information to users in certain shopping areas using advanced location-based technology; and

 

  

OK Cashbag, a loyalty points program which allows members to collect and redeem loyalty points at its partnering merchants and offers differentiated marketing services to such partnering merchants.

Others.    We offerhigh-end audio devices under the brand name “Astell&Kern” that are manufactured by our subsidiary, Dreamus Company (“Dreamus”). Dreamus also operates our personalized music platform “FLO,” which provides a music streaming service with customized music recommendations and user interfaces by analyzing individual user preferences with our AI technology. In 2017 and 2018, we acquired additional equity interests in Dreamus for Won 25.0 billion and Won 65.0 billion, respectively, and as of December 31, 2019, we had a 51.4% equity interest in Dreamus.

We also operate a mobile application marketplace, “One Store,” in collaboration with KT, LG U+ and NAVER Corporation. Through this joint collaboration, we expect to increase the competitiveness of One Store to compete with Google Playstore, the leading mobile application marketplace in Korea. In recent years, we have made offerings of mobile games as the focus of One Store in response to the rapid growth of the mobile game market in Korea.In November 2019, One Store Co., Ltd., our consolidated subsidiary that operates One Store, undertook a capital increase of approximately Won 97.5 billion by issuing convertible preferred shares to a consortium of financial investors including Kiwoom Investment and SKS Private Equity. As of December 31, 2019, we held 52.7% of the total outstanding shares of One Store Co., Ltd.

In addition, in order to strengthen our data security capabilities in light of expected increases in data transmission by wireless service subscribers and users of our IoT solutions through our 5G network, we acquired a controlling equity interest in id Quantique, a leading provider of quantum cryptography solutions for data security based in Switzerland, in 2018. As of December 31, 2019, we held a 66.8% equity interest in id Quantique.

 

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In June 2019, we acquired a 34.6% interest in Incross, a digital advertising company that provides mobile, online and other forms of digital advertising solutions, for an aggregate purchase price of Won 53.7 billion, in light of potential synergies with our media and commerce businesses. Although we own less than a majority of Incross’s outstanding equity interest, Incross is deemed to be our consolidated subsidiary based on our management’s determination that we have sufficient control.

We also provide freight and logistics consulting services to corporate customers through FSK L&S Co. Ltd. (“FSK L&S”), a joint venture with a subsidiary of Foxconn Technology Group of Taiwan, in which we hold a 60.0% equity interest as of December 31, 2019. We acquired such 60.0% equity interest from SK Holdings in February 2018 for approximately Won 18.0 billion. We accounted for FSK L&S as an associate under the equity method in 2018, but following our determination that we have obtained control of FSK L&S during 2019, FSK L&S has become a consolidated subsidiary beginning in 2019.

Interconnection

Our wireless and fixed-line networks interconnect with the public switched telephone networks operated by KT and SK Broadband and, through their networks, with the international gateways of KT and LG U+, as well as the networks of the other wireless telecommunications service providers in Korea. These connections enable our subscribers to make and receive calls from telephones outside our networks. Under Korean law, certain service providers, including us, are required to permit other service providers to interconnect to their networks. If a new service provider desires interconnection with the networks of an existing service provider but the parties are unable to reach an agreement within 90 days, the new service provider can appeal to the KCC.

Domestic Calls

Guidelines issued by the MSIT require that all interconnection charges levied by a regulated carrier take into account (i) the actual costs to that carrier of carrying a call or (ii) imputed costs. The MSIT determines interconnection rates applicable to each carrier based on changes in traffic volume, taking into account other factors such as research results, competition and trends in technology development.

Wireless-to-Fixed-line.    According to our interconnection arrangement with KT, for a call from our wireless network to KT’s fixed-line network, we collect the usage rate from our wireless subscriber and in turn pay KT the interconnection charges. Similarly, KT pays interconnection charges to SK Broadband for a call from KT’s wireless network to SK Broadband’s fixed-line network. The interconnection rate applicable to both KT and SK Broadband was Won 9.15 per minute, Won 9.99 per minute and Won 10.86 per minute for 2019, 2018 and 2017, respectively.

Fixed-line-to-Wireless.    The MSIT determines interconnection arrangements for calls from a fixed-line network to a wireless network. For a call initiated by a fixed-line user to one of our wireless subscribers, the fixed-line network operator collects our usage fee from the fixed-line user and remits to us an interconnection charge. Interconnection with KT accounts for substantially all of ourfixed-line-to-wireless interconnection revenue and expenses. The interconnection rate paid by fixed-line network service providers to each wireless network service provider was Won 11.64 per minute, Won 13.07 per minute and Won 14.56 per minute for 2019, 2018 and 2017, respectively.

Wireless-to-Wireless.     Interconnection charges also apply to calls between wireless telephone networks in Korea. Under these arrangements, the operator originating the call pays an interconnection charge to the operator terminating the call. The applicable interconnection rate is the same as thefixed-line-to-wireless interconnection rate set out in the table above.

Our revenues from thewireless-to-wireless charge were Won 463.8 billion in 2019, Won 498.5 billion in 2018 and Won 505.1 billion in 2017. Our expenses from these charges were Won 464.1 billion in 2019, Won 494.2 billion in 2018 and Won 512.2 billion in 2017. The charges above were agreed among the parties involved and confirmed by the KCC.

International Calls and International Roaming Arrangements

With respect to international calls, if a call is initiated by our wireless subscribers, we bill the wireless subscriber for the international charges of KT, LG U+ or SK Broadband, and we receive interconnection charges

 

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from such operators. If an international call is received by our subscriber, KT, LG U+ or SK Broadband pays interconnection charges to us based on our imputed costs.

To complement the services we provide to our subscribers in Korea, we offer international voice and data roaming services. We charge our subscribers usage fees for global roaming service and, in turn, pay foreign wireless network operators fees for the corresponding usage of their network. For a more detailed discussion of our global roaming services, see “— Wireless Services” above.

Competition

We operate in highly saturated and competitive markets, and we believe that our subscriber growth is affected by many factors, including the expansion and technical enhancement of our networks, the development and deployment of new technologies, the effectiveness of our marketing and distribution strategy, the quality of our customer service, the introduction of new products and services, competitive pricing of our rate plans, new market entrants and regulatory changes.

Historically, there has been considerable consolidation in the telecommunications industry, resulting in the current competitive landscape comprising three mobile and fixed network operators in the Korean market, KT, LG U+ and us. Each of our competitors has substantial financial, technical, marketing and other resources to respond to our business offerings.

The following table shows the market share information, based on number of subscribers, as of December 31, 2019, for the following markets.

 

   Market Share (%) 
   SK Telecom  KT  LG U+  Others 

Wireless Service(1)

   46.4  31.6  22.0  

LTE Service(1)

   45.3   30.6   24.1    

5G Service(1)

   44.7   30.4   24.9    

Fixed-Line Telephone (including VoIP)

   15.9   57.2   17.5   9.4 

Broadband Internet

   25.6   40.9   19.6   13.9 

Pay TV(2)

   14.9   31.4(3)   24.9(4)   28.8 

 

 

(1)

Includes MVNO subscribers that lease the wireless networks of the respective mobile network operator.

 

(2)

Includesvideo-on-demand only service subscribers. Market share is expressed as a percentage of the pay TV market (which includes IPTV, cable TV and satellite TV).

 

(3)

Consists of 24.0% from KT’s IPTV service and 7.4% from its satellite TV service provided through KT Skylife Co, Ltd., a subsidiary of KT.

 

(4)

Consists of 12.9% from LG U+’s IPTV service and 12.0% from its cable TV service provided through LG HelloVision, a subsidiary of LG U+.

Cellular Services

As of December 31, 2019, we had 31.5 million subscribers, representing a market share of approximately 46.4%, including MVNO subscribers leasing our networks. As of December 31, 2019, KT and LG U+ had 21.4 million and 15.0 million subscribers, respectively, representing approximately 31.6% and 22.0%, respectively, of the total number of wireless subscribers in Korea on such date, each including MVNO subscribers leasing its networks. As of December 31, 2019, we had 2.1 million 5G subscribers and KT and LG U+ had 1.4 million and 1.2 million 5G subscribers, respectively. As of December 31, 2019, we had 25.0 million LTE subscribers and KT and LG U+ had 17.2 million and 13.5 million LTE subscribers, respectively, each including MVNO subscribers leasing its networks.

In 2019, we had 5.8 million activations and 5.2 million deactivations. For 2019, our monthly churn rate ranged from 1.0% to 1.4%, with an average monthly churn rate of 1.2%, which remained unchanged from 2018. In 2019, we gained 43.5% of the total number of new wireless subscribers and subscribers that migrated to a different wireless telecommunications service provider, compared to KT with 29.0% and LG U+ with 27.6%.

 

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Our competitors for subscriber activations include MVNOs, including MVNOs that lease our networks. MVNOs generally provide rate plans that are relatively cheaper than similar rate plans of the wireless network providers from which they lease their networks, including us. Currently, thirteen MVNOs provide wireless telecommunications services using the networks leased from us. As of December 31, 2019, MVNOs had a combined market share of 11.4%, of which MVNOs leasing our networks represented 4.2%, MVNOs leasing KT’s networks represented 5.6% and MVNOs leasing LG U+’s networks represented 1.6%.

In addition, other companies may enter the wireless network services market. New entries in such market have historically required obtaining requisite licenses from the MSIT. However, pursuant to an amendment to the Telecommunications Business Act that went into effect in June 2019, companies meeting certain regulatory criteria may become a network service provider by registering with the MSIT without a separate license requirement, which may have the effect of encouraging new entries into the Korean wireless network services market in the future. For a description of the risks associated with the competitive environment in which we operate, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Competition may reduce our market share and harm our results of operations and financial condition.”

Historically, competition in the wireless telecommunications business had caused us to significantly increase our marketing and advertising expenses from time to time depending on the prevailing competitive landscape, with our marketing expenses as a percentage of SK Telecom’s revenue, on a separate basis, reaching a peak of 28.2% in 2012. Such percentage was 25.0% in 2017, 24.5% in 2018 and 25.7% in 2019.We attribute such stabilization to the maturity of the overall wireless telecommunication market and the implementation of the MDDIA, which prohibits wireless telecommunications service providers from unfairly providing discriminatory subsidies based on certain criteria and from providing subsidies exceeding a maximum limit established by the KCC for the purchase of mobile phone models that were launched within the last 15 months, among other restrictions and requirements.However, the prohibition from providing handset subsidies exceeding the amount set by the KCC expired in September 2017 pursuant to the expiration of the three-year effective period of the relevant provision of the MDDIA. For a more detailed discussion of the MDDIA, see “— Law and Regulation — Rate Regulation” below.

We face competition from KT and LG U+ as well as other platform service providers in our other cellular service businesses. For example, our Smart Home service competes with KT’s Giga IoT Home service and LG U+’s IoT@Home service.

Fixed-Line Telecommunication Services

Our fixed-line telephone service competes with KT and LG U+ as well as providers of other VoIP services. As of December 31, 2019, our market share of the fixed-line telephone and VoIP service market was 15.9% (including the services provided by SK Broadband and SK Telink) in terms of number of subscribers compared to KT with 57.2% and LG U+ with 17.5%.

We are the second largest provider of broadband Internet access services in Korea in terms of both revenue and subscribers, and our network covered more than 86% of households in Korea as of December 31, 2019. As of December 31, 2019, our market share of the broadband Internet market was 25.6% in terms of number of subscribers compared to KT with 40.9% and LG U+ with 19.6%.

Our IPTV service competes with other providers of pay TV services, including KT, LG U+ and cable companies. As of December 31, 2019, our market share of the pay TV market (which includes IPTV, cable TV and satellite TV) in terms of number of subscribers was 14.9% compared to KT with 31.4% (including its IPTV and satellite TV services) and LG U+ with 24.9% (including its IPTV and cable TV services), and the collective market share of other pay TV providers was 28.8%. We also face increasing competition from global media streaming service providers such as Amazon Video and Netflix, which launched its services in Korea in January 2016.

Recently, the Korean fixed-line telecommunications industry has been going through significant consolidation involving major pay television service providers. In December 2019, LG U+ acquired a majority equity stake in LG HelloVision to become the second-largest pay TV provider in Korea in terms of number of subscribers. In April 2019, SK Broadband entered into an agreement with Tbroad, pursuant to which Tbroad will merge with and into SK Broadband. Upon the completion of such merger, we expect to own approximately 74.4% of SK Broadband’s total

 

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outstanding shares following the issuance of SK Broadband’s shares to Tbroad’s shareholders. In addition, SK Telecom signed a separate share purchase agreement with Tbroad Co., Ltd. to acquire a 55.0% equity interest in Tbroad Nowon for a purchase price of Won 10.4 billion in cash.Both transactions have obtained all requisite regulatory and shareholder approvals and are expected to be completed as of April 30, 2020 and April 29, 2020, respectively. Such transactions, as well as further consolidation in the fixed-line telecommunications industry, may result in increased competition, as the entities emerging from such consolidation and other remaining players in the industry may actively pursue expanding or protecting their respective market shares.

Furthermore, the Government has historically enforced regulations on cable TV and IPTV service providers that prohibited them from having a market share of more thanone-third of the total number of subscribers in the relevant pay TV market on each of their respective platforms. In June 2015, the Government amended the regulation to impose the same limit on the market share of the entire pay TV market, including satellite TV service providers as well. Such amended regulation, however, expired in June 2018. While the expiration of such regulation has prompted the submission of a number of bills in the National Assembly to extend its application, it is uncertain whether any of such bills will be passed. An extension of such regulation may restrict our and our major competitors’ abilities to engage in further consolidation or otherwise significantly increase market share in the pay TV market. In addition, there is a pending bill in the National Assembly which proposes to require IPTV service providers to obtain approvals from the MSIT for any mergers or acquisitions orchange-of-control transactions.

Security Services

The physical security services industry in Korea is expanding rapidly due to the relatively low penetration of physical security services as compared to other developed countries, growing demand for residential security services and the popularization of unmanned services. Our physical security business operated by ADT Caps competes with other large physical security service providers, includingS-1 and KT Telecop. As of December 31, 2019, our market share of the physical security services market was 32.4% in terms of the aggregate revenue of these three companies, compared toS-1 with 55.9% and KT Telecop with 11.6%.

The information security services market in Korea is also undergoing rapid growth as various industries become more digitalized and the risk of cybersecurity breaches heightens. SK Infosec’s information security services compete with other providers of similar products and services, such as Ahnlab, Inc., SECUi Corp. and WINS Co., Ltd.

Commerce Services

The commerce industry is evolving rapidly and is intensely competitive, and we face a broad array of competitors domestically and increasingly, internationally. Our marketplace business, 11st, faces intense competition from variouse-commerce providers, including online open marketplaces and social commerce operators such as Gmarket, Auction, Interpark, Coupang, Wemakeprice and TMon.We also face competition from traditional retailers with online and mobile shopping portals such as SSG.com and Lotte.com, home shopping providers with online and mobile shopping portals such as CJ Mall by CJ O Shopping, GS Shop by GS Homeshopping and Hyundai Hmall by Hyundai Homeshopping, and various online marketplaces for specific consumer segments or product groups. OurT-commerce business, SK stoa, primarily competes with other home shopping providers such as those listed above, as well as with variouse-commerce providers and traditional retailers.

Other Investments and Relationships

We have investments in several other businesses and companies and have entered into various business arrangements with other companies. Our principal investments fall into the following categories:

SK Hynix

As of December 31, 2019, we held a 20.1% equity interest in SK Hynix, one of the world’s largest memory-chip makers by revenue. SK Hynix designs, manufactures and sells advanced memory semiconductor products, including DRAM and NAND flash products, used in various electronic devices. SK Hynix operates four wafer fabrication facilities in Korea and China.

 

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As of December 31, 2019, the fair value of our holding in SK Hynix was Won 13,748.0 billion. We received dividend payments of Won 219.2 billion in 2019, Won 146.1 billion in 2018 and Won 87.7 billion in 2017 related to such shareholding. In 2019, 2018 and 2017, SK Hynix and its subsidiaries, on a consolidated basis, reported revenues of Won 26,990.7 billion, Won 40,445.1 billion and Won 30,109.4 billion, respectively, profit before income tax of Won 2,442.7 billion, Won 21,341.0 billion and Won 13,439.6 billion, respectively, and profit for the year of Won 2,016.4 billion, Won 15,540.0 billion and Won 10,642.2 billion, respectively. The decrease in SK Hynix’s revenues in 2019 was primarily due to decreases in the demand for and average selling prices of DRAM and NAND flash products. As of December 31, 2019, 2018 and 2017, SK Hynix and its subsidiaries, on a consolidated basis, reported total assets of Won 64,789.5 billion, Won 63,658.3 billion and Won 45,418.5 billion, respectively, and total equity of Won 47,943.2 billion, Won 46,852.3 billion and Won 33,820.9 billion, respectively. For a more detailed discussion of the risks relating to our shareholding in SK Hynix, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Declines in the market value of our equity holdings in SK Hynix and the results of operations of SK Hynix could have a material adverse effect on the market price of our common shares and ADSs as well as our results of operation.”

KEB HanaCard

In February 2010, we purchased shares newly issued by Hana SK Card Co., Ltd. (which was subsequently merged into KEB Card Co., Ltd. and renamed KEB HanaCard Co., Ltd. (“KEB HanaCard”) in November 2014), a credit card services provider, for a total purchase price of Won 400.0 billion. As of December 31, 2019, we held 15.0% of the total outstanding shares of KEB HanaCard. KEB HanaCard offers certain credit card products that provide for discounts on some of our wireless network services and integrate T Membership benefits, among other features.

Wavve

In September 2019, in furtherance of our efforts to enhance the competitiveness of our media business and to promote its future growth, we acquired a minority equity stake in Content Wavve (formerly known as Content Alliance Platform Inc.), a joint venture established by the three major terrestrial broadcasters in Korea that operated the mobile OTT service “POOQ,” by investing Won 90.9 billion in cash and transferring our former mobile OTT service business “oksusu” to Content Wavve. Content Wavve combined oksusu and POOQ to launch a new integrated mobile OTT service “wavve” in September 2019. As of December 31, 2019, we held 30.0% of the total outstanding shares of Content Wavve.

Wavve offers over 240,000 titles ofvideo-on-demand contents, including a wide variety of real-time andon-demand terrestrial broadcast programs, movies, popular U.S. and other foreign TV shows and professional sporting events, to its subscribers that can be played on mobile devices, television, personal computer and/or Google’s Chromecast. Monthly subscription plans range from Won 7,900 to Won 13,900 per month, depending on the type and number of accessible devices. We also offer wavve-specific dataadd-on plans for our wireless service subscribers. Certain types of contents, such as movies, can also be purchased individually.

Law and Regulation

Overview

Korea’s telecommunications industry is subject to comprehensive regulation by the MSIT, which is responsible for information and telecommunications policies. The MSIT regulates and supervises a broad range of communications issues, including:

 

  

entry into the telecommunications industry;

 

  

scope of services provided by telecommunications service providers;

 

  

allocation of radio spectrum;

 

  

setting of technical standards and promotion of technical standardization;

 

  

rates, terms and practices of telecommunications service providers;

 

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interconnection and revenue-sharing between telecommunications service providers;

 

  

research and development of policy formulation for information and telecommunications; and

 

  

competition among telecommunications service providers.

The MSIT is charged with regulating information and telecommunications and the KCC is charged with regulating the public interest aspects of and fairness in broadcasting.

Telecommunications service providers are currently classified into two categories: network service providers and value-added service providers. We are classified as a network service provider because we provide telecommunications services with our own telecommunications networks and related facilities. As a network service provider, we were previously required to obtain a license from the MSIT for the services we provide. However, an amendment to the Telecommunications Business Act, pursuant to which companies meeting certain regulatory criteria may become a network service provider without a separate license requirement, went into effect in June 2019. Our licenses permit us to provide cellular services, third generation wireless telecommunications services using WCDMA and WiBro technologies, fourth generation wireless telecommunications services using LTE technology and fifth generation wireless telecommunication services using 5G technology.

The MSIT may revoke our licenses or suspend any of our businesses if we fail to comply with its rules, regulations and corrective orders, including the rules restricting beneficial ownership and control and corrective orders issued in connection with any violation of rules restricting beneficial ownership and control or any violation of the conditions of our licenses. Alternatively, in lieu of suspension of our business, the KCC may levy a monetary penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years. A network service provider that wants to cease its business or dissolve must notify its users 60 days prior to the scheduled date of cessation or dissolution and obtain MSIT approval.

In the past, the Government has stated that its policy was to promote competition in the Korean telecommunications market through measures designed to prevent the dominant service provider in any such market from exercising its market power in such a way as to prevent the emergence and development of viable competitors. While all network service providers are subject to MSIT regulation, we are subject to increased regulation because of our position as the dominant wireless telecommunications services provider in Korea.

Competition Regulation

The KCC is charged with ensuring that network service providers engage in fair competition and has broad powers to carry out this goal. If a network service provider is found to be in violation of the fair competition requirement, the KCC may take corrective measures it deems necessary, including, but not limited to, prohibiting further violations, requiring amendments to the articles of incorporation or to service contracts with customers, requiring the execution or performance of, or amendments to, interconnection agreements with other network service providers and prohibiting advertisements to solicit new subscribers. The KCC is required to notify the Minister of the MSIT before it takes certain corrective measures.

In addition, we qualify as a “market-dominating business entity” under the Fair Trade Act. Accordingly, we are prohibited from engaging in any act of abusing our position as a market-dominating entity, such as unreasonably determining, maintaining or altering service rates, unreasonably controlling the rendering of services, unreasonably interfering with business activities of other business entities, hindering unfairly the entry of newcomers or substantially restricting competition to the detriment of the interests of consumers.

Because we are a member company of the SK Group, which is a large business group as designated by the FTC, we are subject to the following restrictions under the Fair Trade Act:

 

  

Restriction on debt guarantee among affiliates.    Any affiliate within the SK Group may not guarantee the debts of another domestic affiliate, except for certain guarantees prescribed in the Fair Trade Act, such as those relating to the debts of a company acquired for purposes of industrial rationalization, bid deposits for overseas construction work or technology development funds.

 

  

Restriction on cross-investment.     A member company of the SK Group may not acquire or hold shares in an affiliate belonging to the SK Group that owns shares in the member company.

 

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Restrictions on circular investments.    A member company of the SK Group may not acquire or hold shares which would constitute “circular investments” in an affiliate company which also forms part of the SK Group where “circular investments” refer to a cross-affiliate shareholding relationship under which three or more affiliate companies become connected through cross affiliate shareholdings by owning shares in other affiliates or by becoming an entity whose shares are owned by other affiliates.

 

  

Public notice of board resolution on large-scale transactions with specially related persons.     If a member company of the SK Group engages in a transaction with a specially related person in the amount of 5.0% or more of the member company’s capital orpaid-in capital or for Won 5.0 billion or more, the transaction must be approved by a resolution of the member company’s board of directors and the member company must publicly disclose the transaction.

 

  

Restrictions on investments by subsidiaries andsub-subsidiaries of holding companies.     The Fair Trade Act prohibits subsidiaries of holding companies from investing in, or holding shares of common stock of, domestic affiliates that belong to the same large business group, unless such domestic affiliates are their own subsidiaries. Furthermore, any subsidiaries of a holding company’s subsidiaries(“sub-subsidiaries”) are prohibited from investing in, or holding shares of common stock of, domestic affiliates that belong to the same large business group, unless all shares issued by the affiliates are held by thesub-subsidiary. Therefore, we and other subsidiaries of SK Holdings may not invest in any domestic affiliate that is also a member company of the SK Group, except in the case where we invest in our own subsidiary or where another subsidiary of SK Holdings invests in its own subsidiary.

 

  

Public notice of the current status of a business group.     Under the Fair Trade Act and the Enforcement Decree thereof, a member company of the SK Group must publicly disclose the general status of the SK Group, including the name, business scope and financial status of affiliates, information on the officers of affiliates, information on shareholding and cross-investments between member companies of the SK Group, information on transactions with certain related persons and, if a member company engages in a transaction with an affiliated company in the amount of 5.0% or more of the member company’s quarterly sales or Won 5.0 billion or more, information on transactions with such affiliated company on a quarterly basis.

Rate Regulation

Network service providers whose sales proceeds exceed the amount prescribed by law must report to the MSIT the rates and contractual terms for each type of service they provide. However, as the dominant network service provider for specific services (based on having the largest market share in terms of number of subscribers and meeting certain revenue thresholds), we must obtain prior approval of the MSIT on our rates and terms of service; provided, however, that suchpre-approval of the MSIT is not required, if we are planning to reduce the rates for any type of services that we provide under the MSIT-approved contractual terms. The MSIT’s policy is to approve rates if they are appropriate, fair and reasonable (that is, if the rates have been reasonably calculated, considering supply costs, profits, classification of costs and profits for each service, cost savings through changes in the way services are provided and the influence on fair competition, among others). The MSIT may order changes in the submitted rates if it deems the rates to be significantly unreasonable or against public policy. Multiple bills have been proposed to the National Assembly to change the approval requirement to a simple reporting requirement, which is the requirement for our competitors. However, there is no assurance as to which of these bills, if any, will be passed.

Furthermore, in 2007, the Government announced a “road map” highlighting revisions in regulations to promote deregulation of the telecommunications industry. In accordance with the road map and pursuant to the Combined Sales Regulation, promulgated in May 2007, telecommunications service providers are now permitted to bundle their services, such as wireless data transmission service, wireless voice transmission service, broadband Internet access service, fixed-line telephone service and IPTV service, at a discounted rate; provided, however, that we and KT, as market-dominating business entities under the Telecommunications Business Act, allow other competitors to employ the services provided by us and KT, respectively, so that such competitors can provide similar discounted package services. In September 2007, the regulations and provisions under the Telecommunications Business Act were amended to permit licensed transmission service providers to offer local, domestic long-distance and international telephone services, as well as broadband Internet access and Internet phone services, without additional business licenses.

 

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Moreover, an MVNO system under which the MSIT may designate and obligate certain wireless telecommunications services providers to allow an MVNO, at such MVNO’s request, to use their telecommunication network facilities at a rate mutually agreed upon that complies with the standards set by the MSIT became effective on March 14, 2017 under the amended Telecommunications Business Act. We were designated as the only wireless telecommunications services provider obligated to allow the other wireless telecommunications services provider to use our telecommunications network facilities. Such system, however, expired on September 22, 2019, which has prompted the submission of a bill in the National Assembly to extend its application. While it is uncertain whether such bill will be passed, we plan to continue allowing MVNOs to use our networks. Currently, thirteen MVNOs provide wireless telecommunications services using the networks leased from us.

On October 1, 2014, the MDDIA, enacted for the purpose of establishing a transparent and fair mobile distribution practice, became effective. The MDDIA limits the amount of subsidies a wireless telecommunications service provider can provide to subscribers in order to prevent excessive competition among wireless telecommunications service providers. Pursuant to the MDDIA, wireless telecommunications service providers are prohibited from (i) unfairly providing discriminatory subsidies based on criteria such as type of subscription, subscription plan and characteristics of the subscriber and (ii) entering into a separate agreement with subscribers imposing obligations to use a specific subscription plan as a condition for providing subsidies. The MDDIA also prohibited providing subsidies exceeding a maximum limit established by the KCC for the purchase of mobile phone models that were launched within the last 15 months, which prohibition expired in September 2017. See “Item 5.A. Operating Results — Overview — New Rate Regulations.”

In addition, under the MDDIA, wireless telecommunications service providers are obliged to provide certain benefits, such as discounted rates, to subscribers who subscribe to their service without receiving subsidies. In June 2017, the State Affairs Planning Advisory Committee of Korea announced that it would encourage wireless telecommunications service providers, including us, to increase the applicable discount rate offered to subscribers from 20% to 25%, which we adopted in September 2017, and to offer additional discounts to low income customers, including those on government welfare programs and senior citizen recipients of the basic pension, which we implemented in December 2017 and July 2018, respectively. We cannot provide assurance that we will not provide other rate discounts in the future to comply with the Government’s public policy guidelines or suggestions.

Interconnection

Dominant network service providers such as ourselves that own essential infrastructure facilities or possess a certain market share are required to provide interconnection of their telecommunications network facilities to other service providers upon request. The MSIT sets and announces the standards for determining the scope, procedures, compensation and other terms and conditions of such provision, interconnection orco-use. We have entered into interconnection agreements with KT, LG U+ and other network service providers permitting these entities to interconnect with our network. We expect that we will be required to enter into additional agreements with new operators as the MSIT grants permits to additional telecommunications service providers.

Frequency Allocation

The MSIT has the discretion to allocate and adjust the frequency bandwidths for each type of service and may auction off the rights to certain frequency bandwidths. Upon allocation of new frequency bandwidths or adjustment of frequency bandwidths, the MSIT is required to give a public notice. The MSIT also regulates the frequency to be used by each radio station, including the transmission frequency used by equipment in our cell sites. All of our frequency allocations are for a definite term. We pay fees to the MSIT for our frequency usage that are determined based upon our number of subscribers, frequency usage by our networks and other factors. For 2019, 2018 and 2017, the fee amounted to Won 133.1 billion, Won 151.7 billion and Won 150.3 billion, respectively.

We currently use 10 MHz of bandwidth in the 800 MHz spectrum for our CDMA services, 10 MHz of bandwidth in the 2.1 GHz spectrum for our WCDMA services, 30 MHz of bandwidth in the 2.1 GHz spectrum, 20 MHz of bandwidth in the 800 MHz spectrum, 35 MHz of bandwidth in the 1.8 GHz spectrum and 60 MHz of

 

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bandwidth in the 2.6 GHz spectrum for our LTE services, as well as 100 MHz of bandwidth in the 3.5 GHz spectrum for our 5G services. We also plan to use 800 MHz of bandwidth in the 28 GHz spectrum for our 5G services in the future. For more information regarding the license fees for the various bandwidths that we use, see “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures” and note 16 of the notes to our consolidated financial statements.

For risks relating to the maintenance of adequate bandwidth capacity, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Our business and results of operations may be adversely affected if we fail to acquire adequate additional frequency usage rights or use our bandwidth efficiently to accommodate subscriber growth and subscriber usage.”

