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SKM SK Telecom

Filed: 29 Apr 21, 9:16am
Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2021

 

 

 

 

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, 2020

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 number 1-14418

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)

SK T-Tower

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

(Address of principal executive offices)

Mr. Wooseok Lee

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.

71,327,153 shares of common stock, par value 500 per share (not including 9,418,558 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 Regulation S-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, a non-accelerated filer or an emerging growth company. See definitions of “accelerated filer,” “large accelerated filer” and “emerging growth company” in Rule 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 in Rule 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

   2 

Part I

   4 

Item 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT  AND ADVISERS

   4 

Item 1.A.

 

Directors and Senior Management

   4 

Item 1.B.

 

Advisers

   4 

Item 1.C.

 

Auditors

   4 

Item 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

   4 

Item 3.

 

KEY INFORMATION

   4 

Item 3.A.

 

Selected Financial Data

   4 

Item 3.B.

 

Capitalization and Indebtedness

   7 

Item 3.C.

 

Reasons for the Offer and Use of  Proceeds

   7 

Item 3.D.

 

Risk Factors

   7 

Item 4.

 

INFORMATION ON THE COMPANY

   24 

Item 4.A.

 

History and Development of the Company

   24 

Item 4.B.

 

Business Overview

   26 

Item 4.C.

 

Organizational Structure

   51 

Item 4.D.

 

Property, Plants and Equipment

   52 

Item 4A.

 

UNRESOLVED STAFF COMMENTS

   52 

Item 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

   52 

Item 5.A.

 

Operating Results

   53 

Item 5.B.

 

Liquidity and Capital Resources

   70 

Item 5.C.

 

Research and Development, Patents and  Licenses, etc.

   75 

Item 5.D.

 

Trend Information

   76 

Item 5.E.

 

Off-Balance Sheet  Arrangements

   76 

Item 5.F.

 

Tabular Disclosure of Contractual Obligations

   76 

Item 5.G.

 

Safe Harbor

   76 

Item 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

   76 

Item 6.A.

 

Directors and Senior Management

   76 

Item 6.B.

 

Compensation

   82 

Item 6.C.

 

Board Practices

   83 

Item 6.D.

 

Employees

   85 

Item 6.E.

 

Share Ownership

   86 

Item 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

   88 

Item 7.A.

 

Major Shareholders

   88 

Item 7.B.

 

Related Party Transactions

   89 

Item 7.C.

 

Interests of Experts and Counsel

   89 

Item 8.

 

FINANCIAL INFORMATION

   89 

Item 8.A.

 

Consolidated Statements and Other Financial Information

   89 

Item 8.B.

 

Significant Changes

   92 

Item 9.

 

THE OFFER AND LISTING

   92 

Item 9.A.

 

Offering and Listing Details

   92 

Item 9.B.

 

Plan of Distribution

   92 

Item 9.C.

 

Markets

   92 

Item 9.D.

 

Selling Shareholders

   92 

Item 9.E.

 

Dilution

   92 

Item 9.F.

 

Expenses of the Issue

   92 

Item 10.

 

ADDITIONAL INFORMATION

   92 

Item 10.A.

 

Share Capital

   92 

Item 10.B.

 

Memorandum and Articles of Association

   92 

Item 10.C.

 

Material Contracts

   98 

 

(i)


Table of Contents

Item 10.D.

 Exchange Controls   98 

Item 10.E.

 Taxation   103 

Item 10.F.

 Dividends and Paying Agents   108 

Item 10.G.

 Statements by Experts   108 

Item 10.H.

 Documents on Display   109 

Item 10.I.

 Subsidiary Information   109 

Item 11.

 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   109 

Item 12.

 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   110 

Item 12.A.

 Debt Securities   110 

Item 12.B.

 Warrants and Rights   110 

Item 12.C.

 Other Securities   110 

Item 12.D.

 American Depositary Shares   111 

Part II

   112 

Item 13.

 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   112 

Item 14.

 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   112 

Item 15.

 CONTROLS AND PROCEDURES   112 

Item 16.

 RESERVED   113 

Item 16A.

 AUDIT COMMITTEE FINANCIAL EXPERT   113 

Item 16B.

 CODE OF ETHICS   113 

Item 16C.

 PRINCIPAL ACCOUNTANT FEES AND SERVICES   113 

Item 16D.

 EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   114 

Item 16E.

 PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   114 

Item 16F.

 CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   114 

Item 16G.

 CORPORATE GOVERNANCE   114 

Item 16H.

 MINE SAFETY DISCLOSURE   116 

Part III

   117 

Item 17.

 FINANCIAL STATEMENTS   117 

Item 18.

 FINANCIAL STATEMENTS   117 

Item 19.

 EXHIBITS   118 

 

(ii)


Table of Contents

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, 2020 and 2019, and for the years ended December 31, 2020, 2019 and 2018 included in this annual report.

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

 

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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 2021 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 our Wi-Fi network, investments to develop our Internet of Things (“IoT”) solutions and platform services business portfolio, including artificial intelligence (“AI”) solutions, investments in data infrastructure, investments in research and development of 5G technology, investments in businesses that can potentially leverage our 5G network, and funding for mid- 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, mobility, IoT solutions and other innovative products and services offered through our platform services, including AI solutions, and to create synergies among our businesses, including through the adaptation of AI technology;

 

  

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, or other allocations of bandwidth, 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 short-term borrowings, 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, and strategic alliances and cooperation;

 

  

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

 

2


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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.

 

3


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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, 2020 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 Form 6-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 with K-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 under K-IFRS.”

 

  Year Ended December 31, 
  2020(21)  2019(21)  2018(22)  2017  2016 
  (In billions of Won, except per share and number of shares data) 

STATEMENT OF INCOME DATA

     

Operating Revenue and Other Income

 18,724.3  17,843.5  16,945.9  17,552.0  17,158.3 

Revenue

  18,624.7   17,740.7   16,874.0   17,520.0   17,091.8 

Other income

  99.6   102.8   71.9   32.0   66.5 

Operating Expense

  17,619.7   16,836.2   16,112.1   16,327.4   15,854.9 

Operating Profit

  1,104.6   1,007.3   833.8   1,224.6   1,303.4 

Profit before Income Tax

  1,877.0   1,161.0   3,976.0   3,403.3   2,096.1 

Profit from Continuing Operations

  1,500.5   860.7   3,132.0   2,657.6   1,660.1 

Profit for the Year

  1,500.5   860.7   3,132.0   2,657.6   1,660.1 

Basic Earnings per Share(1)

  20,463   12,127   44,066   36,582   23,497 

 

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  Year Ended December 31, 
  2020(21)  2019(21)  2018(22)  2017  2016 
  (In billions of Won, except per share and number of shares data) 

Diluted Earnings per Share(2)

  20,459   12,127   44,066   36,582   23,497 

Basic Earnings per Share from Continuing Operations(1)

  20,463   12,127   44,066   36,582   23,497 

Diluted Earnings per Share from Continuing Operations(2)

  20,459   12,127   44,066   36,582   23,497 

Dividends Declared per Share (Won)

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

Dividends Declared per Share (US$)(3)

  9.2   8.7   9.0   9.4   8.3 

Weighted Average Number of Shares

  72,795,431   72,064,159   70,622,976   70,609,160   70,609,160 
  As of December 31, 
  2020(21)  2019(21)  2018(22)  2017  2016 
  (In billions of Won) 