Mandatory Contributions and Obligations

All telecommunications service providers other than value-added service providers and regional paging service providers or any telecommunications service providers whose net annual revenue is less than an amount determined by the MSIT (currently set at Won 30.0 billion) are required to provide “universal” telecommunications services including local telephone services, local public telephone services, telecommunications services for remote islands and wireless communication services for ships and telephone services for handicapped andlow-income citizens, or contribute toward the supply of such universal services.The MSIT designates universal services and the service provider who is required to provide each service. Currently, under the MSIT guidelines, we are required to offer free subscription and a discount of between 30.0% to 50.0% of our monthly fee for wireless telecommunications services to handicapped andlow-income citizens.

In addition to such universal services for handicapped andlow-income citizens, we are also required to make certain annual monetary contributions to compensate for other service providers’ costs for the universal services. The size of a service provider’s contribution is based on its net annual revenue for the previous year (calculated pursuant to the MSIT guidelines, which differ from our accounting practices). We paid such contributions amounting to Won 16.1 billion, Won 16.7 billion and Won 13.6 billion in 2019, 2018 and 2017, respectively.As a wireless telecommunications services provider, we are not considered a provider of universal telecommunications services and do not receive funds for providing universal service. Other network service providers that do provide universal services make all or a portion of their “contribution” in the form of expenses related to the universal services they provide.

Foreign Ownership and Investment Restrictions and Requirements

Because we are a network service provider, and the exception for the foreign shareholding limit under the amended Telecommunications Business Act, which became effective on August 13, 2013, does not apply to us, foreign governments, individuals, and entities (including Korean entities that are deemed foreigners, as discussed below) are prohibited from owning more than 49.0% of our voting stock. Korean entities whose largest shareholder is a foreign government or a foreigner (together with any of its related parties) that owns 15.0% or more of the outstanding voting stock of such Korean entities are also deemed foreigners. If this 49.0% ownership limitation is violated, certain of our foreign shareholders will not be permitted to exercise voting rights in excess of the limitation, and the MSIT may require other corrective action.

As of December 31, 2019, SK Holdings owned 21,624,120 shares of our common stock, or 26.8% of our issued shares. As of December 31, 2019, the two largest foreign shareholders of SK Holdings each held a 3.5% stake therein. If such foreign shareholders increase their shareholdings in SK Holdings to 15% or more and any such foreign shareholder constitutes the largest shareholder of SK Holdings, SK Holdings will be considered a foreign shareholder, and its shareholding in us would be included in the calculation of our aggregate foreign shareholding. If SK Holdings’ shareholding in us is included in the calculation of our aggregate foreign shareholding, then our aggregate foreign shareholding, assuming the foreign ownership level as of December 31, 2019 (which we believe was 37.2%), would reach 63.4%, exceeding the 49.0% ceiling on foreign shareholding.

If our aggregate foreign shareholding limit is exceeded, the MSIT may issue a corrective order to us, the breaching shareholder (including SK Holdings if the breach is caused by an increase in foreign ownership of SK Holdings) and the foreign shareholder which owns in the aggregate 15.0% or more of SK Holdings.

 

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Furthermore, SK Holdings will be prohibited from exercising its voting rights with respect to the shares held in excess of the 49.0% ceiling, which may result in a change in control of us. In addition, the MSIT will be prohibited from granting us licenses or permits necessary for entering into new telecommunications businesses until our aggregate foreign shareholding is reduced to below 49.0%. If a corrective order is issued to us by the MSIT arising from the violation of the foregoing foreign ownership limit, and we do not comply within the prescribed period under such corrective order, the MSIT may:

 

  

revoke our business license;

 

  

suspend all or part of our business; or

 

  

if the suspension of business is deemed to result in significant inconvenience to our customers or to be detrimental to the public interest, impose aone-time administrative penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years.

Additionally, the Telecommunications Business Act also authorizes the MSIT to assess monetary penalties of up to 0.3% of the purchase price of the shares for each day the corrective order is not complied with, as well as a prison term of up to three years or a penalty of Won 150 million. See “Item 3.D. Risk Factors — Risks Relating to Our Business — If SK Holdings causes us to breach the foreign ownership limitations on our common shares, we may experience a change of control.”

We are required under the Foreign Exchange Transaction Act to file a report with a designated foreign exchange bank or with the MOEF, in connection with any issue of foreign currency denominated securities by us in foreign countries. Issuances of US$30 million or less require the filing of a report with a designated foreign exchange bank, and issuances that are over US$30 million in the aggregate within one year from the filing of a report with a designated foreign exchange bank require the filing of a report with the MOEF.

The Telecommunications Business Act provides for the creation of a Public Interest Review Committee under the MSIT to review investments in or changes in the control of network service providers. The following events would be subject to review by the Public Interest Review Committee:

 

  

the acquisition by an entity (and its related parties) of 15.0% or more of the equity of a network service provider;

 

  

a change in the largest shareholder of a network service provider;

 

  

agreements by a network service provider or its shareholders with foreign governments or parties regarding important business matters of such network service provider, such as the appointment of officers and directors and transfer of businesses; and

 

  

a change in the shareholder that actually controls a network service provider.

If the Public Interest Review Committee determines that any of the foregoing transactions or events would be detrimental to the public interest, then the MSIT may issue orders to stop the transaction, amend any agreements, suspend voting rights, or divest the shares of the relevant network service provider. Additionally, if a dominant network service provider (which would currently include us and KT), together with its specially related persons (as defined under the FSCMA), holds more than 5.0% of the equity of another dominant network service provider, the voting rights on the shares held in excess of the 5.0% limit may not be exercised.

Patents and Licensed Technology

Access to the latest relevant technology is critical to our ability to offer the most advanced wireless telecommunications services and to design and manufacture competitive products. In addition to active internal and external research and development efforts as described in “Item 5.C. Research and Development, Patents and Licenses, etc.,” our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering our products. We own numerous patents and trademarks worldwide, and have applications for patents pending in many countries. Our patents are mainly related to LTE and 5G technology and wireless Internet applications. We have also acquired a number of patents related to WCDMA and CDMA technologies.There are no licensed patents that are material to our business.

 

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We are not currently involved in any material litigation regarding patent infringement. For a description of the risks associated with our reliance on intellectual property, see “Item 3.D. Risk Factors — Risks Relating to Our Business — Our business relies on technology developed by us, and our business will suffer if we are unable to protect our proprietary rights.”

Seasonality of the Business

Our business is not affected by seasonality.

 

Item 4.C.

Organizational Structure

Organizational Structure

We are a member of the SK Group, based on the definition of “group” under the Fair Trade Act. As of December 31, 2019, SK Group members owned in aggregate 26.8% of the shares of our issued common stock. The SK Group is a diversified group of companies incorporated in Korea with interests in, among other things, telecommunications, trading, energy, chemicals, engineering and leisure industries.

Significant Subsidiaries

For information regarding our subsidiaries, see note 1(2) of the notes to our consolidated financial statements.

 

Item 4.D.

Property, Plants and Equipment

The following table sets forth certain information concerning our principal properties as of December 31, 2019:

 

Location

  

Primary Use

  Approximate Area
in Square Feet
 

Seoul Metropolitan Area

  

Corporate Headquarters

   988,447 
  

Regional Headquarters

   608,670 
  

Customer Service Centers

   107,277 
  

Training Centers

   443,648 
  Central Research and Development Center   482,719 
  

Others(1)

   1,777,105 

Busan

  

Regional Headquarters

   363,422 
  

Others(1)

   509,510 

Daegu

  

Regional Headquarters

   20,978 
  

Others(1)

   458,833 

Jeolla and Jeju Provinces

  

Regional Headquarters

   265,614 
  

Others(1)

   739,459 

Chungcheong Province

  

Regional Headquarters

   565,643 
  Others(1)   774,905 

 

 

(1)

Includes cell sites.

Our registered office and corporate headquarters, of which we have full ownership, are located at SKT-Tower, 65, Eulji-ro,Jung-gu, Seoul 04539, Korea, which occupy a total land area of approximately 64,515 square feet. In addition, we own or lease various locations for cell sites and switching equipment. We do not anticipate that we will encounter material difficulties in meeting our future needs for any existing or prospective leased space for our cell sites. See “Item 4.B. Business Overview — Cellular Services — Network Infrastructure.”

We maintain a range of insurance policies to cover our assets and employees, including our directors and officers. We are insured against business interruption, fire, lightning, flooding, theft, vandalism, public liability and certain other risks that may affect our assets and employees. We believe that the types and amounts of our insurance coverage are in accordance with general business practices in Korea.

 

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Item 4A.

UNRESOLVED STAFF COMMENTS

We do not have any unresolved comments from the SEC staff regarding our periodic reports under the Exchange Act.

 

Item 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion together with our consolidated financial statements and the related notes thereto which appear elsewhere in this annual report. We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. In addition, you should read carefully the section titled “— Critical Accounting Policies, Estimates and Judgments” as well as notes 2(4) and 4 of the notes to our consolidated financial statements which provide summaries of certain critical accounting policies that require our management to make difficult, complex or subjective judgments relating to matters which are highly uncertain and that may have a material impact on our financial conditions and results of operations.

 

Item 5.A.

Operating Results

Overview

Our operations are reported in five segments: (1) cellular services, which include wireless voice and data transmission services, sales of wireless devices, IoT solutions and platform services,(2) fixed-line telecommunication services, which includefixed-line telephone services, broadband Internet services, advanced media platform services (including IPTV) and business communications services, (3) security services, which include physical and information security services, (4) commerce services, which include our open marketplace platform, 11st, ourT-commerce business, SK stoa, and related ancillary services, and (5) other businesses, which include our portal service, marketing platform business and certain other miscellaneous businesses that do not meet the quantitative thresholds to be separately considered reportable segments.

In our cellular services segment, we earn revenue principally from our wireless voice and data transmission services through monthlyplan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services andvalue-added service fees paid by our wireless subscribers as well as interconnection fees paid to us by other telecommunications operators for use of our wireless network by their customers and subscribers. We also derive revenue from sales of wireless devices by PS&Marketing. Other sources of revenue include revenue from our IoT solutions and platform services, including AI solutions, as well as other miscellaneous cellular services.

In ourfixed-line telecommunication services segment, we earn revenue principally from ourfixed-line telephone services and broadband Internet services and advanced media platform services (including IPTV) through monthlyplan-based fees and usage charges as well as interconnection fees paid to us by other telecommunications operators for use of ourfixed-line network by their customers and subscribers. In addition, we derive revenue from international calling services and our business communications services through customized fee arrangements with our business customers.

In our security services segment, we generate revenue from our physical and information security services businesses through our subsidiaries ADT Caps (which we acquired in October 2018 and subsequently merged with our former subsidiary NSOK) and SK Infosec (which we acquired in December 2018), respectively. ADT Caps earns revenue principally from physical security services through monthly plan-based fees and usage charges for value-added services paid by its subscribers. SK Infosec generates revenue primarily through consideration paid by customers under contracts for its information security platform and consulting services and solutions.

In our commerce services segment, we derive revenue from our subsidiaries Eleven Street, which wasspun-off as our new consolidated subsidiary from SK Planet in September 2018, and SK Stoa. Eleven Street generates revenue principally throughthird-party seller fees earned (including commissions) for transactions in which it acts as a selling agent to the “mini malls” on 11st, its online open marketplace platform, as well as advertising revenue and other commerce solutions from 11st. SK Stoa derives revenues throughthird-party seller fees earned (including commissions) for transactions in which it acts as a selling agent on SK stoa, itsT-commerce network.

In our others segment, we earn revenue from the marketing platform business of SK Planet, the music streaming service and audio device manufacturing businesses of Dreamus and our “Nate” portal service operated by our subsidiary, SK Communications.

 

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Following the entry into an agreement to transfer SK Broadband’s 100% equity interest in SK Stoa to SK Telecom in April 2019 (which transaction was completed in January 2020), theT-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunication services segment in the years ended December 31, 2018 and 2017, were reclassified as part of our commerce services segment for the year ended December 31, 2019. In addition, our security services businesses, which were previously part of our others segment in the years ended December 31, 2018 and 2017, were reclassified as a new security services segment for the year ended December 31, 2019. The breakdown of our results of operations by operating segment for the years ended December 31, 2018 and 2017 in our consolidated audited financial statements have been recast to retroactively apply such changes in segmentation.

Furthermore, following thespin-off of Eleven Street from SK Planet, the remaining marketing platform business operations of SK Planet, which were previously part of our commerce services segment in the year ended December 31, 2017, were reclassified as part of our others segment for the year ended December 31, 2018. As a result, the breakdown of our results of operations by operating segment for the year ended December 31, 2017 in our consolidated audited financial statements have been recast to retroactively apply such change in segmentation.

Our cellular service revenue andfixed-line telecommunications service revenue depend principally upon the number of our subscribers, the rates we charge for our services, the frequency and volume of subscriber usage of our services and the terms of our interconnection with other telecommunications operators. Our security service revenue depends principally upon the number of our subscribers and customers and the rates we charge for our physical security services as well as the number and terms of the contracts pursuant to which our information security services are provided. Our commerce service revenue depends principally upon the gross merchandise volume, which is the total monetary value of customer purchases of goods and services, net of estimated refunds, of 11st and SK stoa and the number of merchants that utilize 11st and SK stoa to advertise and promote their products and services and the extent of such advertisement and promotion.

Among other factors, management uses operating profit of each reportable segment presented in accordance withK-IFRS (“segment operating profit”) in its assessment of the profitability of each reportable segment. The sum of segment operating profit for all four reportable segments differs from our operating profit presented in accordance with IFRS as issued by the IASB as segment operating profit does not include certain items such as donations, gain and loss from disposal of property and equipment and intangible assets and impairment loss on property and equipment and intangible assets.For a reconciliation of operating profit presented in accordance with IFRS as issued by the IASB and operating profit presented in accordance withK-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS.” In addition to the information set forth below, see note 5 of the notes to our consolidated financial statements for more detailed information regarding each of our reportable segments.

A number of recent developments have had or are expected to have a material impact on our results of operations, financial condition and capital expenditures. These developments include:

New Rate Regulations.    Under the MDDIA, wireless telecommunications service providers are obliged to provide certain benefits, such as discounted rates, to subscribers who subscribe to their service without receiving handset subsidies. Handset subsidies are provided to subscribers who agree to use our service for a predetermined service period and purchase handsets on an installment basis. In June 2017, the State Affairs Planning Advisory Committee of Korea announced that it would encourage wireless telecommunications service providers, including us, to increase the applicable discount rate offered to subscribers from 20% to 25%, which we adopted in September 2017, and to offer additional discounts to low income customers, including those on government welfare programs and senior citizen recipients of the basic pension, which we implemented in December 2017 and July 2018, respectively.

In 2019, the total number of subscribers who had elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA increased due to greater public awareness of the availability of such discounted rates as well as the increase in the applicable discount rate to 25%. In 2019, approximately 55% of our new subscribers elected to receive discounted rates in lieu of handset subsidies compared to 60% in 2018. As of December 31, 2019, a substantial majority of our subscribers who elected to receive these discounted rates are receiving the increased 25% rate discount. These Government measures have adversely affected our revenues and

 

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results of operations as more subscribers elected to receive the 25% rate discount. On the other hand, this has also led to a reduction of, or partially offset increases in, our marketing expenses as the number of subscribers who have elected to receive handset subsidies has declined, and has contributed to maintaining a stable churn rate.

Failure to comply with the MDDIA may lead to suspension of our business or imposition of monetary penalties. For more information about the MDDIA and the penalties imposed for violating Government regulations, see “Item 4.B. Business Overview — Law and Regulation — Rate Regulation” and “Item 8.A. Consolidated Statements and Other Financial Information — Legal Proceedings — KCC Proceedings.”

Decrease in Interconnection Fees.    Our wireless telecommunications services depend, in part, on our interconnection arrangements with domestic and internationalfixed-line and other wireless networks. Charges for interconnection affect our revenues and operating results. The MSIT determines the basic framework for interconnection arrangements, including policies relating to interconnection rates in Korea. Under our interconnection agreements, we are required to make payments in respect of calls which originate from our networks and terminate in the networks of other Korean telecommunications operators, and the other operators are required to make payments to us in respect of calls which originate in their networks and terminate in our network. The MSIT has continued to gradually decrease the interconnection rates in Korea, which has led to a continued decrease in our interconnection revenue as well as interconnection expenses from 2012 to 2019 and any further reduction in interconnection rates by the MSIT may continue to impact our results of operations. Beginning in 2017, a single interconnection rate paid by fixed-line network service providers for fixed-line to wireless calls applies to all wireless telecommunications service providers. For more information about our interconnection revenue and expenses, see “Item 4.B. Business Overview — Interconnection.”

Decrease in Monthly Revenue per Subscriber.    We measure monthly average revenue per subscriber using two metrics: average monthly revenue per subscriber excluding MVNO subscribers leasing our networks (“ARPU”) and average monthly revenue per subscriber including such MVNO subscribers (“ARPU including MVNO”). ARPU is derived by dividing the sum of total SK Telecom revenues on a separate basis from voice service and data service for the period (excluding revenue derived from MVNO subscribers leasing our networks) by the monthly average number of subscribers (excluding the number of MVNO subscribers) for the period, then dividing that number by the number of months in the period. ARPU including MVNO is derived by dividing the sum of total SK Telecom revenues on a separate basis from voice service and data service for the period (including revenue derived from MVNO subscribers) by the monthly average number of subscribers (including the number of MVNO subscribers) for the period, then dividing that number by the number of months in the period.

Our ARPU decreased by 3.6% to Won 31,076 in 2019 from Won 32,247 in 2018, which represented a decrease of 7.6% from Won 34,901 in 2017. Our ARPU including MVNO decreased by 4.2% to Won 27,414 in 2019 from Won 28,615 in 2018, which represented a decrease of 8.2% from Won 31,171 in 2017. The decreases in ARPU and ARPU including MVNO in 2019 and 2018 were primarily due to a decrease in revenue attributable to an increase in the number of subscribers who elected to receive discounted rates in lieu of receiving handset subsidies and the increase in such discount rate from 20% to 25% starting in September 2017, as well as the additional rate discounts offered to low income customers, including those on government welfare programs and senior citizen recipients of the basic pension, starting in December 2017 and July 2018, respectively. Such decreases were offset in part by an increase in subscribers that subscribe to our higher-priced unlimited data usage plans and 5G plans.

Potential Effects ofCOVID-19.    Demand for our products and services may fluctuate in light of the overall economic conditions in Korea. The overall prospects for the Korean economy and, in turn, the market conditions for the industries in which we operate, remain uncertain, especially in light of the ongoing globalCOVID-19 pandemic, which is likely to have a significant negative effect on the Korean economy. For example, an increase in unemployment among, and/or a decrease in disposable income of, our customers resulting from a deterioration of the Korean economy due toCOVID-19 may decrease demand for some of our products and services or cause an increase in delinquent subscriber accounts. While it is not possible to predict the duration or full magnitude of harm fromCOVID-19, a continued and prolonged outbreak ofCOVID-19 may have a material adverse effect on our business, financial condition and results of operations. See “Item 3.D. Risk Factors—Risks Relating to Our Business — The ongoing global pandemic ofCOVID-19 and any possible recurrence of other types of widespread infectious diseases may adversely affect our business, financial condition or results of operations.”

 

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Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS

In addition to preparing consolidated financial statements in accordance with IFRS as issued by the IASB included in this annual report, we also prepare financial statements in accordance withK-IFRS as adopted by the KASB, which we are required to file with the FSC and the Korea Exchange under the FSCMA.

K-IFRS requires operating profit, which is calculated as operating revenue less operating expense, to be separately presented on the consolidated statement of income. The presentation of operating profit in our consolidated statements of income prepared in accordance with IFRS as issued by the IASB included in this annual report differs from the presentation of operating profit in the consolidated statements of income prepared in accordance withK-IFRS for the corresponding periods in certain respects. The table below sets forth a reconciliation of our operating profit as presented in our consolidated statements of income prepared in accordance with IFRS as issued by the IASB for each of the three years ended December 31, 2019 to the operating profit as presented in the consolidated statements of income prepared in accordance withK-IFRS.

 

   For the Year Ended December 31, 
   2019  2018  2017 
   (In billions of Won) 

Operating profit pursuant to IFRS as issued by the IASB

  1,000.9  833.8  1,224.6 

Differences:

    

Other income pursuant to IFRS that are classified as othernon-operating income pursuant toK-IFRS:

    

Fee revenues

   (0.6  (0.7  (1.4

Gain on disposal of property and equipment and intangible assets

   (8.9  (38.9  (14.0

Others

   (93.7  (32.3  (16.6
  

 

 

  

 

 

  

 

 

 
   (103.2  (71.9  (32.0

Other operating expenses pursuant to IFRS that are classified as othernon-operating expenses pursuant toK-IFRS:

    

Loss on impairment of property and equipment and intangible assets

   65.9   255.8   54.9 

Loss on disposal of property and equipment and intangible assets

   56.2   87.3   60.1 

Donations

   17.6   59.0   112.6 

Bad debt for accounts receivable — other

   5.8   7.7   5.8 

Others

   66.8   30.1   110.6 
  

 

 

  

 

 

  

 

 

 
   212.3   439.9   344.0 
  

 

 

  

 

 

  

 

 

 

Operating profit pursuant toK-IFRS

  1,110.0  1,201.8  1,536.6 
  

 

 

  

 

 

  

 

 

 

See note 5(2) of the notes to our consolidated financial statements. However, there is no impact on profit for the year or earnings per share for each of the three years ended December 31, 2019, 2018 and 2017.

 

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Critical Accounting Policies, Estimates And Judgments

Our consolidated financial statements are prepared in accordance with IFRS as issued by the IASB. The preparation of the consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. We continually evaluate our estimates and judgments including those related to loss allowances, fair value measurements of financial instruments, estimated useful lives and impairment oflong-lived assets, impairment of goodwill, provisions, retirement benefit plans and income taxes. We base our estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment or complexity:

Loss Allowances

A loss allowance is provided based on a review of the status of individual receivable accounts at the end of the year. We maintain loss allowances for estimated losses that result from the inability of our customers to make required payments. We base our allowances on the likelihood of recoverability of accounts receivable based on the aging of accounts receivable at the end of the period, past customer default experience and their credit status, and economic and industrial factors. In addition, following our adoption of IFRS 9,Financial Instruments, in the fiscal year beginning January 1, 2018, we use an “expected credit loss” impairment model to estimate our loss allowances based on the above-described criteria. Under such model, loss allowances are recorded prior to experiencing delinquency on our receivable accounts rather than upon actual delinquency, which was the case under the previously applicable accounting standards. See “— Recently Adopted International Financial Reporting Standards — IFRS 9.” Loss allowance amounted to Won 346.4 billion as of December 31, 2019 and Won 376.0 billion as of December 31, 2018. If economic or specific industry trends worsen beyond our estimates, the loss allowances we have recorded may be materially adjusted in the future.

Fair Value Measurement of Financial Instruments

Subsequent to initial recognition, financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income and derivative financial assets are stated at fair value with any gains or losses arising on remeasurement recognized in profit for the period or other comprehensive income. When measuring fair value, we use quoted prices in active markets to the extent such prices exist. The fair values of financial instruments, including derivative instruments, that are not traded in an active market are determined using valuation techniques that require management’s estimates of future cash flows and discount rates. Our management uses its judgment to select a variety of methods and makes assumptions that are mainly based on market conditions existing at the end of each reporting period. See notes 2(4) and 35(3) of the notes to our consolidated financial statements.

Impairment ofLong-lived Assets Including Frequency Usage Rights

Long-lived assets generally consist of property and equipment and definite-lived intangible assets. We review our depreciation and amortization methods, estimated useful lives and residual values oflong-lived assets at the end of each annual reporting period. If any such asset or cash-generating unit is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset or cash-generating unit exceeds the estimated recoverable amount. The recoverable amount of along-lived asset is the greater of an asset’s fair value less costs to sell and its value in use. For the purpose of assessing impairment, we review the recoverable amount of an individual asset or, if it is not possible to measure the individual recoverable amount of an asset, at the level of a cash-generating unit. The recoverable amounts of assets orcash-generating units may be determined based onvalue-in-use calculations, which require the use of estimates.

Our definite-lived intangible assets include our frequency usage rights, which have contractual lives of 5 to 10.25 years and are amortized from the date commercial service is initiated through the end of their contractual lives. Because the use of frequency usage rights is exposed to risks and challenges associated with our business, any or all of which, if realized or not properly addressed, may have a material adverse effect on our financial condition,

 

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results of operations and cash flows, we review the frequency usage rights for any indication of impairment on an annual basis. If any such indication exists, we test for impairment utilizing the estimatedlong-term revenue and cash flow forecasts. The use of different assumptions within our cash flow model could result in different recoverable amounts for our frequency usage rights. The results of our review using the testing method described above resulted in no impairment of our frequency usage rights in 2019. See note 16 of the notes to our consolidated financial statements.

Impairment of Goodwill

Goodwill is measured as the excess of the sum of: (1) the consideration transferred, (2) the amount of anynon-controlling interests in the acquiree and (3) the fair value of the acquirer’s previously held equity interest in the acquiree (if any), over the net fair value of theacquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Goodwill is not amortized, but tested for impairment at the end of each annual reporting period or whenever there is an indication that the asset may be impaired. Goodwill is carried at cost less accumulated impairment losses and the impairment losses are not reversed. For the purpose of impairment testing, we review the recoverable amount of an individual asset or, if it is not possible to measure the individual recoverable amount of an asset, at the level of a cash-generating unit. The recoverable amount of an asset or cash-generating unit to which goodwill has been allocated is the greater of its value in use and its fair value less costs to sell. The value in use calculation requires our management to estimate the future cash flows expected related to the respectivecash-generating unit and the determination of an appropriate discount rate in order to calculate present value.

In 2019, we recognized Won 21.1 billion of impairment losses on goodwill compared to Won 166.8 billion of impairment losses on goodwill in 2018. Impairment losses on goodwill in 2019 were mainly due to our recognition of impairment losses on goodwill relating to our consolidated subsidiary Life Design Company Inc. (“Life Design Company”), which operates a celebrity-related merchandise business in Japan. Impairment losses on goodwill in 2018 were mainly due to our recognition of impairment losses on goodwill relating to our former consolidated subsidiary Shopkick, which operated a mobile reward points-basedin-store shopping application. We disposed of our entire equity interest in Shopkick in June 2019.

As of December 31, 2019, the amount of goodwill allocated to our security services cash-genearting unit, which is primarily derived from the acquisition of LSH, was Won 1,173.0 billion, which remained unchanged from December 31, 2018. Our management calculated the recoverable amount of such cash-generating unit based on its value in use using a discounted cash flow method. The discounted cash flow method was based on certain key assumptions with respect to relevant revenue growth rates, labor costs, perpetual growth rate and cash flow discount rate that were primarily derived from internal sources as well as historical performance, external market data and industry reports. The estimated revenue growth rates and labor costs were based on 5-year financial budgets that have been approved by management, which took into account external market data, market trends and expectations as well as historical performance. Cash flows beyond 2024 were projected to grow at a perpetual growth rate estimated at 1.0%. Estimating a perpetual growth rate requires significant management judgment about future business strategies as well as micro- and macro-economic environments that are inherently uncertain. Our 5-year cash flow projections with a terminal value were discounted at an appropriate weighted average cost of capital to 7.3%. Based on such calculation, the recoverable amount of the cash-generating unit exceeded its carrying amount, and no impairment loss was recognized on such goodwill in 2019. Future changes in one or more of such assumptions may cause the carrying amount of the cash-generating unit to exceed its recoverable amount, which would require us to recognize impairment losses on goodwill relating to such cash-generating unit as discussed in note 15(2) of the notes to our consolidated financial statements.

See notes 4(12) and 15 of the notes to our consolidated financial statements.

Income Taxes

We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns. This process requires management to make assessments regarding the timing and probability of the tax impact. Actual income taxes could vary from these estimates due to future changes in income

 

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tax law or unpredicted results from the final determination of each year’s liability by taxing authorities. We believe that the accounting estimate related to assessment of deferred tax assets for recoverability is a “critical accounting estimate” because (1) it requires management to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities and (2) the impact that changes in actual performance versus these estimates could have on the realization of tax benefits as reported in our results of operations could be material. Management’s assumptions require significant judgment because actual performance has fluctuated in the past and may continue to do so. As of December 31, 2019 and 2018, unused tax loss carryforwards of Won 1,023.9 billion and Won 849.9 billion, respectively, were not recognized as deferred tax assets because we did not believe that their realization would be probable. The increase of Won 174.0 billion in unrecognized tax loss carryforwards in 2019 compared to 2018 was primarily related to the effects of consolidation of FSK L&S as well as the net loss incurred by some of our consolidated subsidiaries. See notes 4(26) and 31 of the notes to our consolidated financial statements.

Prepaid Expenses

We pay commissions to our retail stores and authorized dealers in connection with acquiring wireless and fixed-line telecommunications subscriber contracts, which would not have been paid if there were no binding contracts with subscribers. Following our adoption of IFRS 15,Revenue from Contracts with Customers, in the fiscal year beginning January 1, 2018, we capitalize certain costs associated with such commissions as prepaid expenses and amortize them over the expected periods over which we expect to maintain such subscribers under contract. Our management assesses such expected contract periods based on our historical experience on the duration of subscriber contracts. If we experience any changes in such historical experience, or if our management decides to use other factors for the determination of the expected contract periods, our estimate of the expected contract period will change, which in turn will affect the rate at which the applicable prepaid expenses are amortized and recognized as our operating expenses. See note 8 of the notes to our consolidated financial statements.

Determination of Stand-Alone Selling Prices in Recognition of Revenue from Cellular Services

Following our adoption of IFRS 15 in the fiscal year beginning January 1, 2018, for contracts where we sell both a wireless device and subscription plan together to a single customer through our subsidiary PS&Marketing, we allocate revenue proportionately based on the relative stand-alone selling prices of the subscription plan and the device, and we recognize unbilled receivables from wireless device sales as contract assets. See note 9 of the notes to our consolidated financial statements. In determining the stand-alone selling price for the subscription plan, we apply the published price of such subscription plan net of any applicable rate discounts, based on our management’s judgment that such discounted price represents the appropriate stand-alone selling price of such plan. A significant change in the facts and circumstances upon which we made such judgment on the determination of stand-alone selling prices may have an impact on the allocation of revenues from our cellular services segment.