STATEMENT OF FINANCIAL POSITION DATA

     

Working Capital (Deficit)(4)

 597.1  236.8  1,111.3  (907.3 (447.5

Property and Equipment, Net

  13,377.1   12,933.5   10,718.4   10,144.9   10,374.2 

Total Assets

  47,907.0   45,202.4   42,369.1   33,428.7   31,297.7 

Non-current Liabilities(5)

  15,332.7   14,533.8   13,172.3   8,290.4   8,737.1 

Share Capital

  44.6   44.6   44.6   44.6   44.6 

Total Equity

  24,396.2   22,816.9   22,349.3   18,029.2   16,116.4 
  As of December 31, 
  2020(21)  2019(21)  2018(22)  2017  2016 
  (In billions of Won, except percentage data) 

OTHER FINANCIAL DATA

     

Capital Expenditures(6)

   3,557.8    3,375.9    2,792.4    2,715.9    2,490.5 

Research and Development Expense

  416.4   391.3   387.7   395.3   344.8 

Depreciation and Amortization Expense(7)

  3,991.1   3,856.7   3,126.1   3,097.5   2,941.9 

Net Cash Provided by Operating Activities

  5,821.9   4,035.0   4,332.6   3,855.8   4,243.2 

Net Cash Used in Investing Activities

  (4,250.4  (3,581.6  (4,047.7  (3,070.6  (2,462.2

Net Cash Used in Financing Activities

  (1,457.6  (686.7  (238.3  (826.6  (1,044.8

Margins (% of Operating Revenue and Other Income):

     

Operating Margin(8)

  5.9  5.6  4.9  7.0  7.6

Net Margin(9)

  8.0  4.8  18.5  15.1  9.7

 

  As of or for the year ended December 31, 
  2020  2019  2018  2017  2016 

SELECTED OPERATING DATA

     

Population of Korea (in millions)(10)

  51.8   51.8   51.8   51.8   51.7 

Our Wireless Penetration(11)

  60.6  60.8  59.6  58.3  57.2

Number of Employees(12)

  41,097   40,543   39,909   30,608   25,844 

Our Wireless Subscribers (in thousands)(13)

  31,384   31,535   30,882   30,195   29,595 

Our 5G Subscribers (in thousands)(14)

  5,476   2,084          

Our 5G Penetration(15)

  17.4  6.6         

Our LTE Subscribers (in thousands)(16)

  22,848   25,022   24,796   22,865   21,078 

Our LTE Penetration(17)

  72.8  79.3  80.3  75.7  71.2

Average Monthly Data Usage per 5G Subscriber(18)

  26.6 GB   28.0 GB          

Average Monthly Data Usage per LTE Subscriber(19)

  7.8 GB   8.2 GB   7.1 GB   6.0 GB   5.2 GB 

Average Monthly Churn Rate(20)

  1.2  1.2  1.2  1.5  1.5

Cell Sites

             57,932              63,066              54,203              52,132              54,986 

 

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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 exercise of stock options granted to employees, if any. 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 exercise of stock options granted to employees, if any.

 

(3) The Dollar amounts shown for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 were translated at the rate of Won 1,086.1 to US$1.00, Won 1,155.5 to US$1.00, Won 1,112.9 to US$1.00, Won 1,067.4 to US$1.00 and Won 1,203.7 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(18) 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 margin represents operating profit divided by operating revenue and other income.

 

(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, 2020, 2019, 2018, 2017 and 2016 include 2.3 million subscribers, 2.9 million subscribers, 3.5 million subscribers, 3.4 million subscribers and 3.2 million subscribers, respectively, of mobile virtual network operators (“MVNO”) that lease our wireless networks.

 

(14) The number of 5G subscribers as of December 31, 2020 includes approximately 400 subscribers of MVNOs that lease our 5G network.

 

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

 

(16) The number of LTE subscribers as of December 31, 2020, 2019, 2018, 2017 and 2016 include 0.7 million subscribers, 0.6 million subscribers, 0.6 million subscribers, 0.5 million subscribers and 0.3 million subscribers, respectively, of MVNOs that lease our LTE network.

 

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

 

(18) 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.

 

(19) 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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(20) 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.

 

(21) 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. In the fiscal year beginning on January 1, 2020, we applied the agenda decision, Lease Term and Useful Life of Leasehold Improvements (IFRS 16 Leases and IAS 16 Property, Plant and Equipment)—November 2019, published by the International Financial Reporting Interpretations Committee (“IFRIC”) on December 16, 2019, as a change in accounting policy, and have retrospectively applied such change and restated our consolidated financial statements as of and for the year ended December 31, 2019. The comparative information presented for 2018, 2017 and 2016 has not been restated. See “Item 5.A. Operating Results — Recently Adopted International Financial Reporting Standards – IFRS 16” and note 3 of the notes to our consolidated financial statements.

 

(22) 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 and 2016 has not been restated.

 

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 54.9%, in terms of number of wireless subscribers (including an aggregate of 9.8% attributable to MVNOs that lease KT’s and LG U+’s respective networks), as of December 31, 2020.

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,

 

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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, 2020, our market share of the fixed-line telephone and VoIP service market was 15.8% (including the services provided by SK Broadband Co., Ltd. (“SK Broadband”) and SK Telink Co., Ltd. (“SK Telink”)) in terms of number of subscribers compared to KT with 56.8% and LG U+ with 19.1%. In addition, our broadband Internet access, Internet protocol TV (“IPTV”) and cable TV services provided through SK Broadband compete with other providers of such services, including KT, LG U+ and cable companies. Furthermore, our IPTV and cable TV services are facing an increasing level of competition from global operators of online video streaming platforms, such as YouTube, Amazon Video and Netflix, and the video services offered by leading domestic online and mobile search and communications platforms including NAVER and Kakao, as such services continue to become increasingly popular to serve as a substitute to traditional television programming. As of December 31, 2020, our market share of the broadband Internet market was 29.0% in terms of number of subscribers compared to KT with 41.1% and LG U+ with 20.3%. As of December 31, 2020, our market share of the pay TV market (which includes IPTV, cable TV and satellite TV) was 24.4% compared to KT with 32.2% (including its IPTV and satellite TV services) and LG U+ with 25.0% (including its IPTV and cable TV services), and the collective market share of other pay TV providers was 18.4%.

Recently, the Korean fixed-line telecommunications industry has been going through significant consolidation involving major pay television service providers. In April 2020, we completed the merger of Tbroad Co., Ltd., a former leading cable television and other fixed-line telecommunication services provider in Korea, and two of its subsidiaries, Tbroad Dongdaemun Broadcasting Co., Ltd. and Korea Digital Cable Media Center Co. Ltd. (collectively, “Tbroad”), with and into SK Broadband. As a result of the merger and the issuance of SK Broadband’s shares to the former shareholders of Tbroad with an aggregate fair value of Won 862.1 billion as of April 30, 2020, we own approximately 74.3% of SK Broadband’s total outstanding shares as of December 31, 2020. In the same month, SK Telecom acquired a 55.0% equity interest in Broadband Nowon Co., Ltd. (formerly known as Tbroad Nowon Broadcasting Co., Ltd.), another subsidiary of Tbroad Co., Ltd., for a purchase price of Won 10.4 billion in cash. As a result of such transactions (the “Tbroad Merger”), we have become the third-largest pay TV provider in Korea in terms of number of subscribers as of December 31, 2020. 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 as of December 31, 2020. 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 than one-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. There are bills currently pending in the National Assembly to abolish the previous market share regulations on cable TV and IPTV service providers. It is uncertain whether such bills will be passed.