Recently Adopted International Financial Reporting Standards

IFRS 16

We adopted IFRS 16,Leases, in the fiscal year beginning on January 1, 2019 using the modified retrospective method by recognizing the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of retained earnings as of such date.

IFRS 16 introduces a single,on-balance sheet accounting model for lessees. Pursuant to IFRS 16, we recognizeright-of-use assets representing our rights to use the underlying assets and lease liabilities representing our obligation to make lease payments in relation to substantially all of our lease arrangements, except for certain short-term leases and leases oflow-value assets. As a result, we recognizedright-of-use assets (as part of our property and equipment) of Won 654.4 billion and Won 709.4 billion and lease liabilities (as part of our financial liabilities) of Won 663.8 billion and Won 712.7 billion, in each case as of January 1, 2019 and December 31, 2019, respectively. For the year ended December 31, 2019, we recognized Won 360.6 billion of depreciation expenses relating to ourright-of-use assets and Won 15.5 billion of interest expenses relating to our lease liabilities. Lessor accounting remains similar to previous accounting policies.

 

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As of December 31, 2019, we assess the lease term of a lease contract based on the assumption that the right to extend or terminate the lease is not enforceable if the lease contract requires the counterparty’s consent for its termination or extension. In December 2019, International Financial Reporting Interpretations Committee (“IFRIC”) issued its final agenda decision that the concept of penalty that should be considered in determining the enforceable period of a lease under IFRS 16 must be determined considering broader economics of the lease contract, rather than just the contractual termination payments. Furthermore, under such agenda, a lease is no longer enforceable when each of the parties to it has the right to terminate the lease without permission from the other party with no more than an insignificant penalty. Considering the type and number of lease contracts entered into as of and from January 1, 2019, we believe that we did not have sufficient time to complete the analysis on our lease portfolios to reflect the impact of such IFRIC agenda decision in our consolidated financial statements as of and for the year ended December 31, 2019. We are in the process of conducting such analysis, which we expect to complete during the first half of 2020, and we plan to apply such IFRIC agenda decision beginning in 2020 as a change in our accounting policies. We expect such application to have the effect of increasing the lease term for certain of our lease contracts, and to result in an increase in ourright-of-use assets and lease liabilities.

See notes 3, 4(13) and 4(14) of the notes to our consolidated financial statements for further details regarding the effects of our adoption of IFRS 16 and significant accounting policies related to leases prior to and following the adoption of IFRS 16.

IFRS 15

We adopted IFRS 15,Revenue from Contracts with Customers, in the fiscal year beginning on January 1, 2018. We adopted IFRS 15 by recognizing the cumulative effect of initially applying IFRS 15 as an adjustment to the opening balance of retained earnings as of January 1, 2018. We elected to apply IFRS 15 retrospectively only to contracts that were not completed as of January 1, 2018.

IFRS 15 is an accounting standard issued by the IASB that provides a comprehensive framework for determining whether, how much and when revenue is recognized. Pursuant to IFRS 15, we allocate revenue generated from our wireless and fixed-line telecommunication services based on our identification and satisfaction of our stand-alone performance obligations under applicable customer contracts. For example, in the case of contracts where we sell both a wireless device and subscription plan together to a single customer, from which a substantial portion of our overall revenue is generated, we allocate the portion of the overall transaction price related to the wireless device and immediately recognize such portion as revenue, whereas the portion related to the wireless subscription plan is allocated and recognized as revenue over the course of the customer contract period. Under IFRS 15, such allocation is made proportionately based on the stand-alone selling prices of the wireless device and subscription plan.

In addition to the revenue recognition model, IFRS 15 specifies how to account for the incremental costs of obtaining a contract, which in our case includes certain of our commissions paid to our retail stores and authorized dealers in connection with acquiring new customer contracts. IFRS 15 requires certain of such costs to be capitalized as assets and subsequently amortized over the applicable expected contract periods calculated based on our historical experience on the duration of subscriber contracts.

In the case of our consolidated statement of income for the year ended December 31, 2018, the adoption of IFRS 15 had the effect of decreasing our operating revenue by Won 85.8 billion, and decreasing advertising expenses and commission expenses by Won 51.2 billion and Won 12.7 billion, respectively, for a total decrease in our operating expense by Won 66.1 billion. Therefore, the adoption of IFRS 15 resulted in decreases in operating profit and profit before income tax by Won 19.7 billion each. In addition, the adoption had the effect of decreasing our profit for the year by Won 88.2 billion and increasing our income tax expense by Won 68.5 billion. The adoption of IFRS 15 did not have a material impact on our consolidated statement of cash flows for the year ended December 31, 2018. See notes 4(23) and 4(24) of the notes to our consolidated financial statements for further details regarding significant accounting policies related to revenue prior to and following the adoption of IFRS 15.

 

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IFRS 9

We adopted IFRS 9,Financial Instruments, in the fiscal year beginning on January 1, 2018. We adopted IFRS 9 by recognizing the cumulative effect of initially applying IFRS 9 as an adjustment to the opening balance of retained earnings as of January 1, 2018.

IFRS 9 requires all financial assets, on initial recognition, to be classified as financial assets at amortized cost, debt instruments at fair value through other comprehensive income, equity investments at fair value through other comprehensive income or financial assets at fair value through profit or loss. The classification is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. In addition, IFRS 9 sets out an “expected credit loss” impairment model, under which we generally recognize impairment losses on debt instruments at an amount equal to their twelve-month expected credit losses. However, with respect to debt instruments experiencing a significant increase in credit risk and accounts receivable – trade, we recognize impairment losses at an amount equal to their lifetime expected credit losses.

The adoption of IFRS 9 did not have a material impact on our consolidated statement of income or our consolidated statement of cash flows for the year ended December 31, 2018. See notes 4(5) and 4(6) of the notes to our consolidated financial statements for further details regarding significant accounting policies related to financial assets prior to and following the adoption of IFRS 9.

Operating Results

The following table sets forth summary consolidated income statement information, including that expressed as a percentage of operating revenue and other income, for the periods indicated:

 

   For the year ended December 31, 
   2019  2018  2017 
   (In billions of Won, except percentages) 

Operating revenue and other income

  17,846.9   100.0 16,945.9    100.0 17,552.0    100.0

Revenue

   17,743.7   99.4   16,874.0    99.6   17,520.0    99.8 

Other income

   103.2   0.6   71.9    0.4   32.0    0.2 

Operating expenses

   16,846.0   94.4   16,112.1    95.1   16,327.4    93.0 

Operating profit

   1,000.9   5.6   833.8    4.9   1,224.6    7.0 

Profit before income tax

   1,162.7   6.5   3,976.0    23.5   3,403.3    19.4 

Income tax expense

   300.7   1.7   844.0    5.0   745.7    4.2 

Profit for the year

   861.9   4.8   3,132.0    18.5   2,657.6    15.1 

Attributable to:

         

Owners of the Parent Company

   889.9   5.0   3,127.9    18.5   2,599.8    14.8 

Non-controlling interests

   (28.0  (0.2  4.1    0.0   57.8    0.3 

The following table sets forth additional information about our operations with respect to our reportable segments during the periods indicated:

 

  For the year ended December 31, 
  2019  2018  2017 
  Amount  Percentage of
Total Revenue
  Amount  Percentage of
Total Revenue
  Amount  Percentage of
Total Revenue
 
  (In billions of Won, except percentages) 

Cellular Services Revenue

      

Wireless Service(1)

 9,532.4   53.7 9,770.4   57.9 10,639.0   60.7

Cellular Interconnection

  494.3   2.8   532.2   3.2   592.8   3.4 

Wireless Device Sales

  1,032.0   5.8   989.1   5.9   958.2   5.5 

Miscellaneous(2)

  1,113.7   6.3   1,087.2   6.4   1,072.1   6.1 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Cellular Services Revenue

  12,172.4   68.6   12,378.9   73.4   13,262.1   75.7 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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  For the year ended December 31, 
  2019  2018  2017 
  Amount  Percentage of
Total Revenue
  Amount  Percentage of
Total Revenue
  Amount  Percentage of
Total Revenue
 
  (In billions of Won, except percentages) 

Fixed-line Telecommunication Services Revenue

      

Fixed-line Telephone Service

  224.5   1.3   371.3   2.2   401.0   2.3 

Fixed-line Interconnection

  92.3   0.5   95.8   0.6   116.0   0.7 

Broadband Internet Service and Advanced Media Platform Service

  1,807.6   10.2   1,760.4   10.4   1,654.1   9.4 

International Calling Service

  137.9   0.8   152.9   0.9   166.9   1.0 

Miscellaneous(3)

  685.9   3.9   441.9   2.6   381.4   2.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

TotalFixed-line Telecommunication Services Revenue

  2,948.2   16.6   2,822.3   16.7   2,719.4   15.5 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Security Services Revenue(4)

  1,109.5   6.3   284.3   1.7   92.0   0.5 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Commerce Services Revenue(3) (5)

  710.7   4.0   728.4   4.3   651.8   3.7 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Others Revenue

      

Portal Service(6)

  18.4   0.1   15.7   0.1   25.1   0.1 

Miscellaneous(4) (5) (7)

  784.5   4.4   644.4   3.8   769.6   4.4 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Other Revenue

  802.9   4.5   660.1   3.9   794.7   4.5 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Revenue

  17,743.7   100.0   16,874.0   100.0   17,520.0   100.0 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Revenue Growth

  5.2   (3.7)%    2.5 

Segment Operating Expense(8)

      

Cellular Services

  11,258.3   63.4   11,079.0   65.7   11,548.1   65.9 

Fixed-line Telecommunication Services

  2,809.0   15.8   2,576.8   15.3   2,550.9   14.6 

Security Services

  975.9   5.5   295.6   1.8   108.7   0.6 

Commerce Services

  708.7   4.0   813.4   4.8   806.7   4.6 

Others

  881.8   5.0   907.4   5.4   969.0   5.5 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Segment Operating Expense

  16,633.7   93.7   15,672.2   92.9   15,983.4   91.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Segment Operating Profit

      

Cellular Services

  914.1   5.2   1,299.9   7.7   1,714.0   9.8 

Fixed-line Telecommunication Services

  139.2   0.8   245.5   1.5   168.5   1.0 

Security Services

  133.6   0.8   (11.3  (0.1  (16.7  (0.1

Commerce Services

  2.0   0.0   (85.0  (0.5  (154.9  (0.9

Others

  (78.9  (0.4  (247.3  (1.5  (174.3  (1.0
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Segment Operating Profit

 1,110.0   6.3 1,201.8   7.1 1,536.6   8.8
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(1)

Wireless service revenue includes revenue from wireless voice and data transmission services principally derived through monthlyplan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services andvalue-added service fees paid by wireless subscribers.

 

(2)

Miscellaneous cellular services revenue includes revenue from our IoT solutions as well as other miscellaneous cellular services.

 

(3)

Miscellaneousfixed-line telecommunication services revenue includes revenues from business communications services (other thanfixed-line telephone service) provided by SK Broadband and VoIP services provided by SK Telink. Following the entry into an agreement to transfer SK Broadband’s 100% equity interest in SK Stoa to SK Telecom in April 2019 (which transaction was completed in January 2020), theT-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunications services segment in the

 

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 years ended December 31, 2018 and 2017, were reclassified as part of our commerce services segment for the year ended December 31, 2019. As a result, our results of operations for the years ended December 31, 2018 and 2017 have been restated to retroactively apply such reclassification.

 

(4)

Security services revenue includes revenues from ADT Caps and SK Infosec. Such revenues, which were previously part of our others segment in the years ended December 31, 2018 and 2017, were separated into a new security services segment for the year ended December 31, 2019. As a result, our results of operations for the years ended December 31, 2018 and 2017 have been restated to retroactively apply such new segmentation.

 

(5)

Commerce services revenue includes revenues from Eleven Street and SK Stoa, in each case as described above. Eleven Street wasspun-off as our new consolidated subsidiary from SK Planet in September 2018. Following suchspin-off, the remaining marketing platform business operations of SK Planet, which were previously part of our commerce services segment in the year ended December 31, 2017, were reclassified as part of our others segment for the year ended December 31, 2018. As a result, our results of operations for the year ended December 31, 2017 have been restated to retroactively apply such reclassification.

 

(6)

Portal service revenue includes revenues from “Nate,” our online portal service operated by SK Communications.

 

(7)

Miscellaneous others revenue includes revenues from the marketing platform business operations of SK Planet as described above and other businesses.

 

(8)

“Segment operating expense” means operating expense for each reportable segment presented in accordance withK-IFRS and therefore does not include certain expenses that are classified as othernon-operating expenses underK-IFRS. For more information on the differences between our consolidated operating expense pursuant toK-IFRS and pursuant to IFRS as issued by the IASB, see “— Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS.”

2019 Compared to 2018

Operating Revenue and Other Income.    Our consolidated operating revenue and other income increased by 5.3% to Won 17,846.9 billion in 2019 from Won 16,945.9 billion in 2018, due to increases in both operating revenue and other income, as discussed below.

Our consolidated operating revenue increased by 5.2% to Won 17,743.7 billion in 2019 from Won 16,874.0 billion in 2018, primarily due to an increase in security services revenue, and to a much smaller extent, increases in others revenue and fixed-line telecommunications services revenue, which were partially offset by decreases in cellular services revenue and commerce services revenue.

Our consolidated other income increased by 43.5% to Won 103.2 billion in 2019 from Won 71.9 billion in 2018, primarily due to the gain on the transfer of oure-sports business to SK Telecom CS T1 Co., Ltd., a joint venture with Comcast Spectacor that was newly established in February 2019, as well as on the transfer of our former mobile OTT service business, “oksusu,” to Content Wavve in September 2019.

The following sets forth additional information about our operating revenues with respect to each of our reportable segments.

 

  

Cellular services: The revenue of our cellular services segment, which is composed of revenues from wireless service, cellular interconnection, wireless device sales and miscellaneous cellular services, decreased by 1.7% to Won 12,172.4 billion in 2019 from Won 12,378.9 billion in 2018. The decrease in our cellular services revenue was due to decreases in wireless service revenue and cellular interconnection revenue, partially offset by increases in wireless device sales revenue and miscellaneous cellular services revenue.

 

  

Wireless service revenue decreased by 2.4% to Won 9,532.4 billion in 2019 from Won 9,770.4 billion in 2018, primarily attributable to the continued increase in the percentage of wireless service subscribers who elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA. The impact of such decrease was partially offset by an increase in the number of subscribers that subscribe to our higher-priced unlimited data usage plans and 5G plans.

 

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Cellular interconnection revenue decreased by 7.1% to Won 494.3 billion in 2019 from Won 532.2 billion in 2018. The decrease was primarily attributable to continued decreases in interconnection rates andland-to-mobile call volume.

 

  

Wireless device sales revenue increased by 4.3% to Won 1,032.0 billion in 2019 from Won 989.1 billion in 2018, primarily due to the launch of our 5G services in April 2019 and the ensuing sales of higher-priced5G-compatible smartphones.

 

  

Miscellaneous cellular services revenue increased by 2.4% to Won 1,113.7 billion in 2019 from Won 1,087.2 billion in 2018, primarily because of an increase in rental income from SK Telecom’s real properties, which is recognized as part of our cellular services segment revenue.

 

  

Fixed-line telecommunications services: The revenue of ourfixed-line telecommunication services segment, which is composed of revenues from broadband Internet service and advanced media platform service (including IPTV),fixed-line telephone service, international calling service,fixed-line interconnection and miscellaneousfixed-line telecommunication services, increased by 4.5% to Won 2,948.2 billion in 2019 from Won 2,822.3 billion in 2018, primarily due to increases in our broadband Internet service and advanced media platform service revenue and miscellaneous fixed-line telecommunications services revenue, partially offset by a decrease in fixed-line telephone service revenue.

 

  

Miscellaneousfixed-line telecommunication services revenue increased by 55.2% to Won 685.9 billion in 2019 from Won 441.9 billion in 2018, primarily due to an increase in revenue from our business communications services.

 

  

Revenue from our broadband Internet service and advanced media platform service (including our IPTV service and former mobile OTT service, which was transferred to Content Wavve in September 2019) increased by 2.7% to Won 1,807.6 billion in 2019 from Won 1,760.4 billion in 2018, primarily due to an increase in the number of IPTV subscribers to 5.2 million subscribers as of December 31, 2019 from 4.7 million subscribers as of December 31, 2018 and an increase in the number of premium subscriptions with higher monthly rates and purchases of premiumvideo-on-demand content.

 

  

Fixed-line telephone service revenue decreased by 39.5% to Won 224.5 billion in 2019 from Won 371.3 billion in 2018, primarily due to decreases in the number of fixed-line telephone subscribers (including subscribers to VoIP services of SK Broadband and SK Telink) to 3.9 million as of December 31, 2019 from 4.1 million as of December 31, 2018 and residential calling volume as a result of shifting consumer preferences toward wireless communication.

 

  

Security services: The revenue of our security services segment, which is composed of revenues from ADT Caps and SK Infosec, increased by 290.3% to Won 1,109.5 billion in 2019 from Won 284.3 billion in 2018. A substantial majority of such increase was due to the inclusion of revenues of ADT Caps for a full year in 2019 compared to a partial year in 2018 following the addition of the entities comprising ADT Caps as new consolidated subsidiaries in October 2018 and, to a much smaller extent, the inclusion of revenue of SK Infosec as a new consolidated subsidiary starting at the end of December 2018.

 

  

Commerce services: The revenue of our commerce services segment, which is composed of revenues from 11st, our open marketplace platform, and SK stoa, ourT-commerce network, decreased by 2.4% to Won 710.7 billion in 2019 from Won 728.4 billion in 2018, primarily due to our continued strategic focus to optimize and improve the profitability of our 11st business.

 

  

Others: The revenue of our others segment, which is composed of revenue from our portal service and miscellaneous other revenue, increased by 21.6% to Won 802.9 billion in 2019 from Won 660.1 billion in 2018, primarily due to the inclusion of revenues of newly consolidated subsidiaries, such as FSK L&S and Incross.

Operating Expense.    Our consolidated operating expense increased by 4.6% to Won 16,846.0 billion in 2019 from Won 16,112.1 billion in 2018, primarily due to a 20.6% increase in depreciation and amortization expenses to Won 3,771.5 billion in 2019 from Won 3,126.1 billion in 2018 and a 23.3% increase in labor costs to Won

 

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2,822.7 billion from Won 2,288.7 billion in 2018, partially offset by a 56.2% decrease in rent expenses to Won 231.9 billion in 2019 from Won 529.5 billion in 2018, a 3.2% decrease in other operating expenses to Won 1,724.9 billion in 2019 from Won 1,782.4 billion in 2018 and a 6.9% decrease in network interconnection expenses from Won 752.3 billion in 2019 from Won 808.4 billion in 2018.

The increase in depreciation and amortization expenses was primarily due to the recognition of depreciation expenses relating to ourright-of-use assets following our adoption of IFRS 16, as well as the commencement of amortization of our frequency usage rights for our 5G services. See “— Recently Adopted International Financial Reporting Standards — IFRS 16.”

The increase in labor costs was primarily due to the additional personnel on payroll in connection with our acquisitions of ADT Caps in October 2018 and SK Infosec in December 2018, as well as the expansion of new businesses such as AI solutions and other platform services.

The decrease in rent expenses was primarily due to the adoption of IFRS 16, pursuant to which we recognized payments on certain of our leased real properties in 2019 as depreciation expenses onright-of-use assets instead of as rent expenses. See “— Recently Adopted International Financial Reporting Standards — IFRS 16.”

The decrease in other operating expenses was primarily due to a decrease in impairment loss on property and equipment and intangible assets to Won 65.9 billion in 2019 from Won 255.8 billion in 2018, which amount in 2018 mainly reflected impairment losses we recognized on the goodwill and intangible assets of our former subsidiary Shopkick.

The decrease in network interconnection expenses was mainly attributable to decreases inwireless-to-fixed-line andfixed-line-to-wireless interconnection rates, as well as decreases in the number of fixed-line telephone subscribers and calling volume.

The following sets forth additional information about our segment operating expense with respect to each of our reportable segments, which do not include certain expenses that are classified as othernon-operating expenses underK-IFRS. For more information on the difference between our consolidated operating expense pursuant toK-IFRS and pursuant to IFRS as issued by the IASB, see “— Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS” and note 5(2) of the notes to our consolidated financial statements.

 

  

Cellular services: The segment operating expense for our cellular services segment increased by 1.6% to Won 11,258.3 billion in 2019 from Won 11,079.0 billion in 2018, mainly attributable to an increase in marketing costs to promote our 5G services and the commencement of amortization of our frequency usage rights for our 5G services.

 

  

Fixed-line telecommunication services: The segment operating expense for ourfixed-line telecommunication services segment increased by 9.0% to Won 2,809.0 billion in 2019 from Won 2,576.8 billion in 2018, primarily due to increases in labor costs, marketing costs to gain more subscribers to ourultra-high definition IPTV and high speed broadband Internet services and depreciation and amortization expenses.

 

  

Security services: The segment operating expense for our security services segment increased by 230.1% to Won 975.9 billion in 2019 from Won 295.6 billion in 2018, primarily due to the inclusion of operating expenses of ADT Caps for a full year in 2019 compared to a partial year in 2018 following the addition of the entities comprising ADT Caps as new consolidated subsidiaries in October 2018 and, to a much smaller extent, the inclusion of operating expenses of SK Infosec as a new consolidated subsidiary starting at the end of December 2018.

 

  

Commerce services: The segment operating expense for our commerce services segment decreased by 12.9% to Won 708.7 billion in 2019 from Won 813.4 billion in 2018, primarily due to our continued strategic focus to optimize and improve the profitability of our 11st business.

 

  

Others: The segment operating expense for our others segment decreased by 2.8% to Won 881.8 billion in 2019 from Won 907.4 billion in 2018, primarily as a result of cost-cutting efforts by SK Planet and other subsidiaries in this segment.

 

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Operating Profit.    Our consolidated operating profit increased by 20.0% to Won 1,000.9 billion in 2019 from Won 833.8 billion in 2018, as the increase in operating revenue and other income outpaced the increase in operating expense in 2019.

The following sets forth additional information about our segment operating profit with respect to each of our reportable segments. Our segment operating profit with respect to each of our reportable segments is based onK-IFRS and the sum of segment operating profit for all five reportable segments differs from our consolidated operating profit presented in accordance with IFRS as issued by the IASB. For a reconciliation of operating profit presented in accordance with IFRS as issued by the IASB and operating profit presented in accordance withK-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS” and note 5(2) of the notes to our consolidated financial statements.

 

  

Cellular services: The segment operating profit of our cellular services segment decreased by 29.7% to Won 914.1 billion in 2019 from Won 1,299.9 billion in 2018, due to the decrease in segment operating revenue and the increase in segment operating expense, for the various reasons described above.As a result, the segment operating margin (which, with respect to each reportable segment, is segment operating profit (loss) divided by revenue from such segment, expressed as a percentage) of our cellular services segment decreased to 7.5% in 2019 from 10.5% in 2018.

 

  

Fixed-line telecommunication services: The segment operating profit of ourfixed-line telecommunication services segment decreased by 43.3% to Won 139.2 billion in 2019 from Won 245.5 billion in 2018, due to the greater increase in segment operating expense as compared to the increase in segment operating revenue, for the reasons described above.As a result, the segment operating margin of ourfixed-line telecommunication services segment decreased to 4.7% in 2019 from 8.7% in 2018.

 

  

Security services: Our security services segment had a segment operating profit of Won 133.6 billion in 2019 compared to a segment operating loss of Won 11.3 billion in 2018, due to the aggregate impact of our acquisitions of ADT Caps and SK Infosec as described above.As a result, the segment operating margin of our security services segment improved to 12.0% in 2019 from (4.0)% in 2018.

 

  

Commerce services: Our commerce services segment had a segment operating profit of Won 2.0 billion in 2019 compared to a segment operating loss of Won 85.0 billion in 2018, due to the greater decrease in segment operating expense as compared to the decrease in segment operating revenue, for the reasons described above.As a result, the segment operating margin of our commerce services segment improved to 0.3% in 2019 from (11.7)% in 2018.

 

  

Others: The segment operating loss of our others segment decreased by 68.1% to Won 78.9 billion in 2019 from Won 247.3 billion in 2018, due to the increase in segment operating revenue and the decrease in segment operating expense as described above. As a result, the segment operating margin of our others segment improved to (9.8)% in 2019 from (37.5)% in 2018.

Finance Income and Finance Costs.    Our finance income decreased by 44.6% to Won 142.0 billion in 2019 from Won 256.4 billion in 2018, primarily due to a decrease in gain relating to financial assets at fair value through profit or loss to Won 4.5 billion in 2019 from Won 83.6 billion in 2018, primarily relating to our disposal of 200,000 redeemable convertible preference shares of KRAFTON Co., Ltd. (formerly known as Bluehole Inc.) (“Krafton”) in 2018, as well as a decrease in dividends to Won 10.0 billion in 2019 from Won 35.1 billion in 2018, which was primarily related to a decrease in dividend payments following SK Planet’s disposal of investments in certain real estate funds as well as our disposal of all of our shares of KB Financial Group Inc. in 2018. The effect of such decrease was partially offset by an increase in gain on settlement of derivatives to Won 29.3 billion in 2019 from Won 20.4 billion in 2018, primarily as a result of exchange rate fluctuations.

Our finance costs increased by 11.6% to Won 429.8 billion in 2019 from Won 385.2 billion in 2018, primarily due to an increase in interest expense to Won 397.9 billion in 2019 from Won 307.3 billion in 2018 as a result of an increase in the aggregate amount of our outstanding debentures, which was partially offset by a decrease in loss on foreign currency transactions to Won 12.7 billion in 2019 from Won 38.9 billion in 2018.

Gains (Losses) Related to Investments in Associates and Joint Ventures.    Gains related to investments in associates and joint ventures decreased by 86.3% to Won 449.5 billion in 2019 from Won 3,270.9 billion in 2018,

 

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primarily due to a decrease in share of profits of SK Hynix to Won 416.2 billion in 2019 from Won 3,238.1 billion in 2018.Such decrease was primarily due to a decrease in SK Hynix’s profit for the year to Won 2,016.4 billion in 2019 from Won 15,540.0 billion in 2018.

Income Tax.    Income tax expense decreased by 64.4% to Won 300.7 billion in 2019 from Won 844.0 billion in 2018 primarily due to a 70.8% decrease in profit before income tax to Won 1,162.7 billion in 2019 from Won 3,976.0 billion in 2018. Our effective tax rate in 2019 increased to 25.9% from 21.2% in 2018. Our effective tax rates in 2019 and 2018 were lower than the maximum statutory tax rate of 27.5% for both years, primarily due tonon-taxable income in 2019 and changes in unrecognized deferred taxes in 2018.

Profit for the Year.    Principally as a result of the factors discussed above, our profit for the year decreased by 72.5% to Won 861.9 billion in 2019 from Won 3,132.0 billion in 2018. Profit for the year as a percentage of operating revenue and other income was 4.8% in 2019 compared to 18.5% in 2018.

2018 Compared to 2017

Operating Revenue and Other Income.    Our consolidated operating revenue and other income decreased by 3.5% to Won 16,945.9 billion in 2018 from Won 17,552.0 billion in 2017, due to a decrease in operating revenue, offset in small part by an increase in other income, as discussed below.

Our consolidated operating revenue decreased by 3.7% to Won 16,874.0 billion in 2018 from Won 17,520.0 billion in 2017, primarily due to a decrease in cellular services revenue, and to a much smaller extent, a decrease in others revenue, which were partially offset by increases in security services revenue, fixed-line telecommunication services revenue and commerce services revenue.

Our consolidated other income increased by 124.7% to Won 71.9 billion in 2018 from Won 32.0 billion in 2017, primarily due to the gain on the disposal of SK Broadband’s internet data center in Seoul.

The following sets forth additional information about our operating revenues with respect to each of our reportable segments.

 

  

Cellular services: The revenue of our cellular services segment, which is composed of revenues from wireless service, cellular interconnection, wireless device sales and miscellaneous cellular services, decreased by 6.7% to Won 12,378.9 billion in 2018 from Won 13,262.1 billion in 2017. The decrease in our cellular services revenue was due to decreases in wireless service revenue and cellular interconnection revenue, partially offset by increases in wireless device sales revenue and miscellaneous cellular services revenue.

 

  

Wireless service revenue decreased by 8.2% to Won 9,770.4 billion in 2018 from Won 10,639.0 billion in 2017, primarily attributable to the continued increase in the percentage of wireless service subscribers who elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA and the decrease in revenues from our roaming services subsequent to the launch of our “Safe Automatic T Roaming” service in March 2018. Such decrease was also partly attributable to the adoption of IFRS 15, which caused us to recognize a smaller portion of the overall transaction price of contracts under which we sell both a wireless device and subscription plan together to a single customer as wireless service revenue than under the previously applicable accounting standards. See “— Recently Adopted International Financial Reporting Standards — IFRS 15.”

 

  

Cellular interconnection revenue decreased by 10.2% to Won 532.2 billion in 2018 from Won 592.8 billion in 2017. The decrease was primarily attributable to continued decreases in interconnection rates andland-to-mobile call volume.

 

  

Wireless device sales revenue increased by 3.2% to Won 989.1 billion in 2018 from Won 958.2 billion in 2017, primarily due to the adoption of IFRS 15, which caused us to recognize a greater portion of the overall transaction price of contracts under which we sell both a wireless device and subscription plan together to a single customer as wireless device sales revenue than under the previously applicable accounting standards, partly offset by a decrease in sales of

 

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handsets due to lower customer demand for new devices. See “— Recently Adopted International Financial Reporting Standards — IFRS 15.”

 

  

Miscellaneous cellular services revenue increased by 1.4% to Won 1,087.2 billion in 2018 from Won 1,072.1 billion in 2017, primarily because of an increase in revenue from our IoT solutions business.

 

  

Fixed-line telecommunications services: The revenue of ourfixed-line telecommunication services segment, which is composed of revenues from broadband Internet service and advanced media platform service (including IPTV),fixed-line telephone service, international calling service,fixed-line interconnection and miscellaneousfixed-line telecommunication services, increased by 3.8% to Won 2,822.3 billion in 2018 from Won 2,719.4 billion in 2017, primarily due to increases in our broadband Internet service and advanced media platform service revenue and miscellaneous fixed-line telecommunications services revenue, partially offset by decreases in fixed-line interconnection revenue and fixed-line telephone service revenue.