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 2020, the monthly churn rate in our wireless telecommunications business ranged from 1.1% to 1.4%, with an average monthly churn rate of 1.2%, which remained unchanged from 2019. 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 competes with other large physical security service providers, including S-1 Corporation (“S-1”) and KT Telecop Co., Ltd. (“KT Telecop”). As of December 31, 2020, our market share of the physical security services market was 34% in terms of the aggregate revenue of these three companies, compared to

 

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S-1 with 55% and KT Telecop with 11%. Our information security services compete with other providers of similar products and services, such as Ahnlab, Inc., SECUi Corp. and Igloo Security, Inc.

With respect to the e-commerce business operated by Eleven Street Co., Ltd. (“Eleven Street”), 11st, our marketplace business, faces intense competition from various e-commerce providers, including online open marketplaces and social commerce operators such as Coupang, Gmarket, Auction and Interpark. We also face competition from leading online and mobile search and communication platform companies with e-commerce operations, including NAVER and Kakao, as well as 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 various e-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 first 5G-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 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 terminated our second generation CDMA wireless services in July 2020. 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 2020, 2019 and 2018, we spent Won 1,878.6 billion, 2,514.3 billion and Won 1,735.6 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

 

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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.

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 — 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 2022. Currently, 14 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

 

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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 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, beginning in December 2020, the MSIT has fifteen days to object to any new rates and terms of service reported by us, compared to the prior regulations that required us to obtain prior approval from the MSIT to raise our existing rates or introduce new rates. 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.

COVID-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, has materially and adversely affected the global economy and caused significant volatility in global financial markets to date as well as disrupted our business operations. The World Health Organization declared COVID-19 as a pandemic in March 2020. We have implemented remote work arrangements for most of our employees at our headquarters and certain other locations from time to time in light of the Government’s recommendation for social distancing. In addition, the travel restrictions imposed by governments in response to the COVID-19 pandemic has resulted in a decrease in revenue from roaming services, and the pandemic has also contributed to lower customer demand for new wireless devices, resulting in a decrease in our wireless device sales revenue. While we do not believe that the COVID 19 pandemic and the resulting temporary remote work arrangements or such decreases in revenue have had a material adverse impact on our business to date, a prolonged outbreak of COVID-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, among others, lead to a reduction in labor

 

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productivity, as well as further decrease in revenue from roaming services or wireless device sales.

Other risks associated with a prolonged outbreak of COVID-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 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 from COVID-19. In the event that COVID-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, 2020, 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, 2020, the fair value of our holding in SK Hynix was Won 17,312.9 billion. We received dividend payments of Won 146.1 billion in 2020, Won 219.2 billion in 2019 and Won 146.1 billion in 2018 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, the industry 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 global COVID-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 or corporate reorganizations, 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. We also continue to seek ways to optimize our corporate structure to maximize the value of our traditional businesses on the one hand and newly developed businesses on the other. Accordingly, we are often engaged in evaluating potential transactions and other strategic alternatives as well as corporate reorganizations, some of which may be significant in size.

For example, we completed the Tbroad Merger in April 2020 and became the third-largest pay TV provider in Korea in terms of number of subscribers as of December 31, 2020. 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 owned 100% of ADT CAPS Co., Ltd. (“Former ADT CAPS”), 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 Former 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 Inc. (which changed its English name from SK Holdings Co., Ltd. to SK Inc. as of March 29, 2021), 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, with Won 55.2 billion in cash and Won 5.7 billion in contribution-in-kind in 2018 and through our participation in its capital increases in 2019 and 2020, as a result of which our equity interest in id Quantique was 68.1% as of December 31, 2020. We have subsequently combined LSH, Former ADT CAPS and SK Infosec into a single entity through a series of mergers that were completed in March 2021, and the surviving entity, SK Infosec, changed its name to ADT CAPS Co., Ltd. (“ADT CAPS”) and has become the principal consolidated subsidiary that operates our security business.

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 mobile over-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, 2020, we held 30.0% of the total outstanding shares of Content Wavve. In addition, Eleven Street is currently in discussions with Amazon.com, Inc. regarding a potential partnership. 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.”

Furthermore, in December 2020, we spun off our mobility business into a new wholly-owned subsidiary, T map Mobility Co., Ltd. (“T Map Mobility”), in order to enhance its competitiveness and promote its future growth, and we have also formed a strategic partnership with Uber Technologies, Inc. (“Uber”) pursuant to which Uber has invested approximately US$50 million in T Map Mobility and approximately US$100 million in UT LLC, a joint venture formed in April 2021 between T Map Mobility and Uber in which we hold a 49.0% interest. Through UT LLC, we will launch a taxi hailing service that integrates our affiliated taxi driver network and mapping and AI technologies with Uber’s ride hailing technology. See “Item 4.B. Business Overview — Other Businesses — Miscellaneous Businesses — Mobility Business.”

 

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In order to pursue enhancement of shareholder value and acceleration of our growth, we are currently considering a potential corporate restructuring whereby we would split into a wireless and fixed-line telecommunications company (including our interest in, among others, SK Broadband) and a holding company that would hold interests in semiconductor and new ICT businesses (including our interest in, among others, SK Hynix, ADT CAPS, Eleven Street and T Map Mobility) (the “Spin-off Company”). Such restructuring would be implemented through a horizontal spin-off transaction (“injeok bunhal”) under Korean law, whereby the Spin-off Company would be newly incorporated and our existing shareholders would receive shares of the Spin-off Company on a pro rata basis. Further decisions regarding such potential spin-off, if any, are expected to be made in the first half of 2021.

While we are hoping to benefit from a range of synergies from our recent or future acquisitions and corporate reorganizations as well as develop new growth engines for our business, we may not be able to successfully complete or integrate such acquisitions, new businesses or reorganized entities 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-based in-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 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, 2020 was approximately 134.2%, 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 136.6 billion in 2020, Won 133.1 billion in 2019 and Won 151.7 billion in 2018. For more information regarding the various bandwidths that we use and the usage right fees for such bandwidths, see “Item 4.B. Business Overview — Law and Regulation — Frequency Allocation,” “Item 5.B. Liquidity and Capital Resources — Capital Requirements — Capital Expenditures” and note 17 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

 

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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.

In November 2020, the MSIT announced plans to reallocate a total of 310 MHz of frequency bandwidths whose usage terms are due to expire in 2021 to KT, LG U+ and us, 95 MHz of which will be allocated to us. The final consideration to be paid by us for such reallocated bandwidths will depend on the number of 5G cell sites constructed by us until 2022, and the aggregate consideration to be paid by KT, LG U+ and us is expected to range between approximately Won 3.2 trillion and Won 3.8 trillion. 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 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 net debt-to-EBITDA ratio of 3.50 and a minimum EBITDA-to-total interest expense 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

 

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telecommunication businesses. We spent Won 3,557.8 billion for capital expenditures in 2020. We expect to spend a similar amount for capital expenditures in 2021 compared to 2020 for a range of projects, including investments to expand and improve our newly implemented 5G network, investments to maintain our LTE network and LTE-A services, investments to improve and expand our Wi-Fi network, investments to develop our IoT solutions and platform services business portfolio, including AI solutions, investments in data infrastructure, investments in research and development of 5G technology, investments in businesses that can potentially leverage our 5G network, and funding for mid- 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 November 2020, the MSIT announced plans to reallocate a total of 310 MHz of frequency bandwidths whose usage terms are due to expire in 2021 to KT, LG U+ and us, 95 MHz of which will be allocated to us. The final consideration to be paid by us for such reallocated bandwidths will depend on the number of 5G cell sites constructed by us until 2022, and the aggregate consideration to be paid by KT, LG U+ and us is expected to range between approximately Won 3.2 trillion and Won 3.8 trillion. We would be required to spend additional amounts on capital expenditures in connection with building out our networks on such reallocated bandwidths.