 

  

Revenue from our broadband Internet service and advanced media platform service (including our IPTV service and former mobile OTT service, which was transferred to Content Wavve in September 2019) increased by 6.4% to Won 1,760.4 billion in 2018 from Won 1,654.1 billion in 2017, primarily due to an increase in the number of IPTV subscribers to 4.7 million subscribers as of December 31, 2018 from 4.4 million subscribers as of December 31, 2017 and an increase in the number of premium subscriptions with higher monthly rates and purchases of premiumvideo-on-demand content.

 

  

Miscellaneousfixed-line telecommunication services revenue increased by 15.9% to Won 441.9 billion in 2018 from Won 381.4 billion in 2017, primarily due to an increase in revenue from our business communications services.

 

  

Fixed-line telephone service revenue decreased by 7.4% to Won 371.3 billion in 2018 from Won 401.0 billion in 2017, primarily due to a decrease in the number of fixed-line telephone subscribers and residential calling volume as discussed above.

 

  

Fixed-line interconnection revenue decreased by 17.4% to Won 95.8 billion in 2018 from Won 116.0 billion in 2017, primarily due to a decrease in interconnection rates, as well as decreases in the number of fixed-line telephone subscribers (including subscribers to VoIP services of SK Broadband and SK Telink) to 4.1 million as of December 31, 2018 from 4.3 million as of December 31, 2017 and residential calling volume as a result of shifting consumer preferences toward wireless communication.

 

  

Security services: The revenue of our security services segment increased by 209.0% to Won 284.3 billion in 2018 from Won 92.0 billion in 2017, primarily due to the consolidation of revenues of ADT Caps starting in October 2018.

 

  

Commerce services: The revenue of our commerce services segment, which is primarily composed of revenues from 11st, our open marketplace platform, and SK stoa, ourT-commerce network, increased by 11.8% to Won 728.4 billion in 2018 from Won 651.8 billion in 2017, primarily due to an increase in revenue from SK stoa as a result of increased volume of merchandise sold through such channel.

 

  

Others: The revenue of our others segment, which is composed of revenue from our portal service and miscellaneous other revenue, decreased by 16.9% to Won 660.1 billion in 2018 from Won 794.7 billion in 2017, primarily due to the effects of the reorganization of SK Planet’s business operations.

Operating Expense.     Our consolidated operating expense decreased by 1.3% to Won 16,112.1 billion in 2018 from Won 16,327.4 billion in 2017, primarily due to an 8.8% decrease in commissions to Won 5,002.6 billion in 2018 from Won 5,486.3 billion in 2017, a 4.8% decrease in cost of goods sold to Won 1,796.1 billion in 2018 from Won 1,886.5 billion in 2017 and a 7.6% decrease in network interconnection expenses to Won 808.4 billion in 2018 from Won 875.0 billion in 2017, partially offset by a 16.4% increase in labor costs to Won 2,288.7 billion in 2018 from Won 1,966.2 billion in 2017 and a 9.3% increase in other operating expenses to Won 1,782.4 billion in 2018 from Won 1,630.7 billion in 2017.

 

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The decrease in commissions was attributable mainly to a decrease in marketing costs relating to our cellular services primarily caused by the continued maturing of the market for new wireless devices in 2018, partially offset by an increase in marketing costs relating to our fixed-line telecommunication services.

The decrease in cost of goods sold was primarily due to a decrease in the number of wireless devices resold in 2018.

The decrease in network interconnection expenses was mainly attributable to decreases inwireless-to-fixed-line andfixed-line-to-wireless interconnection rates, as well as decreases in the number of fixed-line telephone subscribers and calling volume.

The increase in labor costs was primarily due to the additional personnel on payroll in connection with our acquisition of ADT Caps in October 2018, as well as the establishment in June 2017 of our subsidiary, Home & Service Co., Ltd. (“Home & Service”), which providesin-home customer services primarily to our fixed-line telecommunication service subscribers that were previously outsourced to a third party vendor and the costs for which were classified as commissions prior to the establishment of Home & Service, and the expansion of new businesses such as AI solutions.

The increase in other operating expenses was primarily due to an increase in impairment loss on property and equipment and intangible assets to Won 255.8 billion in 2018, which mainly reflected impairment losses we recognized on the goodwill and intangible assets of Shopkick, from Won 54.9 billion in 2017.

The following sets forth additional information about our segment operating expense with respect to each of our reportable segments, which do not include certain expenses that are classified as othernon-operating expenses underK-IFRS. For more information on the difference between our consolidated operating expense pursuant toK-IFRS and pursuant to IFRS as issued by the IASB, see “— Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS” and note 5(2) of the notes to our consolidated financial statements.

 

  

Cellular services: The segment operating expense for our cellular services segment decreased by 4.1% to Won 11,079.0 billion in 2018 from Won 11,548.1 billion in 2017, attributable mainly to a decrease in marketing costs in light of lower customer demand for new wireless devices and the completion of depreciation for some of our property and equipment.

 

  

Fixed-line telecommunication services: The segment operating expense for ourfixed-line telecommunication services segment increased by 1.0% to Won 2,576.8 billion in 2018 from Won 2,550.9 billion in 2017, primarily due to an increase in marketing costs to gain more subscribers to ourultra-high definition IPTV and high speed broadband Internet services and an increase in depreciation and amortization expenses.

 

  

Security services: The segment operating expense for our security services segment increased by 171.9% to Won 295.6 billion in 2018 from Won 108.7 billion in 2017, primarily due to the recognition of operating expenses related to ADT Caps following our acquisition thereof in October 2018.

 

  

Commerce services: The segment operating expense for our commerce services segment increased by 0.8% to Won 813.4 billion in 2018 from Won 806.7 billion in 2017, primarily due to the increase in the volume of merchandise sold through SK stoa.

 

  

Others: The segment operating expense for our others segment decreased by 6.4% to Won 907.4 billion in 2018 from Won 969.0 billion in 2017, primarily due to the effects of the reorganization of SK Planet’s business operations.

Operating Profit.     Our consolidated operating profit decreased by 31.9% to Won 833.8 billion in 2018 from Won 1,224.6 billion in 2017, as the decrease in operating revenue and other income outpaced the decrease in operating expense in 2018.

The following sets forth additional information about our segment operating profit with respect to each of our reportable segments. Our segment operating profit with respect to each of our reportable segments is based onK-IFRS and the sum of segment operating profit for all five reportable segments differs from our consolidated operating profit presented in accordance with IFRS as issued by the IASB. For a reconciliation of operating profit

 

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presented in accordance with IFRS as issued by the IASB and operating profit presented in accordance withK-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information underK-IFRS” and note 5(2) of the notes to our consolidated financial statements.

 

  

Cellular services: The segment operating profit of our cellular services segment decreased by 24.2% to Won 1,299.9 billion in 2018 from Won 1,714.0 billion in 2017, due to the greater decrease in segment operating revenue as compared to the decrease in segment operating expense, for the various reasons described above.As a result, the segment operating margin (which, with respect to each reportable segment, is segment operating profit (loss) divided by revenue from such segment, expressed as a percentage) of our cellular services segment decreased to 10.5% in 2018 from 12.9% in 2017.

 

  

Fixed-line telecommunication services: The segment operating profit of ourfixed-line telecommunication services segment increased by 45.7% to Won 245.5 billion in 2018 from Won 168.5 billion in 2017, due to the greater increase in segment operating revenue as compared to the increase in segment operating expense, for the reasons described above.As a result, the segment operating margin of ourfixed-line telecommunication services segment increased to 8.7% in 2018 from 6.2% in 2017.

 

  

Security services: The segment operating loss of our security services segment decreased by 32.3% to Won 11.3 billion in 2018 from Won 16.7 billion in 2017, due to the greater increase in segment operating revenue as compared to the increase in segment operating expense, for the reasons described above.As a result, the segment operating margin of our security services segment improved to (4.0)% in 2018 from (18.2)% in 2017.

 

  

Commerce services: The segment operating loss of our commerce services segment decreased by 45.1% to Won 85.0 billion in 2018 from Won 154.9 billion in 2017, due to the greater increase in segment operating revenue as compared to the increase in segment operating expense, for the reasons described above.As a result, the segment operating margin of our commerce services segment improved to (11.7)% in 2018 from (23.8)% in 2017.

 

  

Others: The segment operating loss of our others segment increased by 41.9% to Won 247.3 billion in 2018 from Won 174.3 billion in 2017, due to the greater decrease in segment operating revenue as compared to the decrease in segment operating expense as described above. As a result, the segment operating margin of our others segment worsened to (37.5)% in 2018 from (21.9)% in 2017.

Finance Income and Finance Costs.     Our finance income decreased by 30.1% to Won 256.4 billion in 2018 from Won 366.6 billion in 2017, primarily due to a significant decrease in gain on valuation of derivatives to Won 6.5 billion in 2018 from Won 223.9 billion in 2017, which primarily related to a significant increase in valuation of redeemable convertible preferred shares issued by Krafton in 2017. The effect of such decrease was partially offset by a significant increase in gain relating to financial assets at fair value through profit or loss to Won 83.6 billion in 2018, primarily relating to our disposal of 200,000 redeemable convertible preference shares of Krafton in 2018, from less than Won 0.1 billion in 2017.

Our finance costs decreased by 11.2% to Won 385.2 billion in 2018 from Won 433.6 billion in 2017, primarily due to a decrease in loss on disposal of long-term investment securities from Won 36.0 billion in 2017, which was primarily due to the disposal of our shares of Kakao, to nil in 2018, and a decrease in other finance costs from Won 35.9 billion in 2017, relating to management fees paid in connection with our investment in Krafton’s securities, to nil in 2018.

Gains (Losses) Related to Investments in Associates and Joint Ventures.    Gains related to investments in associates and joint ventures increased by 45.7% to Won 3,270.9 billion in 2018 from Won 2,245.8 billion in 2017, primarily due to an increase in share of profits of SK Hynix to Won 3,238.1 billion in 2018 from Won 2,175.9 billion in 2017.Such increase was primarily due to an increase in SK Hynix’s profit for the year to Won 15,540.0 billion in 2018 from Won 10,642.2 billion in 2017.

Income Tax.     Income tax expense increased by 13.2% to Won 844.0 billion in 2018 from Won 745.7 billion in 2017 primarily due to a 16.8% increase in profit before income tax to Won 3,976.0 billion in 2018 from Won 3,403.3 billion in 2017. Our effective tax rate in 2018 decreased to 21.2% from 21.9% in 2017. Our effective tax

 

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rates in 2018 and 2017 were lower than the statutory tax rate of 27.5% and 24.2%, respectively, primarily due to changes in unrecognized deferred taxes in 2018 and a tax refund in 2017.

Profit for the Year.     Principally as a result of the factors discussed above, our profit for the year increased by 17.9% to Won 3,132.0 billion in 2018 from Won 2,657.6 billion in 2017. Profit for the year as a percentage of operating revenue and other income was 18.5% in 2018 compared to 15.1% in 2017.

Inflation

We do not consider inflation in Korea to have had a material impact on our results of operations in recent years. According to the Korean Statistical Information Service, annual inflation in Korea was 0.4% in 2019, 1.5% in 2018 and 1.9% in 2017.

 

Item 5.B.

Liquidity and Capital Resources

Liquidity

We had a working capital surplus (current assets in excess of current liabilities) of Won 314.6 billion as of December 31, 2019 and Won 1,111.3 billion as of December 31, 2018. The decrease in our working capital as of December 31, 2019 compared to December 31, 2018 was primarily attributable to an increase in other accounts payable, which was mainly due to an increase in our investments in 5G networks, and our recognition of lease liabilities in 2019 pursuant to the adoption of IFRS 16 starting January 1, 2019. See “— Recently Adopted International Financial Reporting Standards — IFRS 16.” We plan to fund our current liabilities with the cash flow generated by our operations, proceeds from the disposal of investment securities or property and equipment that are no longer deemed profitable and proceeds from additional borrowings, as necessary.

We had cash and cash equivalents,short-term financial instruments andshort-term investment securities of Won 2,268.1 billion as of December 31, 2019 and Won 2,747.5 billion as of December 31, 2018. We had outstandingshort-term borrowings and current portion of long-term debt of Won 1,037.9 billion as of December 31, 2019 and Won 1,064.3 billion as of December 31, 2018. As of December 31, 2019, we had credit lines with several local banks that provided for borrowing of up to Won 480.0 billion, all of which was available for borrowing.

Cash flows from operating activities and debt financing have been our principal sources of liquidity. We had cash and cash equivalents of Won 1,270.8 billion as of December 31, 2019 and Won 1,506.7 billion as of December 31, 2018. We believe that we have a variety of alternatives available to us to satisfy our financial requirements to the extent that they are not met by funds generated by operations, including the issuance of debt securities and bank borrowings.

 

  Year ended December 31,  Change 
  2019  2018  2017  2019 to 2018  2018 to 2017 
  (In billions of Won, except percentages) 

Net cash provided by operating activities

 3,986.1  4,332.6  3,855.8  (346.5  (8.0)%  476.8   12.4

Net cash used in investing activities

  (3,582.5  (4,047.7  (3,070.6  465.2   (11.5  (977.1  31.8 

Net cash used in financing activities

  (636.8  (238.3  (826.6  (398.5  167.2   588.3   (71.2

Net increase (decrease) in cash and cash equivalents

  (233.2  46.6   (41.4  (279.9  N.A.   87.9   N.A. 

Effect of exchange rate changes on cash and cash equivalents held in foreign currencies

  (2.6  2.4   (6.2  (5.0  N.A.   8.6   N.A. 

Cash and cash equivalents at beginning of period

  1,506.7   1,457.7   1,505.3   49.0   3.4   (47.6  (3.2

Cash and cash equivalents at end of period

  1,270.8   1,506.7   1,457.7   (235.9  (15.7  49.0   3.4 

 

N.A. = Not available

 

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Cash Flows from Operating Activities.    Net cash provided by operating activities was Won 3,986.1 billion in 2019, Won 4,332.6 billion in 2018 and Won 3,855.8 billion in 2017. Profit for the year was Won 861.9 billion in 2019, Won 3,132.0 billion in 2018 and Won 2,657.6 billion in 2017. Net cash provided by operating activities in 2019 decreased by 8.0% from 2018 primarily due to an increase in prepaid expenses at the year-end 2019 compared to the year-end 2018. Net cash provided by operating activities in 2018 increased by 12.4% from 2017 primarily due to a decrease in our outstanding other accounts receivable at theyear-end 2018 compared to theyear-end 2017.

Cash Flows from Investing Activities.    Net cash used in investing activities was Won 3,582.5 billion in 2019, Won 4,047.7 billion in 2018 and Won 3,070.6 billion in 2017. Cash inflows from investing activities were Won 754.2 billion in 2019, Won 686.1 billion in 2018 and Won 456.8 billion in 2017. Cash inflows in 2019 were primarily attributable to a decrease in short-term financial instruments, net of Won 254.0 billion, which was mainly in connection with funding our investments in property and equipment, and proceeds from disposals of long-term investment securities of Won 234.7 billion, which was primarily in connection with the disposal of 6,109,000 common shares of Hana Financial Group Inc. for Won 221.1 billion in cash.Cash inflows in 2018 were primarily attributable to proceeds from disposals of long-term investment securities of Won 371.8 billion, primarily in connection with the disposal of all of our shares of KB Financial Group Inc. for Won 179.6 billion in cash and the disposal of redeemable convertible preferred shares of Krafton for Won 130.0 billion in cash and the collection ofshort-term loans of Won 117.6 billion. Cash inflows in 2017 were primarily attributable to the collection ofshort-term loans of Won 216.7 billion and proceeds from disposals of long-term investment securities of Won 129.7 billion, mostly in connection with the disposal of our shares of Kakao for Won 112.6 billion in cash in April 2017.

Cash outflows for investing activities were Won 4,336.7 billion in 2019, Won 4,733.8 billion in 2018 and Won 3,527.4 billion in 2017. Cash outflows in 2019, 2018 and 2017 were primarily attributable to expenditures related to the acquisition of property and equipment of Won 3,375.9 billion, Won 2,792.4 billion and Won 2,715.9 billion, respectively, primarily in connection with the acquisition of 5G and LTE equipment, the expansion of our 5G network and the maintenance of our LTE network.

Cash Flows from Financing Activities.    Net cash used in financing activities was Won 636.8 billion in 2019, Won 238.3 billion in 2018 and Won 826.6 billion in 2017. Cash inflows from financing activities were Won 2,047.3 billion in 2019, Won 4,651.7 billion in 2018 and Won 1,261.8 billion in 2017. Such inflows were primarily driven by the issuance of debentures, which provided cash of Won 1,633.4 billion in 2019, Won 1,809.6 billion in 2018 and Won 973.3 billion in 2017, and proceeds fromlong-term borrowings, which provided cash of nil in 2019, Won 1,920.1 billion in 2018 and Won 120.0 billion in 2017. In 2019, we also received proceeds of Won 300.0 billion from the disposal of our treasury shares to Kakao. In 2018, we received net proceeds of Won 499.9 billion from the transfer of interests in subsidiaries tonon-controlling interests and of Won 398.8 billion from the issuance of hybrid securities.

Cash outflows for financing activities were Won 2,684.1 billion in 2019, Won 4,890.0 billion in 2018 and Won 2,088.4 billion in 2017. Cash outflows for financing activities included repayment of debentures, payment of dividends, repayments of other long-term payables, repayments of lease liabilities and repayment of long-term borrowings, among other items. Repayment of debentures were Won 940.0 billion in 2019, Won 1,488.0 billion in 2018 and Won 842.7 billion in 2017. Payment of dividends were Won 718.7 billion in 2019, Won 706.1 billion in 2018 and Won 706.1 billion in 2017. Repayments of otherlong-term payables were Won 428.2 billion in 2019, Won 305.6 billion in 2018 and Won 305.5 billion in 2017. Repayments of lease liabilities was Won 393.4 billion in 2019. Repayment of long-term borrowings were Won 89.9 billion in 2019, Won 1,780.7 billion in 2018 and Won 32.7 billion in 2017.

As of December 31, 2019, we had totallong-term debt (excluding current portion) outstanding of Won 9,226.0 billion, which included debentures in the amount of Won 7,253.9 billion and bank and institutional borrowings in the amount of Won 1,972.1 billion. As of December 31, 2018, we had totallong-term debt (excluding current portion) outstanding of Won 8,587.6 billion, which included debentures in the amount of Won 6,572.2 billion and bank and institutional borrowings in the amount of Won 2,015.4 billion. For a description of ourlong-term debt, see note 17 of the notes to our consolidated financial statements.

 

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As of December 31, 2019, we had (i) Won 6,512.5 billion aggregate principal amount of KoreanWon-denominated debentures outstanding, of which SK Telecom issued Won 5,040.0 billion, SK Broadband issued Won 1,460.0 billion and LSH issued Won 12.5 billion, and (ii) Won 1,736.7 billion aggregate principal amount of debentures outstanding denominated in U.S. dollars. The fixed interest rates of our debentures range from 1.40% to 6.63% depending on the offering size, maturity, interest rate environment at the time of the offering and currency, among other factors. We have a diversified maturity profile with respect to our debentures. See “— Contractual Obligations and Commitments” for more details.

As of December 31, 2019, all of our foreigncurrency-denominatedlong-term borrowings and debentures, which in the aggregate amounted to 17.3% of our total outstandinglong-term debt, including the current portion and present value discount as of such date, was denominated in Dollars. However, substantially all of our revenue and operating expenses are denominated in Won. We generally pay for imported capital equipment in Dollars. Appreciation of the Won against the Dollar will result in net foreign currency transaction and translation gains, while depreciation of the Won against the Dollar will result in net foreign currency transaction and translation losses. Changes in foreign currency exchange rates will also affect our liquidity because of the effect of such changes on the amount of funds required for us to make interest and principal payments on our foreigncurrency-denominated debt. For a description of swap or derivative transactions we have entered into, among other transactions, to mitigate the effects of such losses, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

Capital Requirements

Historically, capital expenditures, repayment of outstanding debt, frequency usage payments and research and development expenditures have represented our most significant use of funds. In recent years, we have also increasingly dedicated capital resources to develop and invest in new growth engines, including ournext-generation growth businesses in media, security, commerce, IoT solutions and other innovative products and services offered through our platform services, including AI solutions.

To fund our scheduled debt repayment and planned capital expenditures over the next several years, we intend to rely primarily on cash flows from operating activities, as well as bank and institutional borrowings, and offerings of debt or equity in the domestic or international markets. We believe that these sources will be sufficient to fund our planned capital expenditures for 2020. Our ability to rely on these alternatives could be affected by the liquidity of the Korean financial markets or by Government policies regarding Won and foreign currency borrowings and the issuance of equity and debt. Our failure to make needed expenditures would adversely affect our ability to sustain subscriber growth and provide quality services and, consequently, our results of operations.

Capital Expenditures.     The following table sets forth our actual capital expenditures for 2019, 2018 and 2017:

 

   Year ended December 31, 
   2019   2018   2017 
   (In billions of Won) 

Wireless Networks(1)

  2,514.3   1,735.6   1,597.0 

Fixed-line Network(2)

   815.8    776.8    790.0 

Others(3)

   45.8    280.0    328.9 
  

 

 

   

 

 

   

 

 

 

Total

  3,375.9   2,792.4   2,715.9 
  

 

 

   

 

 

   

 

 

 

 

 

(1)

Includes investments in our 5G, LTE, WCDMA, CDMA andWi-Fi networks as well as other capital expenditures related to our networks.

 

(2)

Includes all capital expenditures made by SK Broadband.

 

(3)

Includesnon-network related investments such as capital expenditures for product development and upgrades of our information technology systems and equipment.

We set our capital expenditure budget for each upcoming year on an annual basis. Our actual capital expenditures in 2019, 2018 and 2017 were Won 3,375.9 billion, Won 2,792.4 billion and Won 2,715.9 billion,

 

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respectively. Of such amounts, we spent approximately 74.5%, 62.2% and 58.8% in 2019, 2018 and 2017, respectively, on capital expenditures related to building and enhancing our wireless networks. Our othernon-network related capital expenditures in 2019, 2018 and 2017 primarily related to developing new products and upgrades to our information technology systems and equipment.

In particular, we have been making capital expenditures to build and expand our 5G network. We commenced commercial 5G services in April 2019. We have also been making capital expenditures to improve our LTE network.For a more detailed description of our 5G and LTE networks, see “Item 4.B. Business Overview — Cellular Services — Digital Wireless Network.” We plan to continue to make capital investments in 2020 to build and expand our 5G network and develop related technologies, as well as to further improve our LTE network.

The following table sets forth our payment obligations relating to our acquisitions of frequency usage rights.

 

Spectrum Technology (width) Date of Acquisition 

Initial Payment
Amount

 (in billions of Won) 

  Initial
Payment Year
  

Annual Payment
Amount

 (in billions of Won) 

  Annual
Payment Term 
 

1.8 GHz

 

 LTE (35 MHz)

 

 20 MHz Dec. 2011 248.8   2011  74.6   2012-2021 
 15 MHz Sept. 2013  115.3   2013   43.2   2014-2021 

2.1 GHz

 LTE (30 MHz) Dec. 2016  141.2   2016   85.3   2017-2021 
 WCDMA (10 MHz)

2.6 GHz

 LTE (40 MHz + 20 MHz) Aug. 2016  332.5   2016   99.8   2017-2026 

3.5 GHz

 5G (100 MHz) Dec. 2018  304.6   2018   91.4   2019-2028 

28 GHz

 5G (800 MHz) Dec. 2018  51.8   2018   15.5   2019-2023 

In case of the 800 MHz spectrum, for which our frequency usage rights were acquired in June 2011 and will expire in June 2021, we make annual payments amounting to 1.6% of the revenues generated from such spectrum in the previous year. In 2019, we made such annual payment in the amount of Won 29.2 billion. For more information, see note 16 of the notes to our consolidated financial statements.

We expect that our capital expenditure amount in 2020 will be lower than that of 2019. Our expenditures will be for a range of projects, including investments to expand and improve our newly implemented 5G network, investments to maintain our LTE network andLTE-A services, investments to improve and expand ourWi-Fi network, investments to develop our IoT solutions and platform services business portfolio, including AI solutions, investments in research and development of 5G technology, investments in businesses that can potentially leverage our 5G network, and funding formid- tolong-term research and development projects, as well as other initiatives, primarily related to the development of new growth businesses, as well as initiatives related to our ongoing businesses in the ordinary course. However, our overall expenditure levels and our allocation among projects remain subject to many uncertainties. We may increase, reduce or suspend our planned capital expenditures for 2020 or change the timing and area of our capital expenditure spending from the estimates described above in response to market conditions or for other reasons. We may also make additional capital expenditure investments as opportunities arise. Accordingly, we periodically review the amount of our capital expenditures and may make adjustments based on the current progress of capital expenditure projects and market conditions. No assurance can be given that we will be able to meet any such increased expenditure requirements or obtain adequate financing for such requirements, on terms acceptable to us, or at all.

Repayment of Outstanding Debt.    As of December 31, 2019, our principal repayment obligations with respect tolong-term borrowings, bonds and short-term borrowings outstanding were as follows for the periods indicated:

 

Year Ending December 31,

  Total 
   (In billions of Won) 

2020

  1,038.5 

2021

   940.6 

2022

   1,421.6 

2023 and thereafter

   6,914.4 

Investments in New Growth Businesses.    We may also require capital for investments to support our development of new growth businesses.

 

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We made capital contributions of Won 25.0 billion and Won 65.0 billion in 2017 and 2018, respectively, to Dreamus (formerly known as IRIVER LIMITED), a manufacturer of digital audio players and other portable media devices of which we had acquired a 39.3% equity interest in August 2014 and increased our equity interest to 49.0% in December 2014. Dreamus also operates our music streaming service platform, FLO. As of December 31, 2019, we had a 51.4% equity interest in Dreamus.

In 2017, we acquired Life Design Company (formerly known as S.M. Life Design Company Japan Inc.) for Won 30.0 billion, in light of potential synergies that may be achieved through the entertainment business.

In October 2018, we acquired ADT Caps by acquiring a 55.0% interest in LSH, which owns 100% of ADT Caps, for Won 696.7 billion. In December 2018, we merged NSOK with and into ADT CAPS Co., Ltd. In December 2018, we acquired SK Infosec, Korea’s leading information security company, in a share exchange transaction pursuant to which we issued 1,260,668 treasury shares with an aggregate book value of Won 281.2 billion in exchange for all of the outstanding common shares of SK Infosec from SK Holdings. In 2018, we also increased our interest in id Quantique from 4.6% as of December 31, 2017 to 65.6% as of December 31, 2018, through the acquisition of additional shares with Won 55.2 billion in cash and Won 5.7 billion incontribution-in-kind. Following our capital contribution in cash amounting to Won 12.2 billion in 2019, our equity interest in id Quantique increased to 66.8% as of December 31, 2019.

In June 2019, we acquired a 34.6% interest in Incross, a digital advertising company, for an aggregate purchase price of Won 53.7 billion, in light of potential synergies with our media and commerce businesses.

From time to time, we may make other investments in telecommunications or other businesses, in Korea or abroad, where we perceive attractive opportunities for investment. From time to time, we may also dispose of existing investments when we believe that doing so would be in our best interest.

Severance Payments.    The defined benefit obligation, which is the total accrued and unpaid retirement and severance benefits for our employees, as of December 31, 2019 was Won 172.3 billion. This amount was reflected in our consolidated financial statements as a liability, which is net of deposits with insurance companies totaling Won 965.7 billion to fund a portion of the employees’ severance indemnities.

Also see “Item 6.D. Employees — Employee Benefits” and note 20 of the notes to our consolidated financial statements.

Dividends.    Total cash outflows for payments of dividends amounted to Won 718.7 billion in 2019, Won 706.1 billion in 2018 and Won 706.1 billion in 2017.

In April 2020, we distributed annual dividends at Won 9,000 per share (exclusive of an interim dividend of Won 1,000 per share) to our shareholders for an aggregate payout amount of Won 658.2 billion.

 

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Contractual Obligations and Commitments

The following summarizes our contractual cash obligations at December 31, 2019, and the effect such obligations are expected to have on liquidity and cash flow in future periods:

 

  Payments Due by Period(1) 
  Total  Less Than
1 Year
  1-3 Years  4-5 Years  More Than
5 Years
 
  (In billions of Won) 

Bonds

     

Principal

 8,249.2  967.3  2,280.0  2,348.8  2,653.1 

Interest

  1,244.0   217.0   368.6   240.0   418.4 

Long-term borrowings

     

Principal

  2,045.3   50.6   82.2   1,912.5    

Interest

  346.8   88.2   180.2   78.4    

Lease liabilities

     

Principal

  754.0   314.0   296.2   64.5   106.3 

Interest

  3.8   1.7   1.3   0.7   0.1 

Short-term leases and leases oflow-value assets

  144.3   144.3          

Facility deposits

  15.0   10.8         4.2 

Derivatives

  1.0      0.5   0.5    

Otherlong-term payables(2)

     

Principal

  2,051.4   425.3   647.6   413.4   565.1 

Interest

  58.5   15.3   21.1   13.0   9.1 

Short-term borrowings

  20.6   20.6      3,850.7    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total contractual cash obligations

 14,933.9  2,255.2  3,850.7  5,071.8  3,756.2 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(1)

We are contractually obligated to make severance payments to eligible employees we have employed for more than one year, upon termination of their employment, regardless of whether such termination is voluntary or involuntary. Accruals for severance indemnities are recorded based on the amount we would be required to pay in the event the employment of all our employees were to terminate at the balance date. However, we have not yet estimated cash flows for future periods. Accordingly, payments due in connection with severance indemnities have been excluded from this table.

 

(2)

Related to acquisition of frequency licenses. See note 18 of the notes to our consolidated financial statements.

See note 37 of the notes to our consolidated financial statements for details related to our other commitments and contingencies.

 

Item 5.C.

Research and Development, Patents and Licenses, etc.

We maintain a high level of spending on our research and development activity. We also donate funds to several Korean research institutes and educational organizations that focus on research and development activity. We believe that we must maintain a substantialin-house technology capability to achieve our strategic goals.

 

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The main focus of our research and development activity is the development of new wireless technologies and services and value-added technologies and services for our 5G network and LTE network, such as wireless data communications, as well as the development of new technologies that reflect the growing convergence between telecommunications and other industries, such as AI, big data analytics, media, security and mobility. SK Telecom’s research and development activity is centered at our AIX Center, located at our SKT-Tower corporate headquarters in Seoul and our Bundang office inBundang-gu,Seongnam-si,Gyeonggi-do, Korea, which we established in December 2019 by combining our former ICT R&D Center, AI Center and Digital Transformation Center into one organization. To more efficiently manage our research and development resources, our AIX Center is organized into the following groups and labs:

 

Organization

  

Recent Areas of Focus

Tech Innovation Group  Competitiveness of new technologies
Enterprise AI Platform Group          Creation of business synergies through enterprise AI platform support
Enterprise AI Solution Group  Creation of business synergies through enterprise AI solution support
Data Intelligence Group  Measurement of foot traffic congestion in subways using data from cell sites and WiFi network
Global AI Development Group  Multimodal communication technology
T-Brain  AI research & development capabilities and source technology; conversational AI technology
5GX Labs  Wireless and fixed-line network infrastructure; solution business; development ofmid- to long-term key technologies
Data Labs  Data analytics, big data platforms and other business solutions
Media Labs  Improvement of competitiveness of media services; internalization of elemental next-generation media technologies
Cloud Labs  Software-defined data center technologies; machine learning and AI infrastructure technologies; smart operation and control technologies of cloud infrastructure; commercialization and business development of 5G MEC platform; enterprise blockchain technologies
Security Labs  Competitiveness of security platform and services; development of new video security solutions; information security technologies
Mobility Labs  Autonomous driving technologies; commercialization of mobility platform

Each business unit also has its own research team that can concentrate on specific short-term research needs, and some of our consolidated subsidiaries also have their own research and development organizations to focus on activities related to their respective business areas. Such research teams permit our research center to concentrate on long-term, technology-intensive research projects. We aim to establish strategic alliances with selected domestic and foreign companies with a view to exchanging or jointly developing technologies, products and services.

 

Item 5.D.

Trend Information

These matters are discussed under “Item 5.A. Operating Results” and “Item 5.B. Liquidity and Capital Resources” above where relevant.

 

Item 5.E.

Off-Balance Sheet Arrangements

None.

 

Item 5.F.

Tabular Disclosure of Contractual Obligations

These matters are discussed under “Item 5.B. Liquidity and Capital Resources” above where relevant.

 

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Item 5.G.

Safe Harbor

These matters are discussed under “Forward-Looking Statements.”

 

Item 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

Item 6.A.

Directors and Senior Management

Directors and Senior Management

Our board of directors has ultimate responsibility for the management of our affairs. Under our articles of incorporation, our board is to consist of at least three but no more than twelve directors, more than half of whom must be independentnon-executive directors. We currently have a total of eight directors, five of whom are independentnon-executive directors. We elect our directors at a general meeting of shareholders with the approval of at least a majority of those shares present or represented at such meeting. Such majority must represent at leastone-fourth of our total issued and outstanding shares with voting rights.

As required under relevant Korean laws and our articles of incorporation, we have a committee for recommendation of independentnon-executive directors within the board of directors, the Independent Director Nomination Committee. Independentnon-executive directors are appointed from among those candidates recommended by the Independent Director Nomination Committee.

The term of offices for directors is until the close of the third annual general shareholders meeting convened after he or she commences his or her term. Our directors may serve consecutive terms. Our shareholders may remove them from office by a resolution at a general meeting of shareholders adopted by the holders of at leasttwo-thirds of the voting shares present or represented at the meeting, and such affirmative votes also represent at leastone-third of our total voting shares then issued and outstanding.

Representative directors are directors elected by the board of directors with the statutory power to represent our company.

The following are the names and positions of our standing andnon-standing directors. The business address of all of our directors is the address of our registered office at SKT-Tower, 65, Eulji-ro,Jung-gu, Seoul 04539, Korea.

Standing directors are our directors who also serve as our executive officers, and they also comprise the senior management, or the key personnel who manage us. Their names, dates of birth and positions at our company, other positions and business experience are set forth below:

 

Name

 Month and
Year of
Birth
   Director
Since
   Expiration
of Term
   

Position

  

Other Positions

  

Business Experience

Jung Ho Park

  May 1963    2017    2023   Executive Director  President and Chief Executive Officer  Chief Executive Officer, SK Holdings; Head of Corporate Development Office, SK C&C Co., Ltd.; Head of Business Development Office, SK Telecom

Young Sang Ryu

  May 1970    2018    2021   Executive Director  Head of MNO Business  Executive Vice President of Business Development Group, SK Holdings; Senior Vice President of Business Development Office, SK Telecom; Head of Corporate Center, SK Telecom

 

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Our currentnon-standing directors are as set forth below:

 

Name

 Month and
Year of
Birth
   Director
Since
   Expiration
of Term
   

Position

  

Other Positions

  

Business Experience

Dae Sik Cho

  Nov. 1960    2017    2023   Non-executive Director  Chairman, SK SUPEX Council  Chief Executive Officer, SK Holdings; Chief Finance Officer, Head of Finance Division and Risk Management & Corporate Auditing Office, SK Holdings; Head of Business Management, SK Holdings

Jung Ho Ahn

  Feb. 1978    2017    2023   IndependentNon-executive Director  Professor, Graduate School of Convergence Science and Technology, Seoul National University  Visiting Scholar, Google Inc.; Senior Research Scientist, Exascale Computing Lab, HP Labs

Youngmin Yoon

  Dec. 1963    2018    2021   IndependentNon-executive Director  Dean of School of Media and Communications and Graduate School of Journalism and Mass Communication, Korea University  Professor, School of Media & Communication, Korea University; Vice-chair, Korean Academic Society for Public Relations; Advisor, Ministry of Land, Infrastructure and Transport Public Relations Division; Advisor, Korea Media Rating Board

Seok-Dong Kim

  May 1953    2019    2022   IndependentNon-executive Director  Chairman, JIPYONG Institute of Humanities and Society  Chairman, Financial Services Commission; Vice Minister, Ministry of Finance and Economy; Vice Chairman, Financial Supervisory Commission

Yong-Hak Kim

  Jan. 1953    2020    2023   IndependentNon-executive Director  Professor Emeritus, Yonsei University  President, Yonsei University; BK Planning Committee, Ministry of Education; Member, Presidential Advisory Council of Policy Planning; Professor of Sociology, Yonsei University

Junmo Kim

  Sept. 1976    2020    2023   IndependentNon-executive Director  Associate Professor of Electrical Engineering, KAIST  Assistant Professor of Electrical Engineering, KAIST; Senior Researcher, Samsung Advanced Institute of Technology

Other Executive Officers

In addition to our standing directors, we currently have the following executive officers:

 

Name

 

Month and

Year of

Birth

 

Position

 

Business Experience

Jong Ryeol Kang

 Oct. 1964 Head of ICT Infra Center Head of Corporate Culture Division

Chungsik Kang

 Nov. 1971 Public Relations Office 1 Project Leader, Communication Committee PR Team

 

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Name

 

Month and

Year of

Birth

 

Position

 

Business Experience

Dae Hwan Ko

 Sept. 1961 Director of SK Academy Head of Business Support Office, SK Incheon Petrochem

Gyeong Nam Kim

 Jan. 1974 Head of Security Labs PI/Project Manager, HRL Laboratories

Mu Hwan Kim

 Sept. 1974 Head of SKTA Business Development Project Leader, Strategy Support Team, SUPEX Council Project

Min Oh Kim

 Aug. 1971 Head of Mobility Service Unit Representative, Pathos

Seong Soo Kim

 Jun. 1966 Head of Sales Office Head of Distribution Support Office

Sung Han Kim

 Aug. 1969 Head of Infra TF Head of Smart City Unit

Yoon Kim

 Jun. 1971 Head of AIX Center Siri Manager, Apple

Ilung Kim

 Apr. 1959 Officer of ICT Advisory Board Representative, Essencore

Jeong Bok Kim

 Oct. 1965 Head of Metropolitan Infra Office Head of Central Infra Office

Jung Hoon Kim

 Nov. 1963 Head of Infra DevOps Group Naver Business Platform

Jiwon Kim

 Jun. 1985 Head ofT-Brain Professional Researcher, Samsung Advanced Institute of Technology

Jihnwoo Kim

 Feb. 1971 Head of Integrated Services Promotion Group Head of Global Business Office, SK Planet

Jinwon Kim

 Sept. 1966 Head of Financial Strategy & Management Group Representative, SK USA

Hyuk Kim

 Sept. 1967 Head of 5GX Media Business Group Head of Media Business Support Group

Hyeon Kook Kim

 Dec. 1966 Head of Western Regional Marketing Office Head of Metropolitan Area Marketing Office

Hyeong Chan Kim

 Aug. 1962 PD of SK Research Institute for SUPEX Management Telecommunications Policy Research, Korea Information Society Development Institute

Heesup Kim

 Oct. 1968 Head of Public Relations Office 1 AD Office, Chosun Ilbo

SukKwon Na

 Nov. 1966 PD of SK Research Institute for SUPEX Management Director of Statistical Policy, Statistics Korea

Chan Kyu Noh

 Jul. 1965 Officer of Public Relations Team, SUPEX Council Project Brand Team, SK Holdings

Man Gang Ra

 Jan. 1972 Head of HR Group 1 Head of Talent Management Team, HR Office

Byung Hoon Ryu

 Oct. 1980 Head of Management Strategy Group PM Group PM2 CoE

Jung Hwan Ryu

 Jun. 1970 Head of 5GX Infra Group Head of Infra Support Group

Gap In Moon

 May 1969 Head of Smart Device Office Head of Service Strategy Division Policy Group

Byoungyong Moon

 Jul. 1970 Messaging Platform Planning, Messaging Business Office Representative, The Potential

Myung Soon Park

 Feb. 1969 Head of AI Business Unit Head of Growth Technology Institute

Min Hyung Park

 Oct. 1968 Representative of SKTA Motorola Inc.

Suman Park

 May 1972 Officer of Safety, Health and Environment, SUPEX Council Project Head of Business Support Division, SK China

Yong Joo Park

 May 1965 Head of Legal Group Seoul Central District Prosecutor’s Office

Jong Kwan Park

 Jul. 1970 Head of 5GX Labs Head of Core Network Lab, Network Technology Institute

Jong Suk Park

 Nov. 1971 Head of Business Planning Group 1 Head of Business Planning Office, SK Broadband

 

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Name

 

Month and

Year of

Birth

 

Position

 

Business Experience

Jin Woo So

 Dec. 1961 Chairman of Talent Development Committee, SUPEX Council Project Representative, SK Planet

Sukham Sung

 Apr. 1970 Growth Business Support, CR & Growth Business Support Office Evaluation Manager of Performance Evaluation Office, MSIT

Jin Soo Seong

 May 1968 Head of Infra Solution Group Head of Daegu Infra Office

Gwang Hyeon Song

 Mar. 1970 Head of Public Relations Office 2 Head of Business PR Team, Communication Office

Jaeseung Song

 Mar. 1979 Head of Strategic Investment Group Director, Praxis Capital Partners

Sang Kyu Shin

 Nov. 1970 Head of Corporate Culture Center Head of HR Office

Yongsik Shin

 Aug. 1971 Head of Massive IoT Business Office Head of Energy Business Team

Sang Soo Sim

 Aug. 1965 Head of Infra Business Office Head of Infra Division Network Business Support Group

Jeong Yeol Ahn

 Aug. 1969 Head of Supply Chain Management Group 1 Head of Corporate Center, Eleven Street

Junehyeon Ahn

 Nov. 1969 Officer of Corporate Relations Team, SUPEX Council Project Corporate Relations Team, SUPEX Council Project Communication Committee

Maeng Seog Yang

 Mar. 1969 5GX Service Business, 5GX Service Business Office Head of 5GX MNO Business Group

Ji Young Yeo

 Sept. 1966 Head of Open Collaboration Group Head of New Business Promotion Division Design Thinking Team

Sung Jin Yeum

 Oct. 1972 Head of CR Support, CR & Growth Business Support Office Head of CR Support Team

Yong-Seop Yum

 Oct. 1962 Head of SK Research Institute for SUPEX Management Head of Future Research Office

Hui Gang Ye

 Jan. 1970 Head of Brand Marketing Group Head of Brand 2 Office, Hyundai Card

Sehyeon Oh

 Jul. 1963 Head of Blockchain/Authentication Business Office Head of C&C DT Business Development Division

Woong Hwan Ryu

 May 1971 Head of Social Value Innovation Center Head of Open Collaboration Center

Sung Eun Yoon

 Jan. 1973 Head of CR Innovation TF Head of Corporate Relations Strategy Office Policy System Team

Yong Chul Yoon

 May 1965 Head of Communication Center Head of Department, MBC Newsroom

Poong Young Yoon

 Nov. 1974 Head of Corporate Center 1 Head of PM Group

Kang Won Lee

 Feb. 1970 Head of Cloud Labs Manager of Mobile N/W Analytics, IBM T.J. Watson Research Center

Kiyoon Lee

 Dec. 1969 Head of Customer Value Innovation Office PL of Customer Value Innovation Office

Sang Gu Lee

 Jul. 1970 Head of Messaging Business Office Head of MNO Data Business Team

Sang Heon Lee

 Aug. 1965 Head of Policy Development Office Head of Corporate Relations Strategy Office

Jongmin Lee

 Jul. 1978 Head of Technology Innovation Group Head of Media Technology Institute

Jong Ho Lee

 Apr. 1969 Head of Mobility Business Division Head of Global Business Office

Joon Ho Lee

 Aug. 1968 Head of Social Value Group Head of Public Relation Office 2

Joong Ho Lee

 Nov. 1967 Head of Metropolitan Area Marketing Office Head of Busan Marketing Office

 

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Name

 

Month and

Year of

Birth

 

Position

 

Business Experience

HyunA Lee

 Aug. 1971 Head of AI Service Division Head of Conversational Commerce Division, SK Planet

Bong Ho Lim

 Dec. 1966 Head of Busan Marketing Office Head of Metropolitan Area Marketing Office

Hyoung Do Lim

 Jun. 1968 Head of Change Management Office Head of Policy Cooperation Office

KyoHee Chang

 Feb. 1973 Head of Mobility Technology Unit Leader of Display Advertising Development/Management, Naver

Hong Sung Chang

 Mar. 1969 Head of Advertising/Data Business Division Head of Data Technology Institute

Jinsoo Jeon

 Apr. 1975 Head of 5GX Service Business Office Head of Media Labs

Dae Dug Jeong

 Sept. 1967 Tax, Finance Group Head of Tax Team

Doh Hee Jung

 Sept. 1974 Head of Data Intelligence Group Head of Data CoE Data Analysis Team 2

Jae Hyun Chung

 Dec. 1959 Officer of ICT Advisory Board Head of ICT System TF

Dong Hwan Cho

 Nov. 1970 Head of IT Innovation Center Head of Data CoE

Young Log Cho

 Jun. 1971 Head of CR & Growth Business Support Office Assistant to Head of External Cooperation Office

Yohan Chin

 Nov. 1974 Head of Enterprise AI Platform Group Vice President of Data Science & Engineering, Tapjoy

Jongwhi Cha

 Nov. 1974 Head of Integrated Brand/UX Group Head of UX & Design Lab, Hyundai Card

Zonggeun Chai

 Jul. 1968 Head of Ethics Management Office Head of Compliance Team

Nag Hun Choi

 Nov. 1972 Head of Industrial Data Business Unit Head of IoT Business Support Group

Seung Won Choi

 May 1969 Head of Core Infra Office Head of Eastern Infra Office

Woo Seong Chey

 Jan. 1974 Representative, SK Telecom Japan PL of Unicorn Labs Tokyo Office

Eun Sik Choi

 Feb. 1969 Head of Daegu Marketing Office Head of Distribution Innovation Support Group

Il Gyu Choi

 Nov. 1970 Head of B2B Business Office Head of Public Business Unit

Chang Won Chey

 Aug. 1964 Vice President of SK Research Institute for SUPEX Management Chief Executive Officer, SK Chemical

Pan Chul Choi

 Jan. 1969 Head of Enterprise Business Office Head of Enterprise Business Division Financial Business Team

Seong Ho Ha

 Sept. 1968 Head of Corporate Relations Center Head of Corporate Relations Strategy Office

Hyoung Il Ha

 Aug. 1970 Head of Corporate Center 2 Head of Service Innovation Support Division

Myung-jin Han

 Oct. 1973 Head of MNO Marketing Group Head of Global Alliance Group

Geunman Heo

 Aug. 1966 Head of Infra Engineering Group Head of Gangnam Quality Solution Team

Seok Joon Huh

 May 1973 Head of Private Placement Group Managing Director, L Catterton Asia (Singapore)

Ilkyu Huh

 May 1971 Head of Energy Solution TF Head of IoT/Data Business Division

Eunah Hyun

 Nov. 1974 Strategic Legal Affairs, Legal Group Global Business Support Team, SK Holdings

Seung Gyun Hong

 Nov. 1967 Head of IT DevOps Group Head of IT Innovation Team, IT Infra Division

Eric Hartman Davis

 Oct. 1980 Head of Global AI Development Group Head of Global AI Development Group

Seong Joon Kim

 Jul. 1970 Head of Distribution Office 1 Representative, Service Top

Young Joon Kim

 Sept. 1972 Head of AI Technology Unit Head of AI Technology Unit

 

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Name

 

Month and

Year of

Birth

 

Position

 

Business Experience

Jeong Gyu Kim

 Sept. 1976 Officer of Malaysia Regional HQ PL, Global Business Development, SUPEX Council Project

Ji Soo Park

 Jun. 1976 Head of Talent Development CoE, SUPEX Council Project PL, HR Support Team, SUPEX Council Project

Kyung Sik Oh

 Mar. 1966 Head of Sports Marketing Group Head of Sports Marketing Group

Gap Jae Lee

 Feb. 1973 Head of Central Regional Marketing Office Head of Central Regional Marketing Office

Chang Kwon Jeong

 Jul. 1970 Head of Western Infra Office Head of Infra Engineering Group

Jeong Hwan Choi

 Jun. 1968 Head of Investor Relations Office 2 Investor Relations, Corporate Development Center

Min Yong Ha

 Sept. 1970 Head of Business Planning Group 2 Head of Global Alliance Group

Chang Gook Ko

 Jan. 1966 Officer of PR Team, SUPEX Council Project Head of CPR Office 1, SK C&C

 

Item 6.B.

Compensation

The aggregate of the remuneration paid andin-kind benefits granted to our directors (all standing directors, who also serve as our executive officers, andnon-standing directors) during the year ended December 31, 2019 totaled approximately Won 6.0 billion.

The compensation of our directors who received total annual compensation exceeding Won 500 million in 2019 was as follows:

 

Name

 

Position

 Composition of Total Compensation  Total
Compensation
 
 Salary  Bonus  Other Earned
Income
  Severance 
    (in millions of Won) 

Jung Ho Park

 Executive Director, President and Chief Executive Officer  1,300   3,228   3      4,531 

Young Sang Ryu

 Executive Director and Head of MNO Business  460   553   4      1,017 

Remuneration for our directors is determined by shareholder resolution. Severance allowances for our directors are determined by the board of directors in accordance with our regulation on severance allowances for officers, which was adopted by shareholder resolution. The regulation provides for monthly salary, performance bonus, severance payment and fringe benefits. The amount of performance bonuses is independently decided by a resolution of the board of directors.

The aggregate of the remuneration paid andin-kind benefits granted to our executive officers (excluding all standing directors, who also serve as our executive officers) during the year ended December 31, 2019 totaled approximately Won 42.5 billion.

 

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The compensation of the five individuals who received the highest compensation among those who received total annual compensation exceeding Won 500 million in 2019 was as follows:

 

Name

  

Position

 Composition of Total Compensation  Total
Compensation
 
 Salary  Bonus  Other Earned
Income
  Severance 
     (in millions of Won) 

Jung Ho Park

  Executive Director, President and Chief Executive Officer 1,300  3,228  3    4,531 

Jin Woo So

  Chairman of Talent Development Committee, SUPEX Council Project  830   1,137   5      1,972 

Garth Moon

  Former Officer of Self-Management·Responsible Management Support Team, SUPEX Council Project  662   727   44      1,433 

Sung Won Suh

  Former Head of MNO Business  700   710   6      1,416 

Yong-Seop Yum

  Head of SK Research Institute for SUPEX Management  515   505   2      1,022 

On February 22, 2019, our board of directors resolved to grant options to purchase shares of our common stock to certain directors and executive officers, which was approved by shareholder resolution on March 26, 2019. On February 20, 2020, our board of directors resolved to grant options to purchase shares of our common stock to certain directors and executive officers, which was approved by shareholder resolution on March 26, 2020. The following table summarizes the exercisable stock options granted to our directors and executive officers as of March 31, 2020:

 

Recipient

 Position Grant date Exercise period Exercise price
(per share)
  Number of
shares issuable
 
 From To

Jung Ho Park

 Executive Director,
President and
Chief Executive
Officer
 March 24, 2017 March 25, 2019 March 24, 2022 246,750   22,168 
 March 25, 2020 March 24, 2023  266,490   22,168 
 March 25, 2021 March 24, 2024  287,810   22,168 
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   111,106 

Young Sang Ryu

 Executive Director
and Head of MNO
Business
 February 20, 2018 February 21, 2020 February 20, 2023  254,120   1,358 
 March 26, 2019 March 27, 2021 March 26, 2024  254,310   1,734 
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   2,353 

Seong Ho Ha

 Head of Corporate
Relations Center
 February 22, 2019 February 23, 2021 February 22, 2024  265,260   1,369 
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,656 

Hyoung Il Ha

 Head of Corporate
Center 2
 February 22, 2019 February 23, 2021 February 22, 2024  265,260   1,564 
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,961 

Poong Young Yoon

 Head of Corporate
Center 1
 February 22, 2019 February 23, 2021 February 22, 2024  265,260   1,244 
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,743 

Jong Ryeol Kang

 Head of ICT Infra
Center
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   2,048 

Yoon Kim

 Head of AIX
Center
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,874 

Seok Joon Huh

 Head of Private
Placement Group
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,852 

Dong Hwan Cho

 Head of IT
Innovation Center
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,525 

HyunA Lee

 Head of AI Service
Unit
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,525 

 

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Item 6.C.

Board Practices

For information regarding the expiration of each director’s term of appointment, as well as the period from which each director has served in such capacity, see the table set out under “Item 6.A. Directors and Senior Management” above.

Termination of Directors’ Services

Directors are given a retirement and severance payment upon termination of employment in accordance with our internal regulations on severance payments. Upon retirement, directors who have made significant contributions to our company during their term may be appointed to serve either as an advisor to us or as an officer of an affiliate company.

Audit Committee

Under relevant Korean laws and our articles of incorporation, we are required to have an audit committee under the board of directors. The committee is composed of at least three members,two-thirds of whom must be independentnon-executive directors in accordance with applicable rules. The members of the audit committee are appointed annually by a resolution of the general meeting of shareholders. They are required to:

 

  

examine the agenda for the general meeting of shareholders;

 

  

examine financial statements and other reports to be submitted by the board of directors to the general meeting of shareholders;

 

  

review the administration by the board of directors of our affairs; and

 

  

examine the operations and asset status of us and our subsidiaries.

In addition, the audit committee must appoint independent auditors to examine our financial statements. An audit and review of our financial statements by independent auditors is required for the purposes of a securities report. Listed companies must provide such report on an annual, semi-annual and quarterly basis to the FSC and the KRX KOSPI Market.

Our audit committee is composed of four independentnon-executive directors: Seok-Dong Kim,Yong-Hak Kim, Jung Ho Ahn and Youngmin Yoon, each of whom is financially literate and independent under the rules of the NYSE as applicable. The board of directors has determined that Seok-Dong Kim is an “audit committee financial expert” as defined under the applicable rules of the SEC. See “Item 16A. Audit Committee Financial Expert.”

Independent Director Nomination Committee

This committee is devoted to recommending independentnon-executive directors for the board of directors. The objective of the committee is to help promote fairness and transparency in the nomination of candidates for these positions. The board of directors decides from time to time who will comprise the members of this committee. The committee is comprised of one executive director, Jung Ho Park, and two independent directors, Seok-Dong Kim and Jung Ho Ahn.

Capex Review Committee

This committee is responsible for reviewing our business plan (including the budget). It also examines major capital expenditure revisions, and routinely monitors capital expenditure decisions that have already been executed. The committee is comprised of one executive director, Young Sang Ryu, and five independent directors,Yong-Hak Kim, Seok-Dong Kim, Jung Ho Ahn and Youngmin Yoon and Junmo Kim.

Compensation Review Committee

This committee oversees our overall compensation scheme fortop-level executives and directors. It is responsible for reviewing both the criteria for and level of compensation. It is comprised of three independent directors,Yong-Hak Kim, Seok-Dong Kim and Junmo Kim.

 

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Corporate Citizenship Committee

This committee was established to help us achieve world-class sustainable growth and to help us fulfill our corporate social responsibilities. It is comprised of three independent directors, Jung Ho Ahn and Youngmin Yoon and Junmo Kim.

 

Item 6.D.

Employees

The following table sets forth the numbers of our regular employees, temporary employees and total employees as of the dates indicated:

 

   Regular
Employees
   Temporary
Employees
   Total 

December 31, 2017

   29,450    1,158    30,608 

December 31, 2018

   33,999    5,910    39,909 

December 31, 2019

   34,548    5,995    40,543 

Labor Relations

As of December 31, 2019, SK Telecom had a company union consisting of 2,612 regular employees out of 5,172 total regular employees. We have never experienced a work stoppage of a serious nature. Every two years, the union and management negotiate and enter into a new collective bargaining agreement that has atwo-year duration, which is focused on employee benefits and welfare. Employee wages are separately negotiated on an annual basis. Our wage negotiations for 2017 were completed in November 2017 and resulted in an average monthly wage increase of 3% for SK Telecom employees. Our wage negotiations for 2018 were completed in September 2018 and resulted in an average monthly wage increase of 2.5% for SK Telecom employees. Our wage negotiations for 2019 were completed in September 2019 and resulted in an average monthly wage increase of 2.0% for SK Telecom employees. Our wage negotiations for 2020 have not commenced yet. We consider our relations with our employees to be good.

Employee Benefits

Since April 1999, we have been required to contribute an amount equal to 4.5% of employee wages toward a national pension plan. Employees are eligible to participate in an employee stock ownership association. We are not required to, and we do not, make any contributions to the employee stock ownership association, although we subsidize the employee stock ownership association through the Employee Welfare Fund by providing low interest rate loans to employees who desire to purchase our stock through the plan in the event of a capitalization by the association.

We are required to pay a severance amount to eligible employees who voluntarily or involuntarily cease employment with us, including through retirement. This severance amount is based upon the employee’s length of service with us and the employee’s salary level at the time of severance. As of December 31, 2019, the defined benefit obligation, which is the accrued and unpaid retirement and severance benefits, of Won 1,136.8 billion for all of our employees are reflected in our consolidated financial statements as a liability, of which a total of Won 965.7 billion was funded. Under Korean laws and regulations, we are prevented from involuntarily terminating a full-time employee except under certain limited circumstances. In September 2000, we entered into an employment stabilization agreement with the union. Among other things, in the event that we reorganize a department into a separate entity or we outsource an employee to a separate entity where the wage is lower, this agreement provides for a guarantee of the same wage level for the year that such an event occurs.

Under the Basic Labor Welfare Act, we may also contribute up to 5.0% of our annual earnings before tax for employee welfare. Contribution amounts are determined annually following negotiation with the union. The contribution amount for 2019 was set at 3.63% of SK Telecom’s profit before income tax on a separate basis, or Won 43.0 billion. The contribution amount for 2018 was set at 3.52% of SK Telecom’s profit before income tax on a separate basis, or Won 43.0 billion.The contribution amount for 2017 was set at 2.49% of SK Telecom’s profit before income tax on a separate basis, or Won 40.0 billion.

 

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In addition, we provide our employees with miscellaneous other fringe benefits including medical cost subsidies, family camp programs and sabbatical programs for long-term employees.

 

Item 6.E.

Share Ownership

The following table sets forth the share ownership by our directors and executive officers as of March 31, 2020:

 

Name

 

Position

 Number of
Shares
Owned
  Percentage of
Total Shares
Outstanding
  Special
Voting
Rights
  Options 

Directors:

     

Jung Ho Park

 Executive Director, President and Chief Executive Officer  2,500   *   None   177,610 

Young Sang Ryu

 Executive Director and Head of MNO Business  500   *   None   5,445 

Executive Officers:

     

Jong Ryeol Kang

 Head of ICT Infra Center  584   *   None   2,048 

Ilung Kim

 Officer of ICT Advisory Board  1,000   *   None    

Jeong Bok Kim

 Head of Metropolitan Infra Office  273   *   None    

Hyeon Kook Kim

 Head of Western Regional Marketing Office  200   *   None    

Jin Soo Seong

 Head of Infra Solution Group  586   *   None    

Yongsik Shin

 Head of Massive IoT Business Office  128   *   None    

Jeong Yeol Ahn

 Head of Supply Chain Management Group 1  271   *   None    

Ji Young Yeo

 Head of Open Collaboration Group  116   *   None    

Kiyoon Lee

 Head of Customer Value Innovation Office  465   *   None    

Sang Heon Lee

 Head of Policy Development Office  177   *   None    

Hyoung Do Lim

 Head of Change Management Office  175   *   None    

Zonggeun Chai

 Head of Ethics Management Office  500   *   None    

Sukham Sung

 Growth Business Support, CR & Growth Business Support Office  225   *   None    

Jeong Hwan Choi

 Head of Investor Relations Office 2  300   *   None    

Byung Hoon Ryu

 Head of Management Strategy Group  300   *   None    

Myung-jin Han

 Head of MNO Marketing Group  500   *   None    

Jiwon Kim

 Head ofT-Brain Team  100   *   None    

Yong Joo Park

 Head of Legal Group  700   *   None    

Sang Kyu Shin

 Head of Corporate Culture Center  200   *   None    

Jong Ho Lee

 Head of Mobility Business Division  300   *   None    

Jinsoo Jeon

 Head of 5GX Service Business Office  500   *   None    

Seung Won Choi

 Head of Core Infra Office  300   *   None    

Nag Hun Choi

 Head of Industrial Data Business Unit  300   *   None    

Sung Eun Yoon

 Head of CR Innovation TF  200   *   None    

Hyuk Kim

 Head of 5GX Media Business Group  200   *   None    

Chang Kwon Chung

 Head of Western Infra Office  300   *   None    

Dae Dug Jeong

 Tax, Finance Group  200   *   None    

Kyung Sik Oh

 Head of Sports Marketing Group  200   *   None    

Young Log Cho

 Head of CR & Growth Business Support Office  450   *   None    

Sung Jin Yeum

 CR Support, CR & Growth Business Support Office  500   *   None    

Jung Hwan Ryu

 Head of 5GX Infra Group  300   *   None    

Gyeong Nam Kim

 Head of Security Labs  106   *   None    

Jong Suk Park

 Head of Business Planning Group 1  300   *   None    

Jinwon Kim

 Head of Financial Strategy & Management Group  500   *   None    

Seong Ho Ha

 Head of Corporate Relations Center  500   *   None   3,025 

Hyoung Il Ha

 Head of Corporate Center 2  500   *   None   3,525 

Poong Young Yoon

 Head of Corporate Center 1  500   *   None   2,987 

 

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Name

 

Position

 Number of
Shares
Owned
  Percentage of
Total Shares
Outstanding
  Special
Voting
Rights
  Options 

Yoon Kim

 Head of AIX Center  500   *   None   1,874 

Seok Joon Huh

 Head of Private Placement Group  500   *   None   1,852 

Dong Hwan Cho

 Head of IT Innovation Center  500   *   None   1,525 

HyunA Kim

 Head of AI Service Unit        None   1,525 
  

 

 

  

 

 

   

 

 

 

Total

  17,456   *    202,416 

 

 

*

Less than 1%.