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, 2020, we had Won 2,163.4 billion in contractual payment obligations due in 2021, 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 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.

 

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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 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 have never experienced 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.

 

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Every two years, the union and management negotiate and enter into a new collective bargaining agreement that has a two-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.

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.

 

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If SK Inc. 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 Inc., 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, 2020, SK Inc. owned 21,624,120 shares of our common stock, or 26.8%, of our issued shares. SK Inc. is currently not deemed to be a foreign entity. However, should SK Inc. 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, 2020, which we believe was 33.4%) would exceed the 49.0% ceiling on foreign shareholding. As of December 31, 2020, the two largest foreign shareholders of SK Inc. 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 Inc. if the breach is caused by an increase in foreign ownership of SK Inc.) and the foreign shareholder which owns in the aggregate 15.0% or more of SK Inc. Furthermore, if SK Inc. 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 of growth and uncertainty, and starting in 2020, the overall Korean economy and the economies of Korea’s major trading partners have shown signs of deterioration due to the debilitating effects of the COVID-19 pandemic. See “— 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.” As a result, 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 and the increasing weakness of the global economy, in particular due to the COVID-19 pandemic, have 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 and, as a result of deteriorating global and Korean economic conditions, there has been significant volatility in the stock prices of Korean companies recently. 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 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;

 

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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 ongoing global COVID-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, including as a result of the COVID-19 pandemic;

 

  

deterioration in the financial condition or performance of small- and medium-sized enterprises and other companies in Korea due to the Government’s policies to increase minimum wages and limit working hours of employees;

 

  

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

 

  

social and labor unrest;

 

  

substantial changes in the market prices of Korean real estate;

 

  

a substantial 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, in particular in light of the Government’s ongoing efforts to provide emergency relief payments to households and emergency loans to corporations in need of funding in light of COVID-19, which, together, would likely lead to a national budget deficit as well as an increase in the Government’s debt;

 

  

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 any changes to 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;

 

  

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;

 

  

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.

 

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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 Nuclear Non-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.

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, annual 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.

 

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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 Inc. 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, 2020, SK Inc. 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.

We believe that we may be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ending December 31, 2020 and that there is a significant risk that we will be classified as a PFIC in the current and future taxable years, which could subject U.S. investors in our common shares or ADSs to significant adverse U.S. federal income tax consequences.

As a result of changes in the composition and value of our assets as implied by the price of our ADSs, we believe that we may be classified as a “passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes for our taxable year ending December 31, 2020, and that there is a significant risk that we will be a PFIC for the current and future taxable years.

A non-U.S. corporation will be a PFIC if, in any particular taxable year, either (a) 75% or more of its gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of its assets (generally determined on the basis of a quarterly average) is attributable to assets that produce or are held for the production of passive income.

If we are classified as a PFIC in any taxable year, a U.S. holder (as defined in “Item 10.E. Additional Information — Taxation — United States Federal Income Tax Considerations”) may incur significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of the common shares or ADSs and on the receipt of distributions on the common shares or ADSs to the extent such gain or distribution is treated as an “excess distribution” under the U.S. federal income tax rules, and such U.S. holder may be subject to burdensome reporting requirements. 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 that the U.S. holder holds its common shares or ADSs. Further, if we are a PFIC for any year during which a U.S. holder holds our commons shares or ADSs, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our common shares or ADSs unless we cease to be a PFIC and the U.S. holder makes a special election.

 

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A U.S. holder may be able to avoid the unfavorable rules described above by electing to mark its ADSs to market, provided the ADSs are treated as “marketable stock.” The ADSs generally will be treated as marketable stock if the ADSs are “regularly traded” on a “qualified exchange or other market” (which includes the New York Stock Exchange). Further, it should be noted that only the ADSs and not the common shares are listed on the New York Stock Exchange. Consequently, a U.S. holder that holds common shares that are not represented by ADSs may not be eligible to make a mark-to-market election in respect of those common shares.

U.S. holders are strongly urged to consult their own tax advisors regarding our potential classification as a PFIC and regarding the U.S. federal income tax consequences of acquiring, holding, and disposing of our common shares or ADSs if we are so classified, including the advisability of making a “mark-to-market” election, if available. See “Item 10.E. Additional Information — Taxation — United States Federal Income Tax Considerations — Passive Foreign Investment Company Rules” for more details.

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 6,600,692 shares as of March 31, 2021, exceeds a specified maximum, which was 24,321,893 shares as of March 31, 2021, subject to adjustment under certain 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 Inc., 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

 

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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.

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 or non-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 of state-of-the-art wireless technologies. We had 31.4 million wireless subscribers, including MVNO subscribers leasing our networks, as of December 31, 2020, representing a market share of 45.1%, 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, mobility, 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, 2020, we held a 20.1% equity interest in SK Hynix.

On March 31, 2021, we had a market capitalization of approximately Won 22.2 trillion (US$19.7 billion, as translated at the noon buying rate of March 31, 2021) or approximately 1.0% of the total market capitalization on

 

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the KRX KOSPI Market, making us the 17th largest company listed on the KRX KOSPI Market based on market capitalization on that date. Our ADSs, each representing one-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 SK T-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 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, 2020, the market share of the Korean wireless telecommunications market, in terms of number of subscribers, of KT and LG U+ was approximately 31.4% and 23.5%, respectively (compared to our market share of 45.1%), each including MVNO subscribers leasing the respective networks. As of December 31, 2020, MVNOs had a combined market share of 13.1%, of which MVNOs leasing our networks represented 3.3%, MVNOs leasing KT’s networks represented 7.1% and MVNOs leasing LG U+’s networks represented 2.7%.

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 24.8 lines per 100 population as of December 31, 2020, and wireless penetration increasing from 7.0 subscribers per 100 population in 1996 to 134.2 subscribers per 100 population as of December 31, 2020. The table below sets forth certain subscription and penetration information regarding the Korean telecommunications industry as of the dates indicated:

 

   As of December 31, 
   2020   2019   2018   2017   2016 
   (In thousands, except for per population amounts) 

Population of Korea(1)

   51,829    51,850    51,826    51,779    51,696 

Wireless Subscribers(2)

   69,542    67,937    65,360    62,651    60,287 

Wireless Subscribers per 100 Population

   134.2    131.0    126.1    121.0    116.6 

Telephone Lines in Service

   12,859    13,600    14,334    15,039    15,746 

Telephone Lines per 100 Population

   24.8    26.2    27.7    29.0    30.5 

 

 

(1)

Source: The Ministry of the Interior and Safety.