See “Item 6.B. Compensation” for information regarding the exercisable stock options granted to our directors and executive officers.

 

Item 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

Item 7.A.

Major Shareholders

As of the close of our shareholders’ registry on December 31, 2019, approximately 62.8% of our issued shares were held in Korea by approximately 69,000 shareholders. According to Citibank, N.A. (“Citibank”), depositary for our ADRs, as of December 31, 2019, there were at least 100 record holders of our ADRs evidencing ADSs resident in the United States to the best of Citibank’s knowledge, and 7,883,904 shares of our common stock were held in the form of ADSs.As of such date, outstanding ADSs represented approximately 9.8% of our outstanding common shares.

The following table sets forth certain information as of December 31, 2019 with respect to any person known to us to be the beneficial owner of more than 5.0% of our common shares:

 

Shareholder

  Number of
Shares
   Percentage of
Total Shares
Issued(2)
  Percentage of
Total Shares

Outstanding(3)
 

SK Holdings

   21,624,120    26.8  29.6

National Pension Service

   8,982,136    11.1   12.3 

Treasury shares(1)

   7,609,263    9.4    

 

 

(1)

Treasury shares do not have any voting rights. In November 2019, we sold 1,266,620 treasury shares to Kakao for approximately Won 300.0 billion.

 

(2)

Calculated based on 80,745,711 total issued shares, which include 7,609,263 treasury shares, as of December 31, 2019.

 

(3)

Calculated based on 73,136,448 total outstanding shares as of December 31, 2019.

The following table sets forth significant changes in the percentage ownership held by our major shareholders during the past three years:

 

   As of December 31, 

Shareholder

  2019  2018  2017 
   

(As a percentage of total

issued shares)(1)

 

SK Group(2)

   26.8  26.8  25.2

SK Holdings

   26.8   26.8   25.2 

National Pension Service

   11.1   9.8   9.2 

 

 

(1)

Includes 7,609,263 shares, 8,875,883 shares and 10,136,551 shares held in treasury as of December 31, 2019, 2018 and 2017, respectively. In December 2018, we exchanged 1,260,668 treasury shares for all of the outstanding common shares of SK Infosec in a share exchange transaction with SK Holdings. In November 2019, we sold 1,266,620 treasury shares to Kakao for approximately Won 300.0 billion.

 

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(2)

SK Group’s ownership interest as of December 31, 2019, 2018 and 2017 consisted of the ownership interest of SK Holdings only.

Except as described above, other than companies in the SK Group, no other persons or entities known by us to be acting in concert, directly or indirectly, jointly or severally, own in excess of 5.0% of our total shares outstanding or exercise control or could exercise control over our business.

As of March 31, 2020, SK Holdings held 26.8% of our total issued shares of common stock. For a description of our foreign ownership limitation, see “Item 3.D. Risk Factors — Risks Relating to Our Business — If SK Holdings causes us to breach the foreign ownership limitations on our common shares, we may experience a change of control.” and “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements.” In the event that SK Holdings announces plans of a sale of our shares, we expect to be able to discuss the details of such sale with them in advance and will endeavor to minimize any adverse effects on our share prices as a result of such sale.

As of March 31, 2020, the total number of our common shares outstanding was 73,136,448.

Other than as disclosed herein, there are no other arrangements, to the best of our knowledge, which would result in a material change in the control of us. Our major shareholders do not have different voting rights.

 

Item 7.B.

Related Party Transactions

We are part of the SK Group of affiliated companies. See “Item 7.A. Major Shareholders.” As disclosed in note 36 of the notes to our consolidated financial statements, we had related party transactions with a number of affiliated companies of the SK Group during the year ended December 31, 2019.

SK Networks

As of December 31, 2019, we had Won 3.5 billion of accounts receivable from SK Networks. As of the same date, we had Won 85.4 billion of accounts payable to SK Networks, mainly relating to payments for wireless devices by PS&Marketing. The aggregate fees we paid to SK Networks for dealer commissions amounted to Won 1,088.4 billion in 2019, Won 1,189.4 billionin 2018 and Won 1,220.3 billion in 2017.

SK Holdings

We enter into agreements with SK Holdings from time to time for specific information technology-related projects, and we also pay SK Holdings for use of the SK brand. The aggregate fees we paid to SK Holdings for such information technology services and the use of the SK brand amounted to Won 396.0 billion in 2019, Won 397.5 billion in 2018 and Won 397.0 billion in 2017. We also purchase various information technology-related equipment from SK Holdings from time to time. The total amount of such purchases was Won 95.4 billion in 2019, Won 151.5 billion in 2018 and Won 283.6 billion in 2017. We are a party to several service agreements with SK Holdings relating to the development and maintenance of our information technologies systems.

In December 2018, we acquired SK Infosec from SK Holdings in a share exchange transaction, pursuant to which we transferred 1,260,668 treasury shares with an aggregate book value of Won 281.2 billion to SK Holdings in exchange for all of the issued and outstanding common shares of SK Infosec.

SK TNS

SK TNS Co., Ltd. (“SK TNS”) provides us with network construction and maintenance services and related equipment. The total amount of network equipment purchased from SK TNS was Won 607.5 billion in 2019, Won 493.8 billion in 2018 and Won 494.6 billion in 2017. As of December 31, 2019, we had Won 200.7 billion of accounts payable to SK TNS, mainly relating to payments for such services and equipment.

 

Item 7.C.

Interests of Experts and Counsel

Not applicable.

 

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Item 8.

FINANCIAL INFORMATION

 

Item 8.A.

Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pagesF-1 throughG-94.

Legal Proceedings

FTC Proceedings

In March 2012, the FTC fined us Won 21.9 billionfor allegedly colluding with KT, LG U+, Samsung Electronics, LG Electronics and Pantech (which were also assessed separate fines) to inflate the prices of handsets while advertising that the handsets are offered at a discount through subsidy plans. We paid such fine in September 2012 and filed an appeal at the Seoul High Court, which ruled against us in October 2014, and subsequently to the Supreme Court of Korea, which also ruled against us in September 2019.

KCC Proceedings

On March 21, 2017, the KCC imposed a fine of Won 794 million on us for providing subsidies to foreign subscribers in excess of the amounts permitted under the MDDIA. On December 6, 2017, the KCC issued a correctional order relating to restrictions on cancelling broadband Internet and bundled service subscriptions.

On January 24, 2018, the KCC imposed an aggregate fine of Won 21.4 billion on us for providing discriminatory subsidies in violation of the MDDIA.

On March 20, 2019, the KCC imposed a fine of Won 975 million on us and issued a correctional order for providing discriminatory subsidies in violation of the MDDIA. On June 26, 2019, the KCC imposed a fine of Won 231 million on us and issued a correctional order relating to restrictions on subscription cancelations. On July 9, 2019, the KCC imposed a fine of Won 1.5 million on us and issued a correctional order for failing to maintain the amount of subsidies for the minimum period in violation of the MDDIA.

With respect to the correctional orders issued by the KCC set forth above, we have implemented remedial measures pursuant to such correctional orders and reported to the KCC on the implementation of such measures.

We, KT and LG U+ are currently under investigation by the KCC for allegedly providing handset subsidies that were in excess of their officially announced amounts and were discriminatory in nature, as well as allegedly unlawfully requiring subscribers to enroll to certain subscription plans or purchase certain value-added services in return, in connection with attracting new subscribers of 5G wireless services during the period between April 2019 and August 2019. While the results of such investigation are still pending, the KCC may impose a significant amount of fine on us in connection with such alleged activities.

Except as described above, neither we nor any of our subsidiaries are involved in any litigation, arbitration or administrative proceedings relating to claims which may have, or have had during the twelve months preceding the date hereof, a significant effect on our financial position or the financial position of our subsidiaries taken as a whole, and, so far as we are aware, no such litigation, arbitration or administrative proceedings are pending or threatened.

Dividends

Annual dividends, if any, on our outstanding shares must be approved at the annual general meeting of shareholders. This meeting is generally held in March of the following year, and the annual dividend is generally paid shortly after the meeting. Since our shareholders have discretion to declare annual dividends, we cannot give any assurance as to the amount of dividends per share or that any dividends will be declared at all. Interim dividends, if any, can be approved by a resolution of our board of directors. Once declared, dividends must be claimed within five years, after which the right to receive the dividends is extinguished and reverted to us.

We pay cash dividends to the ADR depositary in Won. Under the terms of the deposit agreement, cash dividends received by the ADR depositary generally are to be converted by the ADR depositary into Dollars and distributed to the holders of the ADSs, less withholding tax, other governmental charges and the ADR depositary’s

 

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fees and expenses. The ADR depositary’s designated bank in Korea must approve this conversion and remittance of cash dividends. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

The following table sets forth the dividend per share and the aggregate total amount of dividends declared (including any interim dividends), as well as the number of outstanding shares entitled to dividends, with respect to the years indicated. The dividends set out for each of the years below were paid in the immediately following year.

 

Year Ended December 31,

  Dividend
per Share
   Total Amount of
Dividends
   Number of
Shares Entitled
to Dividend
 
   (In Won)   (In billions of Won)     

2015

  10,000   708.1    70,609,160(1) 

2016

   10,000    706.1    70,609,160 

2017

   10,000    706.1    70,609,160 

2018

   10,000    717.4    71,869,828(2) 

2019

   10,000    730.1    73,136,448(3) 

 

 

(1)

The number of shares entitled to the interim dividend was 72,629,160.

 

(2)

The number of shares entitled to the interim dividend was 70,609,160.

 

(3)

The number of shares entitled to the interim dividend was 71,869,828.

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. Our common shares represented by the ADSs have the same dividend rights as other outstanding common shares.

Holders ofnon-voting shares are entitled to receive dividends in priority to the holders of common shares. The dividend on thenon-voting shares is between 9.0% and 25.0% of the par value as determined by the board of directors at the time of their issuance. If the dividends for common shares exceed the dividends fornon-voting shares, the holders ofnon-voting shares will be entitled to participate in the distribution of such excess amount with the holders of common shares. If the amount available for dividends is less than the aggregate amount of the minimum required dividend, holders ofnon-voting shares will be entitled to receive such accumulated unpaid dividend from dividends payable in the next fiscal year before holders of common shares. There are nonon-voting shares issued or outstanding.

We declare dividends annually at the annual general meeting of shareholders which is generally held within three months after the end of the fiscal year. We pay the annual dividend shortly after the annual general meeting to the shareholders of record or registered pledges as of the end of the preceding fiscal year. We may distribute the annual dividend in cash or in shares. However, a dividend of shares must be distributed at par value. Dividends in shares may not exceedone-half of the annual dividend. Our obligation to pay dividend expires if no claim to dividend is made for five years from the payment date.

Under the Korean Commercial Code, we may pay an annual dividend only out of the excess of our net assets, on anon-consolidated basis, over the sum of (1) our stated capital, (2) the total amount of our capital surplus reserve, (3) legal reserve accumulated up to the end of the relevant dividend period and (4) the increase in our net asset value resulting from the evaluation of our assets and liabilities that has not been offset against unrealized losses. In addition, we may not pay an annual dividend unless we have set aside as a legal reserve an amount equal to at least 10.0% of the cash portion of the annual dividend or until we have accumulated a legal reserve of not less thanone-half of our stated capital. We may not use our legal reserve to pay cash dividends but may transfer amounts from our legal reserve to capital stock or use our legal reserve to reduce an accumulated deficit.

In addition, the Korean Commercial Code and our articles of incorporation provide that, in addition to annual dividends, we may pay interim dividends once during each fiscal year. Unlike annual dividends, the decision to pay interim dividends can be made by a resolution of the board of directors and is not subject to shareholder approval. Any interim dividends must be paid in cash to the shareholders of record as of June 30 of the relevant fiscal year.

Under the Korean Commercial Code, the total amount of interim dividends payable in a fiscal year shall not be more than the net assets on the balance sheet of the immediately preceding fiscal year, after deducting (1) a

 

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company’s capital in the immediately preceding fiscal year, (2) the aggregate amount of its capital reserves and legal reserves accumulated up to the immediately preceding fiscal year, (3) the amount of earnings for dividend payments confirmed at the general shareholders’ meeting with respect to the immediately preceding fiscal year and (4) the amount of legal reserve that should be set aside for the current fiscal year following the interim dividend payment. Furthermore, the rate of interim dividends fornon-voting shares must be the same as that for our common shares.

Our obligation to pay interim dividends expires if no claims to such dividends are made for a period of five years from the payment date.

 

Item 8.B.

Significant Changes

None.

 

Item 9.

THE OFFER AND LISTING

 

Item 9.A.

Offering and Listing Details

These matters are described under “Item 9.C. Markets” below where relevant.

 

Item 9.B.

Plan of Distribution

Not applicable.

 

Item 9.C.

Markets

The principal trading market for our common shares is the KRX KOSPI Market. Our common shares are traded on the KRX KOSPI Market under the identification code 017670. As of March 31, 2020, 73,136,448 shares of our common stock were outstanding.

The ADSs are traded on the NYSE and the London Stock Exchange. The ADSs have been issued by the ADR depositary and are traded on the NYSE under the ticker symbol “SKM.” Each ADS representsone-ninth of one share of our common stock. As of March 31, 2020, ADSs representing 7,982,904 shares of our common stock were outstanding.

 

Item 9.D.

Selling Shareholders

Not applicable.

 

Item 9.E.

Dilution

Not applicable.

 

Item 9.F.

Expenses of the Issue

Not applicable.

 

Item 10.

ADDITIONAL INFORMATION

 

Item 10.A.

Share Capital

Not applicable.

 

Item 10.B.

Memorandum and Articles of Association

Description of Capital Stock

This section provides information relating to our capital stock, including brief summaries of material provisions of our articles of incorporation, the FSCMA, the Korean Commercial Code, the Telecommunications Business Act and related laws of Korea, all as currently in effect. The following summaries are subject to, and are

 

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qualified in their entirety by reference to, our articles of incorporation and the applicable provisions of the FSCMA, the Korean Commercial Code and the Telecommunications Business Act. We have filed a copy of our articles of incorporation as an exhibit to our annual reports onForm 20-F.

General

The name of our company is SK Telecom Co., Ltd. We are registered under the laws of Korea under the commercial registry number of 110111-0371346. As specified in Article 2 (Objectives) of our articles of incorporation, as amended, our objectives are the rational management of the telecommunications business, development of telecommunications technology, and contribution to public welfare and convenience.In order to achieve these objectives, we are engaged in the following:

 

  

information and communication business;

 

  

sale and lease of subscriber handsets;

 

  

new media business;

 

  

advertising business;

 

  

mail order sales business;

 

  

real estate business (development, management and leasing, etc.) and chattel leasing business;

 

  

research and technology development relating to the first four items above;

 

  

overseas and import/export business relating to the first four items above;

 

  

manufacture and distribution business relating to the first four items above;

 

  

travel business;

 

  

electronic financial services business;

 

  

film business (production, import, distribution and screening);

 

  

lifetime education and management of lifetime educational facilities;

 

  

electric engineering business;

 

  

information- and communication-related engineering business;

 

  

ubiquitous city construction and related service business;

 

  

any related business through investment, management and operation of our Korean or offshore subsidiaries and investment companies;

 

  

construction business, including the machine and equipment business;

 

  

export/import business and export/import intermediation/agency business;

 

  

electrical business such as intelligent electrical grid business; and

 

  

any business or undertaking incidental or conducive to the attainment of the objectives stated above.

Currently, our authorized share capital is 220,000,000 shares, which consists of shares of common stock, par value Won 500 per share, and shares ofnon-voting stock, par value Won 500 per share (common shares andnon-voting shares together are referred to as “shares”). Under our articles of incorporation, we are authorized to issue up to 5,500,000non-voting preferred shares. As of March 31, 2020, 80,745,711 common shares were issued, of which 7,609,263 shares were held by us in treasury. In November 2019, we sold 1,266,620 treasury shares to Kakao for approximately Won 300.0 billion. We have never issued anynon-voting preferred shares. All of the issued and outstanding common shares are fully-paid andnon-assessable and are in registered form.

Board of Directors

Meetings of the board of directors are convened by the representative director as he or she deems necessary or upon the request of three or more directors. The board of directors determines all important matters relating to our

 

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business. In addition, the prior approval of the majority of the independentnon-executive directors is required for certain matters, which include:

 

  

investment by us or any of our subsidiaries in a foreign company in equity or acquisition of such foreign company’s other overseas assets in an amount equal to 5.0% or more of our equity under our most recent balance sheet; and

 

  

contribution of capital, loans or guarantees, acquisition of our subsidiaries’ assets or similar transactions with our affiliated companies in excess of Won 10.0 billion through one or a series of transactions.

Resolutions of the board are adopted in the presence of a majority of the directors in office and by the affirmative vote of a majority of the directors present. No director who has an interest in a matter for resolution may exercise his or her vote upon such matter.

There are no specific shareholding requirements for director’s qualification. Directors are elected at a general meeting of shareholders if the approval of the holders of the majority of the voting shares present at such meeting is obtained and if such majority also represents at leastone-fourth of the total number of shares outstanding. Under the Korean Commercial Code, unless otherwise stated in the articles of incorporation, holders of an aggregate of 1.0% or more of the outstanding shares with voting rights may request cumulative voting in any election for two or more directors. Our articles of incorporation permit cumulative voting for the election of directors.

The term of office for directors is until the close of the third annual general shareholders meeting convened after he or she commences his or her term. Our directors may serve consecutive terms and our shareholders may remove them from office at any time by a special resolution adopted at a general meeting of shareholders.

Dividends

We distribute dividends to our shareholders in proportion to the number of shares owned by each shareholder. Our common shares represented by the ADSs have the same dividend rights as other outstanding common shares. For a detailed discussion of our dividend policy, see “Item 8.A. Consolidated Statements and Other Financial Information — Dividends.”

Distribution of Free Shares

In addition to paying dividends in shares out of our retained or current earnings, we may also distribute to our shareholders an amount transferred from our capital surplus or legal reserve to our stated capital in the form of free shares. We must distribute such free shares to all our shareholders in proportion to their existing shareholdings.

Preemptive Rights and Issuance of Additional Shares

We may at times issue authorized but unissued shares, unless otherwise provided in the Korean Commercial Code, on terms determined by our board of directors. All our shareholders are generally entitled to subscribe to any newly-issued shares in proportion to their existing shareholdings. We must offer new shares on uniform terms to all shareholders who have preemptive rights and are listed on our shareholders’ registry as of the relevant record date. We must give public notice of the preemptive rights regarding new shares and their transferability at least two weeks before the relevant record date. Our board of directors may determine how to distribute shares for which preemptive rights have not been exercised or where fractions of shares occur.

Under the Korean Commercial Code and our articles of incorporation, we may issue new shares pursuant to a board resolution to persons other than existing shareholders only if (1) the new shares are issued for the purpose of issuing depositary receipts in accordance with the relevant regulations or through an offering to public investors and (2) the purpose of such issuance is deemed necessary by us to achieve a business purpose, including, but not limited to, the introduction of new technology or the improvement of our financial condition. If we make an allotment of new shares to persons other than our existing shareholders, we are required by the Korean Commercial Code to notify our existing shareholders of (a) the class and number of new shares, (b) the issuance price of new shares and the date set for the payment thereof, (c) in cases of no par value shares, the amount to be included in thepaid-up capital out of the issuance price of new shares and (d) the method of subscription to new shares by no later than two

 

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weeks before the date of payment of the subscription price, or publicly announce such information. Under our articles of incorporation, only our board of directors is authorized to set the terms and conditions with respect to such issuance of new shares.

In addition, under our articles of incorporation, we may issue convertible bonds or bonds with warrants, each up to an aggregate principal amount of Won 400.0 billion, to persons other than existing shareholders, where such issuance is deemed necessary by us to achieve a business purpose, including, but not limited to, the introduction of new technology or the improvement of our financial condition.

Members of our employee stock ownership association, whether or not they are our shareholders, generally have a preemptive right to subscribe for up to 20.0% of the shares publicly offered pursuant to the FSCMA. This right is exercisable only to the extent that the total number of shares so acquired and held by members of our employee stock ownership association does not exceed 20.0% of the sum of the number of shares then outstanding and the number of newly-issued shares.

General Meeting of Shareholders

We generally hold the annual general meeting of shareholders within three months after the end of each fiscal year. Subject to a board resolution or court approval, we may hold an extraordinary general meeting of shareholders:

 

  

as necessary;

 

  

at the request of holders of an aggregate of 3.0% or more of our outstanding common shares;

 

  

at the request of shareholders holding an aggregate of 1.5% or more of our outstanding shares and preferred shares for at least six months; or

 

  

at the request of our audit committee.

Holders ofnon-voting preferred shares may request a general meeting of shareholders only after thenon-voting shares become entitled to vote or “enfranchised,” as described under “— Voting Rights” below.

We must give shareholders written notice setting out the date, place and agenda of the meeting at least two weeks before the date of the general meeting of shareholders. However, for holders of less than 1.0% of the total number of issued and outstanding voting shares, we may give notice by placing at least two public notices in at least two daily newspapers at least two weeks in advance of the meeting. Currently, we use The Korea Economic Daily News and Maeil Business Newspaper, both published in Seoul, for this purpose, but we may give notice in the future through electronic means. Shareholders who are not on the shareholders’ registry as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at the meeting. Holders ofnon-voting preferred shares, unless enfranchised, are not entitled to receive notice of or vote at general meetings of shareholders.

Our general meetings of shareholders have historically been held in or near Seoul.

Voting Rights

Holders of our common shares are entitled to one vote for each common share, except that voting rights of common shares held by us (including treasury shares and shares held by bank trust funds controlled by us), or by a corporate shareholder in which we own more than 10.0% equity interest, either directly or indirectly, may not be exercised. The Korean Commercial Code, unless otherwise stated in the articles of incorporation, permits cumulative voting, which would allow each shareholder to have multiple voting rights corresponding to the number of directors to be appointed in the voting and to exercise all voting rights cumulatively to elect one director. Our articles of incorporation permit cumulative voting for the election of directors.

Our shareholders may adopt resolutions at a general meeting by an affirmative majority vote of the voting shares present or represented at the meeting if such affirmative votes also represent at leastone-fourth of our total voting shares then issued and outstanding. However, under the Korean Commercial Code and our articles of incorporation, the following matters, among others, require approval by the holders of at leasttwo-thirds of the

 

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voting shares present or represented at a meeting, and such affirmative votes must also represent at leastone-third of our total voting shares then issued and outstanding:

 

  

amending our articles of incorporation;

 

  

removing a director;

 

  

effecting any dissolution, merger or consolidation of us;

 

  

transferring the whole or any significant part of our business;

 

  

effecting our acquisition of all of the business of any other company or a part of the business of any other company having a material effect on our business;

 

  

reducing our capital; or

 

  

issuing any new shares at a price lower than their par value.

In general, holders ofnon-voting preferred shares are not entitled to vote on any resolution or receive notice of any general meeting of shareholders.

However, in case of amendments to our articles of incorporation, or any merger or consolidation of us, or in some other cases which affect the rights or interests of thenon-voting preferred shares, approval of the holders ofnon-voting preferred shares is required. We may obtain the approval by a resolution of holders of at leasttwo-thirds of thenon-voting preferred shares present or represented at a class meeting of the holders ofnon-voting preferred shares, where the affirmative votes also represent at leastone-third of our total issued and outstandingnon-voting shares. In addition, if we are unable to pay dividends onnon-voting preferred shares as provided in our articles of incorporation, the holders ofnon-voting shares will become enfranchised and will be entitled to exercise voting rights beginning at the next general meeting of shareholders to be held after the declaration ofnon-payment of dividends is made until such dividends are paid. The holders of enfranchisednon-voting preferred shares will have the same rights as holders of common shares to request, receive notice of, attend and vote at a general meeting of shareholders.

Shareholders may exercise their voting rights by proxy. A shareholder may give proxies only to another shareholder, except that a corporate shareholder may give proxies to its officers or employees.

Holders of ADRs exercise their voting rights through the ADR depositary, an agent of which is the record holder of the underlying common shares. Subject to the provisions of the deposit agreement, ADR holders are entitled to instruct the ADR depositary how to vote our common shares underlying their ADSs.

Limitation on Shareholdings

The Telecommunications Business Act prohibits foreign governments, individuals, and entities (including Korean entities that are deemed foreigners, as discussed below) from owning more than 49.0% of our voting stock. Korean entities whose largest shareholder is a foreign government or a foreigner (together with any of its related parties) that owns 15.0% or more of such Korean entities’ outstanding voting stock are deemed foreigners. A foreigner who has acquired shares of our voting stock in excess of such limitation may not exercise the voting rights with respect to the shares exceeding such limitation and may be subject to the MSIT’s corrective orders.

Rights of Dissenting Shareholders

Under Financial Investment Services and Capital Market Act, in some limited circumstances, including the transfer of all or a significant part of our business or our merger or consolidation with another company (with certain exceptions), dissenting shareholders have the right to require us to purchase their shares. To exercise this right, shareholders, including holders ofnon-voting shares, must submit to us a written notice of their intention to dissent before the general meeting of shareholders. Then, within 20 days after the relevant resolution is passed at a meeting, the dissenting shareholders must request us in writing to purchase their shares. We are obligated to purchase the shares of such dissenting shareholders within one month after the expiration of the20-day period. The purchase price for the shares is required to be determined through negotiation between the dissenting shareholders

 

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and us. If we cannot agree on a price through negotiation, the purchase price will be the average of (1) the weighted average of the daily share prices on the KRX KOSPI Market for thetwo-month period before the date of the adoption of the relevant board resolution, (2) the weighted average of the daily share price on the KRX KOSPI Market for the one month period before the date of the adoption of the relevant resolution and (3) the weighted average of the daily share price on the KRX KOSPI Market for the one week period before the date of the adoption of the relevant resolution. However, a court may determine the purchase price if we or dissenting shareholders do not accept the purchase price.

Registry of Shareholders and Record Dates

Our transfer agent, Kookmin Bank, maintains the register of our shareholders at its office in Seoul, Korea. It records and registers transfers of shares on the register of shareholders.

The record date for annual dividends is December 31. Further, for the purpose of determining the shareholders entitled to some other rights pertaining to the shares, we may set a record date with at least two weeks’ prior public notice by a resolution of our board of directors.

Annual Report

At least one week before the annual general meeting of shareholders, we must make our annual reports and auditednon-consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of annual reports, the auditednon-consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to our shareholders.

Under the FSCMA, we must file with the FSC and the Korea Exchange (1) an annual securities report within 90 days after the end of our fiscal year, (2) amid-year report within 45 days after the end of the first six months of our fiscal year, and (3) quarterly reports within 45 days after the end of the third month and the ninth month of our fiscal year. Copies of these reports are or will be available for public inspection at the FSC and the Korea Exchange.

Transfer of Shares

Under the Korean Commercial Code and the Act on Electronic Registration of Stocks, Bonds, etc., the transfer of shares is effected by registration on the electronic registration ledger. However, to assert shareholders’ rights against us, the transferee must have his or her name, seal and address registered on our registry of shareholders, maintained by our transfer agent. Anon-Korean shareholder may file a sample signature in place of a seal, unless he or she is a citizen of a country with a sealing system similar to that of Korea. In addition, anon-resident shareholder must appoint an agent in Korea authorized to receive notices on his or her behalf and file his or her mailing address in Korea.

Under current Korean regulations, the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and internationally recognized custodians may act as agents and provide related services for foreign shareholders. Certain foreign exchange controls and securities regulations apply to the transfer of shares bynon-residents ornon-Korean citizens. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

Our transfer agent is Kookmin Bank, located at 24,Gukjegeumyung-ro, Yeongdeungpo-gu, Seoul, Korea.

Restrictions Applicable to Shares

Pursuant to the Telecommunications Business Act, the maximum aggregate foreign shareholding in us is limited to 49.0%. See “Item 4.B. Business Overview — Law and Regulation — Foreign Ownership and Investment Restrictions and Requirements.” In addition, certain foreign exchange controls and securities regulations apply to the acquisition of securities bynon-residents ornon-Korean citizens. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

 

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Acquisition of Shares by Us

We may acquire our own shares pursuant to an approval at the general meeting of shareholders, through purchases on the Korea Exchange or a tender offer, or by acquiring the interests in a trust account holding our own shares through agreements with trust companies and asset management companies. The aggregate purchase price for the shares may not exceed the total amount available for distribution as dividends as of the end of the preceding fiscal year less the amount of dividends and mandatory reserves required to be set aside for that fiscal year, subject to certain procedural requirements.