(2)

Includes subscribers of non-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

 

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and the implementation of LTE and 5G technologies providing for fast data transmission speeds and large data transmission capacity. As of December 31, 2020, approximately 59.9 million Korean wireless subscribers owned Internet-enabled handsets capable of accessing wireless Internet services, including 52.2 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, 
   2020  2019  2018  2017  2016 
   (In thousands, except for percentage data) 

Number of Wireless Internet-Enabled Handsets

   59,886   58,812   58,074   56,576   55,085 

Number of Smartphones

   52,223   51,132   49,442   48,660   46,418 

Total Number of Wireless Subscribers(1)

   69,542   67,937   65,360   62,651   60,287 

Penetration of Wireless Internet-Enabled Handsets

   86.1  86.6  88.9  90.3  91.4

Penetration of Smartphones

   75.1  75.3  75.6  77.7  77.0

 

 

(1)

Includes subscribers of non-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 2020, the number of broadband Internet access subscribers increased from approximately 17.2 million to approximately 22.3 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, 
   2020   2019   2018   2017   2016 
   (In thousands) 

Number of Broadband Internet Access Subscribers(1)

   22,330    21,906    20,989    20,349    19,818 

Number of IPTV Subscribers

   19,365    17,989    16,599    15,381    11,850 

 

 

(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 of state-of-the-art wireless and fixed-line technologies and services as well as develop our next-generation growth businesses in media, security, commerce, mobility, 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 cable TV services) and business communications services;

 

  

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

 

  

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

 

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other businesses, which include our portal service, mobility business, 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, mobility, 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 and evolve into a subscription-based marketing company. We plan to maintain our leadership in the wireless services business by offering innovative 5G services that provide differentiated subscriber experiences. 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 products and services that meet such needs. Furthermore, we intend to broaden the range of our product and service offerings for subscription to new business areas such as rental, gaming and overseas shipment and further expand our subscriber base to promote our growth and evolve into a “subscription-based marketing company.”

 

  

Develop our next-generation growth businesses through 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.

As part of our ongoing efforts to pursue such strategies, we are currently considering a potential corporate restructuring whereby we would split into a wireless and fixed-line telecommunications company (including our interest in, among others, SK Broadband) and the Spin-off Company, which would hold interests in semiconductor and new ICT businesses (including our interest in, among others, SK Hynix, ADT CAPS, Eleven Street and T Map Mobility). Such restructuring would be implemented through a horizontal spin-off transaction (“injeok bunhal”)

 

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under Korean law, whereby the Spin-off Company would be newly incorporated and our existing shareholders would receive shares of the Spin-off Company on a pro rata basis. Further decisions regarding the potential spin-off, if any, are expected to be made in the first half of 2021.

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 31.4 million wireless subscribers, including MVNO subscribers leasing our networks, as of December 31, 2020, representing a market share of 45.1%, 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, 
   2020   2019   2018   2017   2016 
   (in thousands) 

Network

          

5G

   5,476    2,084    —      —      —   

LTE

   22,848    25,022    24,796    22,865    21,078 

WCDMA

   2,920    3,986    5,174    5,842    6,491 

CDMA(1)

   139    443    912    1,488    2,026 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   31,384    31,535    30,882    30,195    29,595 

 

 

(1)

In July 2020, we terminated our second generation wireless services using our CDMA network. CDMA subscribers as of December 31, 2020 consist of subscribers who have not upgraded to our other networks or terminated their subscriptions as of such date.

In 2020, 2019 and 2018, our cellular services segment revenue was Won 12,295.7 billion, Won 12,177.5 billion and Won 12,378.9 billion, respectively, representing 66.0%, 68.6% and 73.4%, 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 a voice-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 and e-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.

 

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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 developing low-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, 2020, approximately 23.9 million, or 76.3%, of our subscribers (including MVNO subscribers leasing our networks) owned smartphones that have direct access to the Internet compared to approximately 23.6 million subscribers, or 74.8%, as of December 31, 2019. 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 a Wi-Fi connection. The tablets run primarily on the Apple iOS and Google Android operating systems. In addition, we also offer “T Pocket-Fi” devices that provide a mobile LTE connection and are capable of connecting multiple Wi-Fi enabled devices to the Internet at one time. We offer targeted rate plans for our T Pocket-Fi device. See “— Rate Plans” below.

Wearable Devices.    We offer various wearable devices, which primarily comprise smart watches. These devices utilize our digital wireless networks and have specific features for the relevant target customer. 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 by massive machine-type communication (“mMTC”) 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-speed LTE-M network in March 2016 and our low-cost Low-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 we have further enhanced our competitiveness in this business with our newly deployed 5G network.

We provide network access and customized IoT solutions to our business customers. Our IoT 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 a one-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, 2020, Cloud EMS had approximately 220 customers, mostly from energy-intensive industries such as the petrochemical industry as well as the luxury retail industry.

Platform Services

Through our platform services business, we seek to provide innovative AI products and services that meet our customers’ evolving needs in an increasingly connected world. In September 2016, we launched NUGU, the first

 

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intelligent AI service launched in Korea with Korean language capabilities based on advanced voice recognition technologies. NUGU is one of the leading AI platforms in Korea, which offers a wide range of devices and services that enhance various aspects of everyday life of our customers, such as homes, cars and mobile phones. 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 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 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.

We have also integrated NUGU into our T map service as well as our B tv service as further discussed in “— Other Businesses — Miscellaneous Businesses — Mobility Business” and “— Fixed-line Telecommunication Services — Advanced Media Platform (including IPTV and Cable TV Services).”

In addition, we integrated NUGU into our “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. The integrated “T phone × NUGU” service allows T phone users to search phone numbers, make calls, send text messages and experience other AI-based services through voice commands. Through Dreamus Company, we also offer “NUGU buds,” which are wireless earbuds that enable users to launch and operate “T phone × NUGU” while wearing them without touching their smartphones.

In 2018, we launched “NUGU developers,” a platform on which third-party manufacturers and developers can create and launch new services based on NUGU technology and incorporate NUGU capabilities into their applications or devices. In 2020, we launched “NUGU carecall” in response to the COVID-19 pandemic, which is a service that tracks and records symptoms of persons subject to monitoring through mobile phones. We continue to explore ways in which we can leverage our NUGU technology to launch new, and enhance our existing, products and services.

Other New Businesses

We are preparing to launch a variety of integrated cloud services based on our advanced 5G MEC technology and platform for business customers that require secure and ultra-low latency communications, focusing on the media, logistics, healthcare, finance and manufacturing industries. We completed the construction of MEC infrastructure at four strategic locations during 2020 and we launched our first MEC-based cloud service, “5GX Edge Cloud,” in collaboration with Amazon Web Services in December 2020. We have entered into strategic partnerships with Amazon Web Services and other leading cloud service providers to pursue further collaboration on MEC-based cloud services. We also plan to provide smart factory solutions that can leverage our 5G technology and MEC-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 96.4% of our subscribers received our wireless telecommunications services on a postpaid basis as of December 31, 2020. 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

 

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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, 2020, approximately 4.5 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 2020, a majority of our new LTE subscribers have subscribed to the “T” plans. In January 2021, we also launched “Un-tact” plans that are exclusively available through our online distribution channel, ranging from Won 38,000 to Won 62,000 per month for 5G services and from Won 22,000 to Won 48,000 per month for LTE services. 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.

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 T Pocket-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.

Data Add-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. 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.

Roaming Plans.    Our representative international roaming service plans include our “baro 3 GB,” “baro 4 GB and “baro 7 GB” plans for long-term travel, 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 180 countries for Won 29,000, Won 39,000 and Won 59,000, respectively, as well as our “baro OnePass 300” and “baro OnePass 500” plans suitable for short-term travel, 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 180 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 94 countries. All of our “baro” plans include free high-quality data voice calls to Korea through our T phone

 

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application. We also provide to all of our roaming service subscribers 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). 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, 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 state-of-the-art 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 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 first 5G-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 cities. As part of this coverage expansion, as of December 31, 2020, we have established 189 “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 2.75 Gbps, and our 5G penetration was 17.4% as of December 31, 2020. We have also deployed our 5G network for mMTC connections relating to our IoT solutions.

We believe that our 5G technology and network infrastructure enable us to provide the fastest 5G data transmission network nationwide. In December 2020, the MSIT announced that our 5G 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 5G network was 795.6 Mbps compared to 667.5 Mbps for KT’s 5G network and 608.5 Mbps for LG U+’s 5G network.

 

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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 WCDMA network. Since first commencing our LTE services in July 2011 and LTE-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-band LTE-A services utilizing 4x4 multiple-input multiple-output (“MIMO”) technology providing for data transmission speeds of up to 1 Gbps, and we commenced five-band LTE-A services using 4x4 MIMO technology that provide data transmission speeds of up to 1.15 Gbps in March 2019 and up to 1.25 Gbps in March 2020. With these developments in LTE technology, our LTE penetration increased to 72.8% as of December 31, 2020 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 improved LTE-A technology to increase the maximum data transmission speed of our services. For machine-to-machine connections relating to our IoT solutions, we launched our LTE-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 

Wideband LTE-A

  June 2014   225 Mbps 

Tri-band LTE-A

  December 2014   300 Mbps 

Five-band LTE-A

  June 2017   700 Mbps 

Tri-band LTE-A with 4x4 MIMO

  June 2017   900 Mbps 

Four-band LTE-A with 4x4 MIMO

  February 2018   1 Gbps 

Five-band LTE-A with 4x4 MIMO

  March 2019   1.15 Gbps 

Five-band LTE-A with 4x4 MIMO

  March 2020   1.25 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 2020, 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 207.7 Mbps compared to 142.1 Mbps for KT’s LTE network and 109.5 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.

WCDMA and CDMA Networks.    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 former 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.

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 terminated our second generation CDMA wireless services in July 2020.

Wi-Fi Network.    Wi-Fi technology enables our subscribers with Wi-Fi-capable devices such as smartphones, laptops and tablet computers to access mobile Internet. We started to build Wi-Fi access points in 2010 and, as of

 

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December 31, 2020, we had more than 117,000 Wi-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 each Wi-Fi access point typically has a radius of approximately 20-30 meters, some of our Wi-Fi hot zones, which have multiple Wi-Fi access points, including those installed at public transportation facilities and amusement parks, have much wider service areas.

LoRa Networks.    A Low-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, 2020, our 5G, LTE and WCDMA networks had an aggregate of 57,932 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.

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 and point-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.

 

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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 3,200 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, 2020, we operated more than 600 T Premium Stores. In October 2020, we opened “T Factory,” a facility that offers a wide range of experiences with wireless devices as well as our subscription services and also includes an unmanned store that is open seven days a week and 24 hours a day.

In addition, we operate an online distribution channel, “T Direct Shop,” through which subscribers can conveniently purchase wireless devices and subscribe to our services online. We also operate a dedicated online shop on 11st, our e-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 Direct Shop 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, 2020, we had an aggregate of Won 96.8 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. SK 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, 23 years and 21 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 cable TV services) 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, 
   2020   2019   2018 

Fixed-Line Telephone (including VoIP)(1)

   3,753,246    3,913,274    4,132,265 

Broadband Internet

   6,475,930    5,613,200    5,404,866 

IPTV(2)

   5,657,328    5,193,329    4,729,238 

Cable TV

   2,928,912         

 

 

(1)

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

 

(2)

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

In 2020, 2019 and 2018, our fixed-line telecommunication services segment revenue was Won 3,405.7 billion, Won 2,940.1 billion and Won 2,822.3 billion, respectively, representing 18.3%, 16.6% and 16.7%, 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), the T-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunications services segment in 2018, 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, we completed the Tbroad Merger in April 2020. We currently own approximately 74.3% of SK Broadband’s total outstanding shares. See “Item 3.D. Risk Factors — Risks Relating to Our Business — We may fail to successfully complete, integrate or realize the anticipated benefits of our new acquisitions, joint ventures or other strategic alternatives or corporate reorganizations, and such transactions may negatively impact our business.”

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, 2020, we had approximately 3.8 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, 2020. As of December 31, 2020, we had approximately 6.5 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 and Cable TV Services)

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

We have offered video-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 267 high definition channels

 

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depending on the subscription service as of December 31, 2020, as well as video-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, 2020, we had approximately 5.7 million IPTV subscribers. In January 2018, we launched B tv × NUGU, which is an all-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.

Following the Tbroad Merger, we also offer cable TV services under the “B tv Cable” brand with access to as many as 213 channels. As of December 31, 2020, we had approximately 2.9 million cable TV subscribers.

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 allow point-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 provide back-up storage for transmitted data. Through our Internet data centers, we provide our business subscribers with server-based support including co-location, dedicated server hosting and cloud computing services. Our network solution service utilizes our network infrastructure and voice platform to provide 24-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 and on-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 86% 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 or cable TV services, which are subject to a contract of one to three years, range from Won 30,800 to Won 67,650 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 “5,000 minute” plan for subscribers to our fixed-line telephone service features 5,000 voice minutes for domestic land-to-land calls 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 25,410 to Won 104,500 per month depending on the data throughput speed and existence and length of a contract. We offer individual fixed-rate plans for our IPTV and cable TV services that range from Won 4,400 to Won 25,300 per month depending on the number

 

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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.

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 and cable TV services) 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 60 customer centers and a network of more than 310 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 and cable TV services), 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 into sub-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 our in-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 and follow-up service.

Security Services

Our security business consists of physical security services and information security services provided by ADT CAPS. In 2020, 2019 and 2018, our security services segment revenue was Won 1,246.5 billion, Won 1,109.5 billion and Won 284.3 billion, respectively, representing 6.7%, 6.3% and 1.7%, respectively, of our consolidated revenue. Our security services businesses, which were previously part of our other businesses segment in 2018, were reclassified as a new security services segment in 2019.

ADP CAPS (formerly known as SK Infosec), the surviving entity resulting from the merger of LSH with and into SK Infosec in December 2020 and the merger of Former ADT CAPS with and into SK Infosec in March 2021, operates our security business. We currently own approximately 62.6% of the equity interest in ADT CAPS. We had acquired Former ADT CAPS, which operated our physical security business prior to such mergers, in October 2018 by acquiring a 55.0% interest in LSH, which owned 100% of Former 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 Former ADT CAPS. We had acquired SK Infosec, which operated our information security business prior to the mergers, from SK Inc., 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 Inc. in exchange for all of the issued and outstanding common shares of SK Infosec.

 

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Physical Security

We provide a variety of physical security services utilizing our flagship unmanned surveillance and dispatch platform called the Central Monitoring Services (“CMS”), which 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.