Under the Korean Commercial Code, we may resell or transfer any shares acquired by us to a third party pursuant to an approval by the Board of Directors. In general, corporate entities in which we own a 50.0% or more equity interest may not acquire our common stock. Under the FSCMA, we are subject to certain selling restrictions with respect to the shares acquired by us.

Liquidation Rights

In the event of our liquidation, remaining assets after payment of all debts, liquidation expenses and taxes will be distributed among shareholders in proportion to their shareholdings. Holders ofnon-voting preferred shares have no preference in liquidation. Holders of debt securities have no preference over other creditors in the event of liquidation.

 

Item 10.C.

Material Contracts

We have not entered into any material contracts during the two years immediately preceding the date of this annual report, other than in the ordinary course of our business. For information regarding our agreements and transactions with entities affiliated with the SK Group, see “Item 7.B. Related Party Transactions” and note 36 of the notes to our consolidated financial statements. For a description of certain agreements entered into during the past three years related to our capital commitments and obligations, see “Item 5.B. Liquidity and Capital Resources.”

 

Item 10.D.

Exchange Controls

Korean Foreign Exchange Controls and Securities Regulations

General

The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree, collectively referred to as the Foreign Exchange Transaction Laws, regulate investment in Korean securities bynon-residents and issuance of securities outside Korea by Korean companies.Non-residents may invest in Korean securities pursuant to the Foreign Exchange Transaction Laws. The FSC has also adopted, pursuant to its authority under the FSCMA, regulations that restrict investment by foreigners in Korean securities and regulate issuance of securities outside Korea by Korean companies.

Subject to certain limitations, the MOEF has authority to take the following actions under the Foreign Exchange Transaction Laws:

 

  

if the Government deems it necessary on account of war, armed conflict, natural disaster or grave and sudden and significant changes in domestic or foreign economic circumstances or similar events or circumstances, the MOEF may temporarily suspend performance under any or all foreign exchange transactions, in whole or in part, to which the Foreign Exchange Transaction Laws apply (including suspension of payment and receipt of foreign exchange), impose an obligation to deposit, safe-keep or sell any means of payment to The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies or impose an obligation on a resident that holds a claim against anon-resident to collect such claim to enable the recovery of the relevant debt back to Korea; and

 

  

if the Government concludes that the international balance of payments and international financial markets are experiencing or are likely to experience significant disruption or that the movement of capital between Korea and other countries are likely to adversely affect the Won, exchange rate or other macroeconomic

 

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policies, the MOEF may take action to require any person who intends to effect or effects a capital transaction to deposit all or a portion of the means of payment acquired in such transactions with The Bank of Korea, a foreign exchange stabilization fund, certain other governmental agencies or financial companies.

Under the regulations of the FSC amended on February 4, 2009, (1) if a company listed on the KRX KOSPI Market or a company listed on the KRX KOSDAQ Market has submitted a public disclosure of material matters to a foreign financial investment supervisory authority pursuant to the laws of the foreign jurisdiction, then it must submit a copy of the public disclosure and a Korean translation thereof to the FSC and the Korea Exchange, and (2) if a KRX KOSPI Market-listed company or KRX KOSDAQ Market-listed company is approved for listing on a foreign stock market or determined to bede-listed from the foreign stock market or actually listed on, orde-listed from a foreign stock market, then it must submit a copy of any document, which it submitted to or received from the relevant foreign government, foreign financial investment supervisory authority or the foreign stock market, and a Korean translation thereof to the FSC and the Korea Exchange.

Government Review of Issuances of ADSs

In order for us to issue ADSs in excess of US$30 million, we are required to submit a report to the MOEF with respect to the issuance of the ADSs prior to and after such issuance; provided that such US$30 million threshold amount would be reduced by the aggregate principal amount of any foreign currency loans borrowed, and any securities offered and issued, outside Korea during theone-year period immediately preceding the report’s submission date. The MOEF may at its discretion direct us to take necessary measures to avoid exchange rate fluctuation in connection with its acceptance of report of the issuance of the ADSs.

 

  

Under current Korean laws and regulations, the depositary is required to obtain our prior consent for any proposed deposit of common shares if the number of shares to be deposited in such proposed deposit exceeds the number of common shares initially deposited by us for the issuance of ADSs (including deposits in connection with the initial and all subsequent issuances of ADSs by us or with our consent and stock dividends or other distributions related to the ADSs).

 

  

In addition to such restrictions under Korean laws and regulations, there are also restrictions on the deposits of our common shares for issuance of ADSs. Therefore, a holder of ADRs who surrenders ADRs and withdraws shares may not be permitted subsequently to deposit those shares and obtain ADRs.

We submitted a report to and obtained acceptance thereof by the MOEF for the issuance of ADSs up to an amount corresponding to 24,321,893 common shares. No additional Korean governmental approval is necessary for the issuance of ADSs except that if the total number of our common shares on deposit for conversion into ADSs exceeds 24,321,893 common shares, we may be required to file a report to and obtain acceptance thereof by the MOEF with respect to the increase of such limit and the issuance of additional ADSs.

Reporting Requirements for Holders of Substantial Interests

Under the FSCMA, any person whose direct or beneficial ownership of shares with voting rights, certificates representing the rights to subscribe for shares and equity-related debt securities including convertible bonds and bonds with warrants (collectively referred to as “equity securities”), together with the equity securities beneficially owned by certain related persons or by any person acting in concert with the person, accounts for 5.0% or more of the total outstanding equity securities is required to report the status and purpose (in terms of whether the purpose of shareholding is to affect control over management of the issuer) of the holdings to the FSC and the Korea Exchange within five business days after reaching the 5.0% ownership interest threshold and promptly deliver a copy of such report to the issuer. In addition, any change (1) in the ownership interest subsequent to the report which equals or exceeds 1.0% of the total outstanding equity securities, or (2) in the shareholding purpose is required to be reported to the FSC and the Korea Exchange within five business days from the date of the change. However, the reporting deadline of such reporting requirement is extended for (1) certain professional investors, as specified under the FSCMA, or (2) persons who hold shares for purposes other than management control by up to the tenth day of the month immediately following the last month of the quarter in which the share acquisition or change in their shareholding occurred. Those who reported the purpose of shareholding is to affect control over management of the issuer are prohibited from exercising their voting rights and acquiring additional shares for five days subsequent to the report under the FSCMA.

 

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Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the ownership of unreported equity securities exceeding 5.0%. Furthermore, the FSC may issue an order to dispose of suchnon-reported equity securities.

In addition to the reporting requirements described above, any person whose direct or beneficial ownership of our common shares accounts for 10.0% or more of the total issued and outstanding shares with voting rights (a “major shareholder”) must report the status of his or her shareholding to the Securities and Futures Commission and the Korea Exchange within five business days after he or she becomes a major shareholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Securities and Futures Commission and the Korea Exchange by the fifth business day of any changes in his or her shareholding. Violations of these reporting requirements may subject a person to criminal sanctions, such as fines or imprisonment.

Restrictions Applicable to ADSs

No Korean governmental approval is necessary for the sale and purchase of ADSs in the secondary market outside Korea or for the withdrawal of shares underlying ADSs and the delivery of shares in Korea in connection with the withdrawal, provided that a foreigner who intends to acquire the shares must obtain an investment registration card from the Financial Supervisory Service of Korea (the “FSS”), as described below. The acquisition of the shares by a foreigner must be reported by the foreigner or his or her standing proxy in Korea immediately to the Governor of the FSS (the “Governor”).

Persons who have acquired shares as a result of the withdrawal of shares underlying the ADSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on shares without any further governmental approval.

In addition, we are required to file a securities registration statement with the FSC and such securities registration statement has to become effective pursuant to the FSCMA in order for us to issue shares represented by ADSs, except in certain limited circumstances.

Restrictions Applicable to Shares

As a result of amendments to the Foreign Exchange Transaction Laws and the regulations of the FSC, together referred to as the Investment Rules, adopted in connection with the stock market opening from January 1992 and after that date, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the KRX KOSPI Market or the KRX KOSDAQ Market, unless prohibited by specific laws. Foreign investors may trade shares listed on the KRX KOSPI Market or the KRX KOSDAQ Market only through the KRX KOSPI Market or the KRX KOSDAQ Market, except in limited circumstances, including, among others:

 

  

odd-lot trading of shares;

 

  

acquisition of shares by a foreign company as a result of a merger;

 

  

acquisition or disposal of shares in connection with a tender offer;

 

  

acquisition of shares by exercise of warrant, conversion right under convertible bonds, exchange right under exchangeable bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company (“converted shares”);

 

  

acquisition of shares through exercise of rights under securities issued outside of Korea;

 

  

acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends;

 

  

over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded;

 

  

acquisition of shares by direct investment under the Foreign Investment Promotion Law;

 

  

acquisition and disposal of shares on an overseas stock exchange market, if such shares are simultaneously listed on the KRX KOSPI Market or KRX KOSDAQ Market and such overseas stock exchange;

 

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arm’s length transactions between foreigners in the event all such foreigners belong to an investment group managed by the same person; and

 

  

acquisition and disposal of shares through alternative trading systems.

Forover-the-counter transactions of shares between foreigners outside the KRX KOSPI Market or the KRX KOSDAQ Market for shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, a financial investment company with a brokerage license in Korea must act as an intermediary.Odd-lot trading of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market must involve a financial investment company with a dealing license in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions through borrowing shares from financial investment companies with respect to shares which are subject to a foreign ownership limit.

The Investment Rules require a foreign investor who wishes to invest in shares for the first time on the KRX KOSPI Market or the KRX KOSDAQ Market (including converted shares) and shares being publicly offered for initial listing on the KRX KOSPI Market or the KRX KOSDAQ Market to register its identity with the FSS prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire converted shares with the intention of selling such converted shares within three months from the date of acquisition of the converted shares or who acquire the shares in anover-the-counter transaction or dispose of shares where such acquisition or disposal is deemed to be a foreign direct investment pursuant to the Foreign Investment Promotion Law. Upon registration, the FSS will issue to the foreign investor an investment registration card which must be presented each time the foreign investor opens a brokerage account with a financial investment company or financial institution in Korea. Foreigners eligible to obtain an investment registration card include foreign nationals who have not been residing in Korea for a consecutive period of six months or longer, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by decree promulgated under the FSCMA. All Korean offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea for the purpose of investment registration. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the KRX KOSPI Market or the KRX KOSDAQ Market, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, where a foreign investor acquires or sells shares outside the KRX KOSPI Market and the KRX KOSDAQ Market, such acquisition or sale of shares must be reported by the foreign investor or such foreign investor’s standing proxy to the Governor at the time of each such acquisition or sale; provided, however, that a foreign investor must ensure that any acquisition or sale of shares outside the KRX KOSPI Market or the KRX KOSDAQ Market in the case of trades in connection with a tender offer,odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor by the Korea Securities Depository, financial investment companies with a dealing or brokerage license or securities finance companies engaged to facilitate such transaction. In the event a foreign investor desires to acquire or sell shares outside the KRX KOSPI Market or the KRX KOSDAQ Market and the circumstances in connection with such sale or acquisition do not fall within the exceptions made for certain limited circumstances described above, then the foreign investor must obtain the prior approval of the Governor. In addition, in the event a foreign investor acquires or sells shares outside the KRX KOSPI Market or the KRX KOSDAQ Market, a prior report to the Bank of Korea may also be required in certain circumstances. A foreign investor must appoint one or more standing proxies among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and certain eligible foreign custodians which will act as a standing proxy to exercise shareholders’ rights, or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. Generally, a foreign investor may not permit any person, other than his, her or its standing proxy, to exercise rights relating to its shares or perform any tasks related thereto on his, her or its behalf. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.

 

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Shares of Korean companies must be electronically registered with an eligible custodian in Korea. The Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), financial investment companies with a dealing, brokerage or collective investment license and certain eligible foreign custodians are eligible to act as a custodian of shares for anon-resident or foreign investor.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40.0% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public corporations may set a ceiling on the acquisition of shares by a single person within 3.0% of the total number of shares in their articles of incorporation. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10.0% of the outstanding shares with voting rights of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Law, which is, in general, subject to the report to, and acceptance by, the Ministry of Trade, Industry and Energy of Korea, which delegates its authority to foreign exchange banks or the Korea Trade-Investment Promotion Agency under the relevant regulations. The acquisition of our shares by a foreign investor is also subject to the restrictions prescribed in the Telecommunications Business Act. The Telecommunications Business Act generally limits the maximum aggregate foreign shareholdings in us to 49.0% of the outstanding shares. A foreigner who has acquired shares in excess of such restriction described above may not exercise the voting rights with respect to the shares exceeding such limitations and may be subject to corrective orders.

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to make a portfolio investment in shares of a Korean company listed on the KRX KOSPI Market or the KRX KOSDAQ Market must designate a foreign exchange bank at which he, she or it must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at a securities company. Funds in the foreign currency account may be remitted abroad without any governmental approval.

Dividends on shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any such shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any such shares held by anon-resident of Korea must be deposited either in a Won account with the investor’s financial investment companies with a securities dealing, brokerage or collective investment license or the investor’s Won account. Funds in the investor’s Won account may be transferred to such investor’s foreign currency account or withdrawn for local living expenses, provided that any withdrawal of local living expenses in excess of a certain amount is reported to the tax authorities by the foreign exchange bank at which the Won account is maintained. Funds in the investor’s Won account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Financial investment companies with a securities dealing, brokerage or collective investment license are allowed to open foreign currency accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these financial investment companies may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.

 

Item 10.E.

Taxation

United States Taxation

This summary describes certain material U.S. federal income tax consequences for a U.S. holder (as defined below) of acquiring, owning, and disposing of common shares or ADSs. This summary applies to you only if you

 

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hold our common shares or ADSs as capital assets for tax purposes. This summary does not apply to you if you are a member of a class of holders subject to special rules, such as:

 

  

a dealer in securities or currencies;

 

  

a trader in securities that elects to use amark-to-market method of accounting for securities holdings;

 

  

a bank or other financial institution;

 

  

a life insurance company;

 

  

atax-exempt organization;

 

  

a person that holds common shares or ADSs that are a hedge or that are hedged against interest rate or currency risks;

 

  

a person that holds common shares or ADSs as part of a straddle or conversion transaction for tax purposes;

 

  

a person whose functional currency for tax purposes is not the U.S. dollar;

 

  

a person that owns or is deemed to own 10.0% or more of any class of our stock (by vote or value); or

 

  

an entity or arrangement that is treated as a partnership for U.S. federal income tax purposes (or partners therein).

This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations promulgated thereunder, and published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.

Please consult your own tax advisers concerning the U.S. federal, state, local, and other tax consequences of purchasing, owning, and disposing of common shares or ADSs in your particular circumstances.

For purposes of this summary, you are a “U.S. holder” if you are the beneficial owner of a common share or an ADS and are:

 

  

a citizen or resident of the United States;

 

  

a U.S. domestic corporation; or

 

  

otherwise subject to U.S. federal income tax on a net income basis with respect to income from the common share or ADS.

In general, if you are the beneficial owner of ADSs, you will be treated as the beneficial owner of the common shares represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if you exchange an ADS for the common share represented by that ADS.

Dividends

The gross amount of cash dividends that you receive (prior to deduction of Korean taxes) generally will be subject to U.S. federal income taxation as foreign source “passive income” dividend income and will not be eligible for the dividends received deduction. Dividends paid in Won will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your receipt of the dividend, in the case of common shares, or the depositary’s receipt, in the case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars. If such a dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income.

Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual with respect to the ADSs will be subject to taxation at a preferential rate if the dividends are “qualified dividends”. Dividends paid on the ADSs will be treated as qualified dividends if (1) the ADSs are readily tradable on an established securities market in the United States and (2) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company as defined for U.S. federal income tax purposes (“PFIC”), as discussed below under “Passive Foreign

 

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Investment Company Rules.” The ADSs are listed on the NYSE, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our audited financial statements, as well as relevant market and shareholder data, we believe that we were not a PFIC with respect to our 2018 or 2019 taxable year, but the Internal Revenue Service (“IRS”) could disagree with that conclusion and it is possible that we could become a PFIC in 2020 or subsequent taxable years, as discussed below.

Distributions of additional shares in respect of common shares or ADSs that are made as part of apro-rata distribution to all of our stockholders generally will not be subject to U.S. federal income tax.

Sale or Other Disposition

For U.S. federal income tax purposes, gain or loss you realize on a sale or other disposition of common shares or ADSs generally will be treated as U.S. source capital gain or loss, and will be long-term capital gain or loss if the common shares or ADSs were held for more than one year. Your ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder generally is subject to taxation at reduced rates.

Passive Foreign Investment Company Rules

Special U.S. tax rules apply to companies that are considered to be PFICs. We will be classified as a PFIC in a particular taxable year if either (i) 75 percent or more of our gross income for the taxable year is passive income; or (ii) the average percentage of the value of our assets that produce or are held for the production of passive income is at least 50 percent. Investments in companies in which we own less than 25 percent of the stock (by value) are considered to be assets that produce passive income.

The determination whether we are a PFIC is made annually based on the particular facts and circumstances, such as the composition of our income and the valuation of our assets. Although we do not believe that we were a PFIC in 2019, it is possible that the IRS or a court could disagree with that conclusion, and there is a significant risk that we could be treated as a PFIC in the current year or in future years due to fluctuations in our stock price and changes in the value and composition of our assets, including our substantial investment in the stock of SK Hynix, which is treated as a passive asset for this purpose. Recent stock market volatility could exacerbate these considerations. See “Item 3.D. Risk Factors — Risks Relating to Our Business — The ongoing global pandemic of a new strain of coronavirus(“COVID-19”) and any possible recurrence of other types of widespread infectious diseases may adversely affect our business, financial condition or results of operations.” and “Item 3.D. Risk Factors — Risks Relating to Our Business — Declines in the market value of our equity holdings in SK Hynix and the results of operations of SK Hynix could have a material adverse effect on the market price of our common shares and American Depositary Shares (“ADSs”) as well as our results of operation.” Accordingly, there can be no assurance that we will not be classified as a PFIC for 2019 or in the current or future years.

You should consult your own tax advisors regarding our classification as a PFIC for 2019 or in the current or future years.

If we are classified as a PFIC, and you do not make amark-to-market election, as described in the following paragraph, you will be subject to a special tax at ordinary income tax rates on “excess distributions” (generally, any distributions that you receive in a taxable year that are greater than 125 percent of the average annual distributions that you have received in the preceding three taxable years, or your holding period, if shorter), including gain that you recognize on the sale of your shares or ADSs. The amount of income tax on any excess distributions will be increased by an interest charge to compensate for tax deferral, calculated as if the excess distributions were earned ratably over the period you hold your shares or ADSs. Classification as a PFIC may also have other adverse tax consequences, including, in the case of individuals, the denial of astep-up in the basis of your shares or ADSs at death.

You can avoid the unfavorable rules described in the preceding paragraph by electing to mark your shares or ADSs to market. If you make thismark-to-market election, you will be required in any year in which we are a PFIC to include as ordinary income the excess of the fair market value of your shares atyear-end over your basis in those shares. In addition, any gain you recognize upon the sale of your shares will be taxed as ordinary income in the year of sale.

 

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A U.S. holder that owns an equity interest in a PFIC must annually file IRS Form 8621, and may be required to file other IRS forms. A failure to file one or more of these forms as required may toll the running of the statute of limitations in respect of each of the U.S. holder’s taxable years for which such form is required to be filed. As a result, the taxable years with respect to which the U.S. holder fails to file the form may remain open to assessment by the IRS indefinitely, until the form is filed.

You should consult your own tax advisor regarding the U.S. federal income tax considerations discussed above and in particular the desirability of making amark-to-market election.

Foreign Tax Credit Considerations

You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits, including the possible adverse impact of failing to take advantage of benefits under the income tax treaty between the United States and Korea. If no such rules apply, you may claim a credit against your U.S. federal income tax liability for Korean taxes withheld from dividends on the common shares or ADSs, so long as you have owned our common shares or ADSs (and not entered into specified kinds of hedging transactions) for at least a16-day period that includes theex-dividend date. Instead of claiming a credit, you may, if you so elect, deduct such Korean taxes in computing your taxable income, subject to generally applicable limitations under U.S. tax law. Korean taxes withheld from a distribution of additional shares that is not subject to U.S. tax may be treated for U.S. federal income tax purposes as imposed on “general category” income. Such treatment could affect your ability to utilize any available foreign tax credit in respect of such taxes.

Any Korean securities transaction tax or agricultural and fishery special surtax that you pay will not be creditable for foreign tax credit purposes.

Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities and may not be allowed in respect of arrangements in which a U.S. holder’s expected economic profit is insubstantial.

The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions involve the application of complex rules that depend on a U.S. holder’s particular circumstances. You should consult your own tax advisers regarding the creditability or deductibility of such taxes.

Specified Foreign Financial Assets

Certain U.S. holders that own “specified foreign financial assets” with an aggregate value in excess of U.S.$50,000 on the last day of the taxable year or U.S.$75,000 at any time during the taxable year are generally required to file an information statement along with their tax returns, currently on IRS Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at anon-U.S. financial institution, as well as securities issued by anon-U.S. issuer (which would include the common shares or ADSs) that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. U.S. holders who fail to report the required information could be subject to substantial penalties. Prospective investors should consult their own tax advisers concerning the application of these rules to their investment in the common shares or ADSs, including the application of the rules to their particular circumstances.

U.S. Information Reporting and Backup Withholding Rules

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting and may be subject to backup withholding unless the holder (1) is a corporation or other exempt recipient and demonstrates this when required or (2) provides a taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Holders that are not U.S. persons generally are not subject to information reporting or backup withholding. However, such a holder may be required to provide a certification of itsnon-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.

 

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Korean Taxation

The following is a summary of the principal Korean tax consequences to owners of the common shares or ADSs, as the case may be, who arenon-resident individuals ornon-Korean corporations without a permanent establishment in Korea to which the relevant income is attributable or with which the relevant income is effectively connected(“Non-resident Holders”). The statements regarding Korean tax laws set forth below are based on the laws in force and as interpreted by the Korean taxation authorities as of the date hereof. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor and potential investors are advised to satisfy themselves as to the overall tax consequences of the acquisition, ownership and disposition of the common shares or ADSs, including specifically the tax consequences under Korean law, the laws of the jurisdiction of which they are resident, and any tax treaty between Korea and their country of residence, by consulting their own tax advisors.

Tax on Dividends

Dividends on the common shares or ADSs paid (whether in cash or in shares) to aNon-resident Holder will be subject to Korean withholding taxes at the rate of 22.0% (including local income tax) or such lower rate as is applicable under a treaty between Korea and suchNon-resident Holder’s country of tax residence. Free distributions of shares representing a capitalization of certain capital surplus reserves may be subject to Korean withholding taxes.

The tax is withheld by the payer of the dividend. While it is the payer that is required to withhold the tax, Korean law generally entitles the person who was subject to the withholding of Korean tax to recover from the Government any part of the Korean tax withheld upon providing evidence that it was entitled to have tax withheld at a lower rate if certain conditions are met.

Tax on Capital Gains

As a general rule, capital gains earned byNon-resident Holders upon transfer of the common shares or ADSs are subject to Korean withholding tax at the lower of (1) 11.0% (including local income tax) of the gross proceeds realized or (2) 22.0% (including local income tax) of the net realized gains (subject to the production of satisfactory evidence of the acquisition costs and certain direct transaction costs), unless exempt from Korean income taxation under the effective Korean tax treaty with theNon-resident Holder’s country of tax residence.

However, aNon-resident Holder will not be subject to Korean income taxation on capital gains realized upon the sale of the common shares through the KRX KOSPI Market if theNon-resident Holder (1) has no permanent establishment in Korea and (2) did not or has not owned (together with any shares owned by any entity with certain special relationship with suchNon-resident Holder) 25.0% or more of the total issued and outstanding shares of us at any time during the calendar year in which the sale occurs and during the five calendar years prior to the calendar year in which the sale occurs.

It should be noted that capital gains earned by you (regardless of whether you have a permanent establishment in Korea) from a transfer of ADSs outside Korea will generally be exempt from Korean income taxation, provided that the ADSs are deemed to have been issued overseas. If and when an owner of the underlying common shares transfers the ADSs following the conversion of the underlying shares for ADSs, such person will not be exempt from Korean income taxation.

Inheritance Tax and Gift Tax

Korean inheritance tax is imposed upon (1) all assets (wherever located) of the deceased if at the time of his death he was a tax resident of Korea and (2) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. The taxes are imposed if the value of the relevant property is above a certain limit and vary depending on the value of the property and the identity of the parties involved.

Under Korean inheritance and gift tax laws, securities issued by a Korean corporation are deemed to be located in Korea irrespective of where they are physically located or by whom they are owned.

 

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Securities Transaction Tax

Securities transaction tax is imposed on the transfer of shares issued by a Korean corporation or the right to subscribe for such shares generally at the rate of 0.5% of the sales price. In the case of the transfer of shares listed on the KRX KOSPI Market (such as our common shares), the securities transaction tax is imposed generally at the rate of (1) 0.25% of the sales price of such shares (or 0.3% of the sales price if such shares were sold on or before June 3, 2019) (including agricultural and fishery special surtax thereon) if traded on the KRX KOSPI Market or (2) subject to certain exceptions, 0.45% of the sales price of such shares (or 0.5% of the sales price of such shares were sold on or before April 1, 2020) if traded outside the KRX KOSPI Market.

Securities transaction tax or the agricultural and fishery special surtax is not applicable if (1) the shares or rights to subscribe for shares are listed on a designated foreign stock exchange and (2) the sale of the shares takes place on such exchange.

Securities transaction tax, if applicable, must be paid by the transferor of the shares or rights, in principle. When the transfer is effected through a securities settlement company, such settlement company is generally required to withhold and pay (to the tax authority) the tax, and when such transfer is made through a financial investment company with a brokerage license only, such company is required to withhold and pay the tax. Where the transfer is effected by aNon-resident Holder without a permanent establishment in Korea, other than through a securities settlement company or a financial investment company with a brokerage license, the transferee is required to withhold the securities transaction tax. Failure to do so will result in the imposition of penalties equal to the sum of (1) between 10.0% to 40.0% of the tax amount due, depending on the nature of the improper reporting, and (2) 9.125% per annum (or 10.95% per annum for periods before (and including) February 12, 2019) on the tax amount due for the default period.

Tax Treaties

Currently, Korea has income tax treaties with a number of countries, inter alia, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Luxembourg, Ireland, the Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, the United Kingdom and the United States under which the rate of withholding tax on dividend and interest is reduced, generally to between 5.0% and 16.5% (including local income tax), and the tax on capital gains derived by anon-resident from the transfer of securities issued by a Korean company is often eliminated.

EachNon-resident Holder of common shares should inquire for itself whether it is entitled to the benefits of a tax treaty with Korea. It is the responsibility of the party claiming the benefits of a tax treaty in respect of interest, dividend, capital gains or “other income” to submit to us (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, prior to or at the time of payment, such evidence of tax residence of the party claiming the treaty benefit as the Korean tax authorities may require in support of its claim for treaty protection. In the absence of sufficient proof, we (or our agent), the purchaser or the financial investment company with a brokerage license, as the case may be, must withhold tax at the normal rates.

Furthermore, in order for anon-resident of Korea to obtain the benefits of tax exemption on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires suchnon-resident (or its agent) to submit to the payer of such Korean source income an application for a tax exemption along with a certificate of tax residency of suchnon-resident issued by a competent authority of thenon-resident’s country of tax residence, subject to certain exceptions. The payer of such Korean source income, in turn, is required to submit such application to the relevant district tax office by the ninth day of the month following the date of the first payment of such income.

For anon-resident of Korea to obtain the benefits of treaty-reduced tax rates on certain Korean source income (e.g., capital gains and interest) under an applicable tax treaty, Korean tax law requires suchnon-resident (or its agents) to submit to the payer of such Korean source income an application for treaty-reduced tax rates prior to receipt of such Korean source income; provided, however, that an owner of ADSs who is anon-resident of Korea is not required to submit such application, if the Korean source income on the ADSs is paid through an account opened at the Korea Securities Depository by a foreign depository.

 

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At present, Korea has not entered into any tax treaty relating to inheritance or gift tax.

 

Item 10.F.

Dividends and Paying Agents

Not applicable.

 

Item 10.G.

Statements by Experts

Not applicable.

 

Item 10.H.

Documents on Display

We file reports, including annual reports onForm 20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. Any filings we make electronically will be available to the public over the Internet at the SEC’s Website at http://www.sec.gov.

Documents filed with annual reports and documents filed or submitted to the SEC are also available for inspection at our principal business office during normal business hours. Our principal business office is located at SKT-Tower, 65, Eulji-ro,Jung-gu, Seoul 04539, Korea.

 

Item 10.I.

Subsidiary Information

Not applicable.

 

Item 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to foreign exchange rate and interest rate risk primarily associated with underlying liabilities and to equity price risk as a result of our investment in equity instruments.

We have entered into afloating-to-fixed cross currency interest rate swap contract to hedge foreign currency and interest rate risks with respect to US$300 million of bonds issued in March 2013. In addition, we have entered intofixed-to-fixed cross currency swap contracts to hedge the foreign currency risks of US$400 million of bonds issued in July 2007, US$28.7 million of borrowings from December 2013, US$500 million of bonds issued in April 2018 and US$300 million of bonds issued in August 2018. We also entered intofloating-to-fixed interest rate swap contracts to hedge interest rate risks with respect to Won 24.5 billion of borrowings from December 2016, Won 37.5 billion of borrowings from December 2017 and Won 50.0 billion of borrowings from December 2018. See note 21 of the notes to our consolidated financial statements. We may consider in the future entering into other such transactions solely for hedging purposes.

The following discussion and tables, which constitute “forward looking statements” that involve risks and uncertainties, summarize our market-sensitive financial instruments including fair value, maturity and contract terms. These tables address market risk only and do not present other risks which we face in the normal course of business, including country risk, credit risk and legal risk.

Exchange Rate Risk

Korea is our main market and, therefore, substantially all of our cash flow is denominated in Won. We are exposed to foreign exchange risk related to foreign currency denominated liabilities. These liabilities relate primarily to foreign currency denominated debt, primarily in Dollars. A 10.0% increase in the exchange rate between the Won and all foreign currencies would result in an increase in profit before income tax of Won 7.2 billion, with a decrease of 10.0% in the exchange rate having the opposite effect, as of December 31, 2019. For a further discussion of our exchange rate risk exposures, see note 35(1) of the notes to our consolidated financial statements.

 

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Interest Rate Risk

We are also subject to market risk exposure arising from changing interest rates. The following table summarizes the carrying amounts and fair values, maturity and contract terms of our exchange rate and interest sensitive short-term and long-term liabilities as of December 31, 2019:

 

  Maturities 
  2020  2021  2022  2023  2024  Thereafter  Total  Fair Value 
  (In billions of Won, except for percentage data) 

Local currency:

        

Fixed-rate

 619.7  888.7  1,386.4  2,448.1  847.6  2,183.3  8,373.8  8,780.8 

Average weighted rate(1)

  2.33  2.64  2.20  4.07  2.41  2.48  

Variable rate

  20.0   24.5   37.5   49.9         131.9   131.9 

Average weighted rate(1)

  3.09  2.32  2.78  2.67        

Sub-total

  639.7   913.2   1,423.9   2,498.0   847.6   2,183.3   8,505.7   8,912.7 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Foreign currency:

        

Fixed-rate

  0.6      32.9   919.1      458.5   1,411.1   1,645.5 

Average weighted rate(1)

  7.50     1.70  3.80     6.63  

Variable rate

  347.3                  347.3   347.3 

Average weighted rate(1)

  2.80                 

Sub-total

  347.9      32.9   919.1      458.5   1,758.4   1,992.8 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 987.6  913.2  1,456.8  3,417.1  847.6  2,641.8  10,264.1  10,905.4 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(1)

Weighted average rates of the portfolio at the period end.

A 1.0% point increase in interest rates would result in a decrease in profit before income tax of Won 0.2 billion with a 1.0% point decrease in interest rates having the opposite effect, as of December 31, 2019. For a further discussion of our interest rate risk exposures, see note 35(1) of the notes to our consolidated financial statements.

Equity Price Risk

We are also subject to market risk exposure arising from changes in the equity securities market, which affect the fair value of our equity portfolio. As of December 31, 2019, 2018 and 2017, a 10.0% increase in the equity indices where our equity investments at fair value through other comprehensive income are listed, with all other variables held constant, would have increased our total equity by Won 40.8 billion, Won 29.4 billion and Won 58.9 billion, respectively, with a 10.0% decrease in the equity index having the opposite effect. The foregoing sensitivity analysis assumes that all variables other than changes in the equity index are held constant, and that our equity investments at fair value through other comprehensive income had moved according to the historical correlation to the index, and as such, does not reflect any correlation between the equity index and other variables.

 

Item 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

Item 12.A.

Debt Securities

Not applicable.

 

Item 12.B.

Warrants and Rights

Not applicable.

 

Item 12.C.

Other Securities

Not applicable.

 

Item 12.D.

American Depositary Shares

Fees and Charges under Deposit Agreement

The ADR depositary will charge the party receiving ADSs up to US$5.00 per 100 ADSs (or fraction thereof), provided that the ADR depositary has agreed to waive such fee as would have been payable by us in the case of

 

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(1) an offering of ADSs by us or (2) any distribution of shares of common stock or any rights to subscribe for additional shares of common stock. The ADR depositary will not charge the party to whom ADSs are delivered against deposits. The ADR depositary will charge the party surrendering ADSs for delivery of deposited securities up to US$5.00 per 100 ADSs (or fraction thereof) surrendered. The ADR depositary will also charge the party to whom any cash distribution, or for whom the sale or exercise of rights or other corporate action involving distributions to shareholders, is made with respect to ADSs up to US$0.02 per ADS held plus the expenses of the ADR depositary on aper-ADS basis. We will pay the expenses of the ADR depositary and any entity acting as registrar for the shares only as specified in the deposit agreement. The ADR depositary will pay any other charges and expenses of the ADR depositary and the entity acting as registrar for the shares.

Holders of ADRs must pay (1) taxes and other governmental charges, (2) share transfer registration fees on deposits of shares of common stock, (3) such cable, telex, facsimile transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of persons depositing shares of common stock or holders of ADRs and (4) such reasonable expenses as are incurred by the ADR depositary in the conversion of foreign currency into United States dollars.

Notwithstanding any other provision of the deposit agreement, in the event that the ADR depositary determines that any distribution in property (including shares or rights to subscribe therefor or other securities) is subject to any tax or governmental charges which the ADR depositary is obligated to withhold, the ADR depositary may dispose of all or a portion of such property (including shares and rights to subscribe therefor) in such amounts and in such manner as the ADR depositary deems necessary and practicable to pay such taxes or governmental charges, including by public or private sale, and the ADR depositary will distribute the net proceeds of any such sale or the balance of any such property after deduction of such taxes or governmental charges to the holders of ADSs entitled thereto in proportion to the number of ADSs held by them respectively.

All such charges may be changed by agreement between the ADR depositary and us at any time and from time to time, subject to the deposit agreement. The right of the ADR depositary to receive payment of fees, charges and expenses shall survive the termination of this deposit agreement and, as to any depositary, the resignation or removal of such depositary pursuant to the deposit agreement.

Payments made by ADR Depositary

The ADR depositary reimburses us for certain expenses we incur in connection with our ADR program, subject to certain ceilings. These reimbursable expenses currently include expenses relating to the preparation of SEC filings and submissions, listing fees, education and training fees, corporate action expenses and other miscellaneous fees. In the fiscal year 2019, we received US$6,276,012 from the ADR depositary in connection with such reimbursements.

 

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PART II

 

Item 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

 

Item 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

 

Item 15.

CONTROLS AND PROCEDURES

Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as such term is defined inRules 13a-15(e) and15d-15(e) under the Exchange Act, as of December 31, 2019. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRules 13a-15(f) and15d-15(f) under the Exchange Act, as of December 31, 2019. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS as issued by the IASB. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.

Report of the Independent Registered Public Accounting Firm on the Effectiveness of Our Internal Control Over Financial Reporting

The report of our independent registered public accounting firm, KPMG Samjong Accounting Corp. (“KPMG Samjong”), on the effectiveness of our internal control over financial reporting as of December 31, 2019 is included in Item 18 of thisForm 20-F.

Changes in Internal Control Over Financial Reporting

Beginning January 1, 2019, we adopted IFRS 16 and implemented significant new systems, processes and internal controls over lease accounting to assist us in the application of IFRS 16. Other than as discussed above, there has been no change in our internal control over financial reporting during 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Item 16.

RESERVED

 

Item 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

Seok-Dong Kim is the chairman of our audit committee and determined to be an “audit committee financial expert” within the meaning of this Item 16A by the board of directors. The board of directors have further determined that Seok-Dong Kim is independent within the meaning of applicable SEC rules and the listing standards of the NYSE. See “Item 6.C. Board Practices — Audit Committee” for additional information regarding our audit committee.

 

Item 16B.

CODE OF ETHICS

Code of Ethics for Chief Executive Officer, Chief Financial Officer and Controller

We have a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, senior accounting officers and employees. We also have internal control and disclosure policy designed to promote full, fair, accurate, timely and understandable disclosure in all of our reports and publicly filed documents. A copy of our code of ethics is available on our website at www.sktelecom.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our website.

 

Item 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The table sets forth the fees we paid to our independent registered public accounting firm KPMG Samjong and its affiliates for the years ended December 31, 2019 and 2018:

 

   Year Ended December 31, 
   2019   2018 
   (In millions of Won) 

Audit Fees

  4,299   3,360 

Audit-Related Fees

   3    222 

Tax Fees

   305    355 

All Other Fees

       120 
  

 

 

   

 

 

 

Total

  4,607   4,057 

“Audit Fees” are the aggregate fees billed by KPMG Samjong for the audit of our consolidated annual financial statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and regulatory filings or engagements.

“Audit-Related Fees” are fees charged by KPMG Samjong for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” This category comprises fees billed for assurance services, including verification of the consistency of financial information submitted to relevant governmental authorities with our consolidated annual financial statements, in 2019 and for services related to issuance of comfort letters in connection with our bond offerings in 2018.

“Tax Fees” are fees for professional services rendered by KPMG Samjong for tax compliance, tax advice on actual or contemplated transactions and tax planning services.

“All Other Fees” are fees billed by KPMG Samjong for consulting services related to the preparation of our investor relations materials in 2018.

Pre-Approval of Audit andNon-Audit Services Provided by Independent Registered Public Accounting Firm

Our audit committeepre-approves all audit services to be provided by KPMG Samjong, our independent registered public accounting firm. Our audit committee’s policy regarding thepre-approval ofnon-audit services to be provided to us by our independent auditors is that all such services shall bepre-approved by our audit committee.Non-audit services that are prohibited to be provided to us by our independent auditors under the rules of the SEC and applicable law may not bepre-approved. In addition, prior to the granting of anypre-approval, our audit

 

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committee must be satisfied that the performance of the services in question will not compromise the independence of our independent registered public accounting firm.

Our audit committee did notpre-approve anynon-audit services under thede minimis exception ofRule 2-01 (c)(7)(i)(C) ofRegulation S-X as promulgated by the SEC.

 

Item 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

 

Item 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Neither we nor any “affiliated purchaser,” as defined in Rule10b-18(a)(3) of the Exchange Act, purchased any of our equity securities during the period covered by this annual report.

 

Item 16F.

CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT

Not applicable.

 

Item 16G.

CORPORATE GOVERNANCE

The following is a summary of the significant differences between the NYSE’s corporate governance standards and those that we follow under Korean law.

 

NYSE Corporate Governance Standards

  

Our Corporate Governance Practice

Director Independence

  
Listed companies must have a majority of independent directors.  Of the eight members of our board of directors, five are independent directors.

Executive Session

  
Non-management directors must meet in regularly scheduled executive sessions without management. Independent directors should meet alone in an executive session at least once a year.  Our audit committee, which is comprised solely of four independent directors, holds meetings whenever there are matters related to management directors, and such meetings are generally held once every month.

Nomination/Corporate Governance Committee

  
Listed companies must have a nomination/corporate governance committee composed entirely of independent directors. The committee must have a charter that addresses the purpose, responsibilities (including development of corporate governance guidelines) and annual performance evaluation of the committee.  Although we do not have a separate nomination/corporate governance committee, we maintain an independent director nomination committee composed of two independent directors and one management director.

Compensation Committee

  
Listed companies must have a compensation committee composed entirely of independent directors. The committee must have a charter that addresses the purpose, responsibilities and annual performance evaluation of the committee. The charter must be made available on the company’s website. In addition, in accordance with the SEC rules adopted pursuant to Section 952 of the Dodd-Frank Act, the NYSE listing standards were amended to expand the factors relevant in determining whether a committee member has a relationship with the company.  We maintain a compensation review committee comprised of three independent directors.

 

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NYSE Corporate Governance Standards

  

Our Corporate Governance Practice

Audit Committee

  
Listed companies must have an audit committee that satisfies the independence and other requirements of Rule10A-3 under the Exchange Act. All members must be independent. The committee must have a charter addressing the committee’s purpose, an annual performance evaluation of the committee, and the duties and responsibilities of the committee. The charter must be made available on the company’s website.  We maintain an audit committee comprised solely of four independent directors.

Audit Committee Additional Requirements

  
Listed companies must have an audit committee that is composed of at least three directors.  Our audit committee has four independent directors.

Shareholder Approval of Equity Compensation Plan

  
Listed companies must allow its shareholders to exercise their voting rights with respect to any material revision to the company’s equity compensation plan.  We currently have two equity compensation plans: a stock option plan for officers and directors and employee stock ownership plan for employees (“ESOP”). We manage such compensation plans in compliance with the applicable laws and our articles of incorporation, provided that, under certain limited circumstances, the grant of stock options or matters relating to ESOP are not subject to shareholders’ approval under Korean law.

Shareholder Approval of Equity Offerings

  
Listed companies must allow its shareholders to exercise their voting rights with respect to equity offerings that do not qualify as public offerings for cash, and offerings of equity of related parties.  Pursuant to the Korean Commercial Code and the FSCMA, our shareholders are generally entitled to preemptive rights with respect to the issuance of new shares. Exceptions include public offerings as prescribed in the FSCMA and allotments to third parties in cases necessary for the achievement of a business purpose, such as the introduction of new technology and the improvement of our financial condition.

Corporate Governance Guidelines

  
Listed companies must adopt and disclose corporate governance guidelines.  We have adopted a Corporate Governance Charter, which is available (in Korean) on our website at www.sktelecom.com. We are also in compliance with the Korean Commercial Code in connection with such matters, including the governance of the board of directors.

Code of Business Conduct and Ethics

  
Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers.  We have adopted a Code of Business Conduct and Ethics for all of our directors, officers and employees, and such code is also available on our website at www.sktelecom.com.

 

Item 16H.

MINE SAFETY DISCLOSURE

Not applicable.

 

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PART III

 

Item 17.

FINANCIAL STATEMENTS

Not applicable.

 

Item 18.

FINANCIAL STATEMENTS

 

Index to Financial Statements

   F-1 

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

   F-2 

Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting

   F-4 

Consolidated Statements of Financial Position as of December  31, 2019 and 2018

   F-5 

Consolidated Statements of Income for the years ended December  31, 2019, 2018 and 2017

   F-7 

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

   F-8 

Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018 and
2017

   F-9 

Consolidated Statements of Cash Flows for the years ended December  31, 2019, 2018 and 2017

   F-12 

Notes to the Consolidated Financial Statements for the years ended December 31, 2019, 2018 and 2017

   F-14 

Financial Statements of SK Hynix

  

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

   G-1 

Consolidated Statements of Financial Position as of December  31, 2019 and 2018

   G-2 

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

   G-4 

Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018 and 2017

   G-5 

Consolidated Statements of Cash Flows for the years ended December  31, 2019, 2018 and 2017

   G-7 

Notes to the Consolidated Financial Statements for the years ended December 31, 2019, 2018 and 2017

   G-8 

 

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Item 19.

EXHIBITS

 

Number

  

Description

  1.1  Articles of Incorporation
  2.1  Deposit Agreement dated as of May 31, 1996, as amended by Amendment No. 1 dated as of March 15, 1999, Amendment No.  2 dated as of April 24, 2000 and Amendment No. 3 dated as of July  24, 2002, entered into among SK Telecom Co., Ltd., Citibank, N.A., as Depositary, and all Holders and Beneficial Owners of American Depositary Shares (incorporated by reference to Exhibit 2.1 to the Registrant’s Annual Report on Form20-F filed on June 30, 2006)
  2.2  Description of Capital Stock (See Item 10.B. Memorandum and Articles of Association)
  2.3  Description of American Depositary Shares
  8.1  List of Subsidiaries of SK Telecom Co., Ltd.
12.1  Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2  Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1  Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2  Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

SK TELECOM CO., LTD.

(Registrant)

/s/ Jeong Hwan Choi
Name: Jeong Hwan Choi
Title: Senior Vice President, IRO

Date: April 29, 2020


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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

SK Telecom Co., Ltd.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of SK Telecom Co., Ltd. and subsidiaries (the Group) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Group’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 29, 2020 expressed an unqualified opinion on the effectiveness of the Group’s internal control over financial reporting.

Adoption of New Accounting Standards

As discussed in Note 3 to the consolidated financial statements, effective January 1, 2019, the Group changed its method for accounting for lease contracts as a result of adoption of IFRS 16,Leases,using the modified retrospective method.

As discussed in Note 4 to the consolidated financial statements, effective January 1, 2018, the Group changed its method for recognizing revenue as a result of adoption of IFRS 15,Revenue from Contracts with Customers,using the modified retrospective method.

Basis for Opinion

These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error of fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to

 

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accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of impairment analysis for goodwill in the security services cash generating unit

As disclosed in note 4 (12) and 15 to the consolidated financial statements, the amount of goodwill that is allocated to the security services cash generating unit (“CGU”) is ₩1,173,382 million as of December 31, 2019. The Group performs impairment test for goodwill at least annually or when there is an indication of possible impairment by comparing the recoverable amount and the carrying amount of a CGU to which goodwill is allocated. The recoverable amount of security services CGU was determined based onvalue-in-use (“VIU”).

We identified the evaluation of impairment analysis for goodwill in the security services CGU as a critical audit matter. The estimated recoverable amount of the security service CGU is not significantly higher than its carrying value, indicating a higher risk that the goodwill may be impaired and therefore, involved a high degree of challenging and complex auditor judgment. Specifically, the revenue growth rates, labor costs, perpetual growth rate, and discount rate assumptions used to estimate the VIU of the security services CGU were challenging to test as minor changes to those assumptions would have had a significant effect on the Group’s goodwill impairment analysis.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Group’s goodwill impairment assessment process, including controls related to the determination of the VIU of the security services CGU and the development of revenue growth rates, labor costs, perpetual growth rate, and discount rate assumptions. We evaluated estimated revenue growth rates and labor costs by comparison with the financial budgets approved by the Group. We performed sensitivity analysis for both the discount rates and perpetual growth rate to assess the impact of changes in these key assumptions on the Group’s determination that the VIU of security services CGU exceeded its carrying value. We compared the revenue growth rates and labor costs assumptions used in forecasting cash flow in prior year to the actual results to assess the Group’s ability to accurately forecast. In addition, we involved our valuation professionals with specialized skills and knowledge, who assisted in:

 

  

evaluating estimated revenue growth rates, labor costs and perpetual growth rate by comparison with industry reports as well as historical performance; and

 

  

evaluating the discount rate by comparing with the discount rate that was independently developed using publicly available market data for comparable entities.

/s/ KPMG Samjong Accounting Corp.

We have served as the Group’s auditor since 2012.

Seoul, Korea

April 29, 2020

 

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Report of Independent Registered Public Accounting Firm

On Internal Control Over Financial Reporting

To the Shareholders and the Board of Directors

SK Telecom Co., Ltd.:

Opinion on Internal Control Over Financial Reporting

We have audited SK Telecom Co., Ltd. and subsidiaries’ (the Group) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Group as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements) and our report dated April 29, 2020, expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG Samjong Accounting Corp.

Seoul, Korea

April 29, 2020

 

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SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2019 and 2018

 

(In millions of won)  Note   December 31,
2019
   December 31,
2018
 

Assets

      

Current Assets:

      

Cash and cash equivalents

   34,35   1,270,824    1,506,699 

Short-term financial instruments

   6,34,35    830,647    1,045,676 

Short-term investment securities

   11,34,35    166,666    195,080 

Accounts receivable — trade, net

   7,34,35,36    2,230,979    2,008,640 

Short-term loans, net

   7,34,35,36    66,123    59,094 

Accounts receivable — other, net

   3,7,34,35,36    905,436    937,837 

Prepaid expenses

   3,8    2,030,550    1,768,343 

Contract assets

   9    127,499    90,072 

Inventories, net

   10    162,882    288,053 

Derivative financial assets

   21,34,35,38    26,253    13 

Prepaid income taxes

   31    63,748    1,216 

Advanced payments and others

   7,34,35,36    220,687    58,116 
    

 

 

   

 

 

 
     8,102,294    7,958,839 
    

 

 

   

 

 

 

Non-Current Assets:

      

Long-term financial instruments

   6,34,35    990    1,221 

Long-term investment securities

   11,34,35    857,215    664,726 

Investments in associates and joint ventures

   13    13,385,264    12,811,771 

Property and equipment, net

   3,14,36,37    12,334,280    10,718,354 

Goodwill

   12,15    2,949,530    2,938,563 

Intangible assets, net

   3,16    4,866,092    5,513,510 

Long-term contract assets

   9    64,359    43,821 

Long-term loans, net

   7,34,35,36    33,760    29,034 

Long-term accounts receivable — other

   3,7,34,35,36,37    344,662    274,053 

Long-term prepaid expenses

   3,8    1,241,429    895,272 

Guarantee deposits

   7,34,35,36    164,734    313,140 

Long-term derivative financial assets

   21,34,35,38    124,707    55,444 

Defined benefit assets

   20    1,125    31,926 

Deferred tax assets

   31    109,057    92,465 

Othernon-current assets

   7,34,35    32,122    26,972 
    

 

 

   

 

 

 
     36,509,326    34,410,272 
    

 

 

   

 

 

 

Total Assets

    44,611,620    42,369,111 
    

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position — (Continued)

As of December 31, 2019 and 2018

 

(In millions of won)  Note   December 31,
2019
  December 31,
2018
 

Liabilities and Shareholders’ Equity

 

   

Current Liabilities:

     

Short-term borrowings

   17,34,35,38   20,603   80,000 

Current portion of long-term debt, net

   17,34,35,38    1,017,327   984,272 

Current portion of long-term payables — other

   18,34,35,38    423,839   424,243 

Lease liabilities

   3,34,35,36,38    304,247    

Accounts payable — trade

   34,35,36    438,297   381,302 

Accounts payable — other

   34,35,36    2,521,474   1,913,813 

Withholdings

   34,35,36    1,350,244   1,353,663 

Accrued expenses

   34,35    1,425,251   1,299,217 

Income tax payable

   31    5,450   182,343 

Provisions

   19,37    89,446   87,993 

Contract liabilities

   9    191,225   140,711 

Other current liabilities

     319    
    

 

 

  

 

 

 
     7,787,722   6,847,557 
    

 

 

  

 

 

 

Non-Current Liabilities:

     

Debentures, excluding current portion, net

   17,34,35,38    7,253,894   6,572,211 

Long-term borrowings, excluding current portion, net

   17,34,35,37,38    1,972,149   2,015,365 

Long-term payables — other

   18,34,35,38    1,550,167   1,968,784 

Long-term lease liabilities

   3,34,35,36,38    408,493    

Long-term contract liabilities

   9    32,231   43,102 

Defined benefit liabilities

   20    172,258   141,529 

Long-term derivative financial liabilities

   21,34,35,38    1,043   4,184 

Long-term provisions

   19,37    53,783   99,215 

Deferred tax liabilities

   3,31    2,466,295   2,269,792 

Othernon-current liabilities

   34,35    90,049   58,122 
    

 

 

  

 

 

 
     14,000,362   13,172,304 
    

 

 

  

 

 

 

Total Liabilities

     21,788,084   20,019,861 
    

 

 

  

 

 

 

Shareholders’ Equity

     

Share capital

   1,22    44,639   44,639 

Capital surplus and others

   12,22,23,25    607,722   256,325 

Hybrid bonds

   24    398,759   398,759 

Retained earnings

   3,26    22,235,285   22,144,541 

Reserves

   27    (329,576  (373,442
    

 

 

  

 

 

 

Equity attributable to owners of the Parent Company

     22,956,829   22,470,822 

Non-controlling interests

     (133,293  (121,572
    

 

 

  

 

 

 

Total Shareholders’ Equity

     22,823,536   22,349,250 
    

 

 

  

 

 

 

Total Liabilities and Shareholders’ Equity

    44,611,620   42,369,111 
    

 

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

 

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SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Income

For the years ended December 31, 2019, 2018 and 2017

 

(In millions of won except for per share data) Note  2019  2018  2017 

Operating revenue and other income:

    

Revenue

  5,36  17,743,702   16,873,960   17,520,013 

Other income

  5,29,36   103,230   71,950   31,997 
  

 

 

  

 

 

  

 

 

 
   17,846,932   16,945,910   17,552,010 
  

 

 

  

 

 

  

 

 

 

Operating expenses:

  36    

Labor

   2,822,673   2,288,655   1,966,156 

Commissions

  3,8   5,002,174   5,002,598   5,486,263 

Depreciation and amortization

  3,5   3,771,486   3,126,118   3,097,466 

Network interconnection

   752,334   808,403   875,045 

Leased lines

   272,616   309,773   342,240 

Advertising

   434,561   468,509   522,753 

Rent

  3   231,934   529,453   520,244 

Cost of goods sold

   1,833,362   1,796,146   1,886,524 

Others

  29   1,724,899   1,782,404   1,630,747 
  

 

 

  

 

 

  

 

 

 
   16,846,039   16,112,059   16,327,438 
  

 

 

  

 

 

  

 

 

 

Operating profit

  5   1,000,893   833,851   1,224,572 

Finance income

  5,30   141,977   256,435   366,561 

Finance costs

  3,5,30   (429,758  (385,232  (433,616

Gain relating to investments in subsidiaries, associates and joint ventures, net

  5,13   449,543   3,270,912   2,245,732 
  

 

 

  

 

 

  

 

 

 

Profit before income tax

  5   1,162,655   3,975,966   3,403,249 

Income tax expense

  31   300,713   843,978   745,654 
  

 

 

  

 

 

  

 

 

 

Profit for the year

  861,942   3,131,988   2,657,595 
  

 

 

  

 

 

  

 

 

 

Attributable to:

    

Owners of the Parent Company

  889,907   3,127,887   2,599,829 

Non-controlling interests

   (27,965  4,101   57,766 

Earnings per share

  32    

Basic and diluted earnings per share (in won)

  12,144   44,066   36,582 

See accompanying notes to the consolidated financial statements.

 

F-7


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2019, 2018 and 2017

 

(In millions of won) Note  2019  2018  2017 

Profit for the year

  861,942   3,131,988   2,657,595 

Other comprehensive income (loss)

 

  

Items that will never be reclassified to profit or loss, net of taxes:

    

Remeasurement of defined benefit liabilities

  20   (72,605  (41,490  5,921 

Net change in other comprehensive income (loss) of investments in associates and joint ventures

  13,27   (19,269  (16,330  504 

Valuation loss on financial assets at fair value through other comprehensive income

  27,30   (17,943  (130,035   

Items that are or may be reclassified subsequently to profit or loss, net of taxes:

    

Net change in unrealized fair value ofavailable-for-sale financial assets

  27,30         158,440 

Net change in other comprehensive income (loss) of investments in associates and joint ventures

  13,27   75,763   1,753   (141,512

Net change in unrealized fair value of derivatives

  21,27,30   40,681   32,227   22,586 

Foreign currency translation differences for foreign operations

  27   (5,618  12,291   (46,952
  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss) for the year, net of taxes

   1,009   (141,584  (1,013
 

 

 

  

 

 

  

 

 

 

Total comprehensive income

  862,951   2,990,404   2,656,582 
  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss) attributable to:

 

   

Owners of the Parent Company

  892,260   3,000,503   2,597,160 

Non-controlling interests

   (29,309  (10,099  59,422 

See accompanying notes to the consolidated financial statements.                

 

F-8


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity

For the years ended December 31, 2019, 2018 and 2017

 

(In millions of won) Attributable to owners  Non-controlling
interests
  Total equity 
  Share
capital
  Capital surplus
(deficit) and
others
  Hybrid bonds  Retained
earnings
  Reserves  Total 

Balance, January 1, 2017

 44,639   (198,739  398,518   15,953,164   (226,183  15,971,399   145,031   16,116,430 

Total comprehensive income:

        

Profit for the year

           2,599,829      2,599,829   57,766   2,657,595 

Other comprehensive income (loss) (note 13,20,21,27,30)

           5,875   (8,544  (2,669  1,656   (1,013
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
           2,605,704   (8,544  2,597,160   59,422   2,656,582 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Transactions with owners:

        

Annual dividends (note 33)

           (635,482     (635,482  (281  (635,763

Interim dividends (note 33)

           (70,609     (70,609     (70,609

Interest on hybrid bonds (note 24)

           (16,840     (16,840     (16,840

Share option (note 25)

     414            414      414 

Changes in ownership in subsidiaries

     (3,912     9      (3,903  (17,116  (21,019
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
     (3,498     (722,922     (726,420  (17,397  (743,817
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2017

 44,639   (202,237  398,518   17,835,946   (234,727  17,842,139   187,056   18,029,195 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-9


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity — (Continued)

For the years ended December 31, 2019, 2018 and 2017

 

(In millions of won) Attributable to owners  Non-controlling
interests
  Total equity 
  Share
capital
  Capital surplus
(deficit) and
others
  Hybrid bonds  Retained
earnings
  Reserves  Total 

Balance, December 31, 2017

 44,639   (202,237  398,518   17,835,946   (234,727  17,842,139   187,056   18,029,195 

Impact of adopting IFRS 15

           1,900,049      1,900,049      1,900,049 

Impact of adopting IFRS 9

           60,026   (68,804  (8,778     (8,778
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, January 1, 2018

  44,639   (202,237  398,518   19,796,021   (303,531  19,733,410   187,056   19,920,466 

Total comprehensive income:

        

Profit for the year

           3,127,887      3,127,887   4,101   3,131,988 

Other comprehensive loss (note 13,20,21,27,30)

           (57,473  (69,911  (127,384  (14,200  (141,584
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
           3,070,414   (69,911  3,000,503   (10,099  2,990,404 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Transactions with owners:

        

Annual dividends (note 33)

           (635,482     (635,482     (635,482

Interim dividends (note 33)

           (70,609     (70,609     (70,609

Share option (note 25)

     593            593   196   789 

Interest on hybrid bonds (note 24)

           (15,803     (15,803     (15,803

Repayments of hybrid bonds (note 24)

     (1,482  (398,518        (400,000     (400,000

Proceeds from issuance of hybrid bonds (note 24)

        398,759         398,759      398,759 

Comprehensive stock exchange (note 12)

     129,595            129,595      129,595 

Changes in ownership in subsidiaries

     329,856            329,856   (298,725  31,131 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
     458,562   241   (721,894     (263,091  (298,529  (561,620
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2018

 44,639   256,325   398,759   22,144,541   (373,442  22,470,822   (121,572  22,349,250 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying notes to the consolidated financial statements.

 

F-10


Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Changes in Equity — (Continued)

For the years ended December 31, 2019, 2018 and 2017

 

(In millions of won) Attributable to owners  Non-controlling
interests
  Total equity 
  Share
capital
  Capital surplus
(deficit) and
others
  Hybrid bonds  Retained
earnings
  Reserves  Total 

Balance, December 31, 2018

 44,639   256,325   398,759   22,144,541   (373,442  22,470,822   (121,572  22,349,250 

Impact of adopting IFRS 16 (note 3)

           (24,186     (24,186  (503  (24,689
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, January 1, 2019

  44,639   256,325   398,759   22,120,355   (373,442  22,446,636   (122,075  22,324,561 

Total comprehensive income:

        

Profit for the year

           889,907      889,907   (27,965  861,942 

Other comprehensive income (loss)
(note 13,20,21,27,30)

           (41,513  43,866   2,353   (1,344  1,009 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
           848,394   43,866   892,260   (29,309  862,951