We provide services that utilize synergies between our security business and other key business segments, such as “T Safe Security,” a CMS-based video surveillance and security guard dispatch service offered through the distribution channels for our wireless services. In addition, we offer bundle-based discounted rate plans such as “T&CAPS” and “B&CAPS,” which bundle our wireless service and broadband Internet service, respectively, with our physical security service. Beginning in June 2019, with the launch of T map Parking, we also operate a parking management and security solutions business. See “— Other Businesses — Miscellaneous Businesses — Mobility Business” below.

In response to the COVID-19 pandemic, we have also launched a range of services in 2020 related to disease preventive measures as well as remote work arrangements, such as “CAPS Smart Check” and “CAPS Smart Walk-In,” access security solutions with face recognition and thermometer functions, “CAPS Cleancare,” a disinfection and extermination service, and “CAPS Office Home,” a remote work office solution with information technology and security infrastructure.

Information Security

Our information security services consist of information security consulting services, managed security services as well as cyber threat intelligence solutions. Our representative product is “Secudium IoT,” a convergence security service that combines information, physical and operational technology security services into a single platform.

Commerce Services

Our commerce services segment consists primarily of “11st,” our online marketplace business operated by Eleven Street, and “SK stoa,” our interactive T-commerce network. In 2020, 2019 and 2018, our commerce services segment revenue was Won 792.9 billion, Won 710.7 billion and Won 728.4 billion, respectively, representing 4.3%, 4.0% and 4.3%, 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), the T-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunications services segment in 2018, 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- to large-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, 2020, 11st was the second-largest 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, which has grown significantly in recent years, accounted for 68%, 64% and 62% of 11st’s annual gross merchandise volume, which represents the total annual monetary value of customer purchases of goods and services, net of estimated refunds. 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.

 

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Eleven Street was spun-off as our new consolidated subsidiary from SK Planet Co., Ltd. (“SK Planet”) in September 2018. In connection with such spin-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, 2020.

T-Commerce

We also operate a T-commerce network, “SK stoa,” through our consolidated subsidiary SK Stoa, which offers a broad assortment of goods and services through pre-recorded television programming. The goods and services promoted on SK stoa’s T-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 utilizing video-on-demand capabilities. In September 2019, SK Stoa launched “Hellen Karen,” its own private fashion brand. SK stoa also acts as the exclusive T-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, which we include in our other businesses segment. In 2020, 2019 and 2018, our other businesses segment revenue was Won 883.9 billion, Won 803.0 billion and Won 660.1 billion, respectively, representing 4.7%, 4.5% and 3.9%, respectively, of our consolidated revenue.

Mobility Business

We provide mobility services through T Map Mobility, a wholly-owned subsidiary of SK Telecom created as a result of a spin-off of SK Telecom’s mobility business into a newly incorporated entity as of December 29, 2020. As a result of such spin-off, our mobility business, which was previously part of our cellular services segment, became a part of our other businesses segment beginning December 29, 2020.

Our mobility services is offered through our “T map” platform, which is the leading global positioning system (“GPS”) navigation service in Korea provided 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, 2020, there were approximately 12.4 million monthly average users of our T map service. We have integrated our AI platform, NUGU, into our T map service to enable users to use voice commands to operate its navigation functions as well as their mobile devices, such as calling, text messaging and music streaming, while driving to enhance the convenience and safety of T map users.

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, 2020, T map Taxi and T map Parking had approximately 0.6 million and 0.1 million monthly active users, respectively.

We have entered into strategic partnerships with global ride-hailing service providers. 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 launched a navigation service for Grab drivers based on T map’s key technologies, including big data analysis algorithms and ultra-precise GPS solutions, in Singapore, and we plan to expand such service to other countries in which Grab operates. We also formed a strategic partnership with Uber pursuant to which Uber has invested approximately US$50 million in T Map Mobility and approximately US$100 million in UT LLC, a joint venture formed in April 2021 between T Map Mobility and Uber in which we hold a 49.0% interest. Through UT LLC, we will launch a taxi hailing service that integrates our affiliated taxi driver network and mapping and AI technologies with Uber’s ride hailing technology.

 

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In April 2021, T Map Mobility agreed to receive a Won 400 billion equity investment in the form of common shares from financial investors, Affirma Capital and EastBridge Partners, pursuant to which such financial investors will each hold a 14.0% equity interest in T Map Mobility. The transaction is expected to close in May 2021.

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.

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 free e-mail accounts through Nate Mail.

Others

We offer high-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 2018, we acquired an additional equity interest in Dreamus for Won 65.0 billion, and as of December 31, 2020, 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, 2020, we held 52.1% 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, 2020, we held a 68.1% equity interest in id Quantique.

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, 2020. We acquired such 60.0% equity interest from SK Inc. 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.

 

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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 8.56 per minute, Won 9.15 per minute and Won 9.99 per minute for 2020, 2019 and 2018 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 our fixed-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 10.61 per minute, Won 11.64 per minute and Won 13.07 per minute for 2020, 2019 and 2018, 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 the fixed-line-to-wireless interconnection rate set out in the table above.

Our revenues from the wireless-to-wireless charge were Won 449.1 billion in 2020, Won 463.8 billion in 2019 and Won 498.5 billion in 2018. Our expenses from these charges were Won 451.6 billion in 2020, Won 464.1 billion in 2019 and Won 494.2 billion in 2018. 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 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

 

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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, 2020, for the following markets.

 

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

Wireless Service(1)

   45.1  31.4  23.5  

LTE Service(1)

   43.5   30.8   25.7    

5G Service(1)

   46.2   30.6   23.2    

Fixed-Line Telephone (including VoIP)

   15.8   56.8   19.1   8.3 

Broadband Internet

   29.0   41.1   20.3   9.6 

Pay TV(2)

   24.4(3)   32.2(4)   25.0(5)   18.4 

 

 

(1)

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

 

(2)

Includes video-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 16.1% from our IPTV service and 8.3% from our cable TV service.

 

(4)

Consists of 24.9% from KT’s IPTV service and 7.3% from its satellite TV service provided through KT Skylife Co, Ltd., a subsidiary of KT.

 

(5)

Consists of 14.0% from LG U+’s IPTV service and 11.0% from its cable TV service provided through LG HelloVision, a subsidiary of LG U+.

Cellular Services

As of December 31, 2020, we had 31.4 million subscribers, representing a market share of approximately 45.1%, including MVNO subscribers leasing our networks. As of December 31, 2020, KT and LG U+ had 21.8 million and 16.3 million subscribers, respectively, representing approximately 31.4% and 23.5%, respectively, of the total number of wireless subscribers in Korea on such date, each including MVNO subscribers leasing its networks. As of December 31, 2020, we had 5.5 million 5G subscribers and KT and LG U+ had 3.6 million and 2.8 million 5G subscribers, respectively, each including MVNO subscribers leasing its networks. As of December 31, 2020, we had 22.8 million LTE subscribers and KT and LG U+ had 16.2 million and 13.5 million LTE subscribers, respectively, each including MVNO subscribers leasing its networks.

In 2020, we had 4.4 million activations and 4.5 million deactivations. For 2020, our monthly churn rate ranged from 1.1% to 1.4%, with an average monthly churn rate of 1.2%, which remained unchanged from 2019. In 2020, we gained 41.8% of the total number of new wireless subscribers and subscribers that migrated to a different wireless telecommunications service provider, compared to KT with 30.6% and LG U+ with 27.6%.

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, 14 MVNOs provide wireless telecommunications services using the networks leased from us. As of December 31, 2020, MVNOs had a combined market share of 13.1%, of which MVNOs leasing our networks represented 3.3%, MVNOs leasing KT’s networks represented 7.1% and MVNOs leasing LG U+’s networks represented 2.7%.

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

 

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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 24.5% in 2018, 25.6% in 2019 and 26.1% in 2020. 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. 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, 2020, our market share of the fixed-line telephone and VoIP service market was 15.8% (including the services provided by SK Broadband and SK Telink) in terms of number of subscribers compared to KT with 56.8% and LG U+ with 19.1%.

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, 2020. As of December 31, 2020, our market share of the broadband Internet market was 29.0% in terms of number of subscribers compared to KT with 41.1% and LG U+ with 20.3%.

Our IPTV and cable TV services compete with other providers of pay TV services, including KT, LG U+ and cable companies. As of December 31, 2020, our market share of the pay TV market (which includes IPTV, cable TV and satellite TV) in terms of number of subscribers was 24.4% compared to KT with 32.2% (including its IPTV and satellite TV services) and LG U+ with 25.0% (including its IPTV and cable TV services), and the collective market share of other pay TV providers was 18.4%. Furthermore, our IPTV and cable TV services are facing an increasing level of competition from global operators of online video streaming platforms, such as YouTube, Amazon Video and Netflix, and the video services offered by leading domestic online and mobile search and communications platforms including NAVER and Kakao, as such services continue to become increasingly popular to serve as a substitute to traditional television programming.

Recently, the Korean fixed-line telecommunications industry has been going through significant consolidation involving major pay television service providers. We completed the Tbroad Merger in April 2020, as a result of which we have become the third-largest pay TV provider in Korea in terms of number of subscribers as of December 31, 2020. 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 as of December 31, 2020. 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 than one-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. There are bills currently pending in the National Assembly to abolish the previous market share regulations on cable TV and IPTV service providers. It is uncertain whether such bills will be passed.

 

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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 competes with other large physical security service providers, including S-1 and KT Telecop. As of December 31, 2020, our market share of the physical security services market was 34% in terms of the aggregate revenue of these three companies, compared to S-1 with 55% and KT Telecop with 11%.

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. Our information security services compete with other providers of similar products and services, such as Ahnlab, Inc., SECUi Corp. and Igloo Security, Inc.

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 various e-commerce providers, including online open marketplaces and social commerce operators such as Coupang, Gmarket, Auction and Interpark. We also face competition from leading online and mobile search and communication platform companies with e-commerce operations, including NAVER and Kakao, as well as 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 T-commerce business, SK stoa, primarily competes with other home shopping providers such as those listed above, as well as with various e-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 include the following:

SK Hynix

As of December 31, 2020, 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.

As of December 31, 2020, the fair value of our holding in SK Hynix was Won 17,312.9 billion. We received dividend payments of Won 146.1 billion in 2020, Won 219.2 billion in 2019 and Won 146.1 billion in 2018 related to such shareholding. In 2020, 2019 and 2018, SK Hynix and its subsidiaries, on a consolidated basis, reported revenues of Won 31,900.4 billion, Won 26,990.7 billion and Won 40,445.1 billion, respectively, profit before income tax of Won 6,237.0 billion, Won 2,432.6 billion and Won 21,341.0 billion, respectively, and profit for the year of Won 4,758.9 billion, Won 2,009.1 billion and Won 15,540.0 billion, respectively. The increase in SK Hynix’s revenues in 2020 was primarily due to increases in the demand for DRAM and NAND flash products, despite decreases in their average selling prices. As of December 31, 2020, 2019 and 2018, SK Hynix and its subsidiaries, on a consolidated basis, reported total assets of Won 71,173.9 billion, Won 65,248.4 billion and Won 63,658.3 billion, respectively, and total equity of Won 51,909.1 billion, Won 47,935.9 billion and Won 46,852.3 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.”

 

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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, 2020, 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, 2020, we held 30.0% of the total outstanding shares of Content Wavve.

Wavve offers over 240,000 titles of video-on-demand contents, including a wide variety of real-time and on-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 data add-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;

 

  

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.

 

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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 take into account the opinion of 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.

 

  

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 or paid-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 and sub-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

 

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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 the sub-subsidiary. Therefore, we and other subsidiaries of SK Inc. 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 Inc. 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. Prior to December 2020, 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 had to obtain prior approval of the MSIT on our rates and terms of service; provided, however, that such pre-approval of the MSIT was not required to reduce the rates for any type of services provided under the MSIT-approved contractual terms. The MSIT’s policy was to approve rates if they were appropriate, fair and reasonable (that is, if the rates had been reasonably calculated, considering supply costs, profits, classification of costs and profits for each service, cost savings through changes in the way services were provided and the influence on fair competition, among others). The MSIT could order changes in the submitted rates if it deemed the rates to be significantly unreasonable or against public policy. In December 2020, however, the Telecommunications Business Act was amended to change such approval requirement to a reporting requirement. Under the new reporting requirement, which does not apply to other network service providers, the MSIT has fifteen days to object to any new rates and terms of service reported by us, and we may implement such new rates and terms of service after the fifteen-day period expires in the absence of the MSIT’s objection.

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.

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. The expiration of such system has been extended to September 22, 2022 pursuant to an amendment to the Telecommunications Business Act. Currently, 14 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

 

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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. See “Item 5.A. Operating Results — Overview — 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 or co-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 2020, 2019 and 2018, the fee amounted to Won 136.6 billion, Won 133.1 billion and Won 151.7 billion, respectively.

We currently use 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 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. In 2020, we recognized an impairment loss of Won 186.0 billion in connection with the frequency usage rights for the 800 MHz of bandwidth in the 28 GHz spectrum as the carrying amount exceeded the recoverable amount. 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 17 of the notes to our consolidated financial statements.

In November 2020, the MSIT announced plans to reallocate a total of 310 MHz of frequency bandwidths whose usage terms are due to expire in 2021 to KT, LG U+ and us, 95 MHz of which will be allocated to us. The final consideration to be paid by us for such reallocated bandwidths will depend on the number of 5G cell sites constructed by us until 2022, and the aggregate consideration to be paid by KT, LG U+ and us is expected to range between approximately Won 3.2 trillion and Won 3.8 trillion.

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.”

 

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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 and low-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 and low-income citizens.

In addition to such universal services for handicapped and low-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 17.4 billion, Won 16.1 billion and Won 16.7 billion in 2020, 2019 and 2018, 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, 2020, SK Inc. owned 21,624,120 shares of our common stock, or 26.8% of our issued shares. As of December 31, 2020, the two largest foreign shareholders of SK Inc. each held a 3.9% stake therein. If such foreign shareholders increase their shareholdings in SK Inc. to 15% or more and any such foreign shareholder constitutes the largest shareholder of SK Inc., SK Inc. will be considered a foreign shareholder, and its shareholding in us would be included in the calculation of our aggregate foreign shareholding. If SK Inc.’s 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, 2020 (which we believe was 33.4%), would reach 60.2%, 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 Inc. if the breach is caused by an increase in foreign ownership of SK Inc.) and the foreign shareholder which owns in the aggregate 15.0% or more of SK Inc. Furthermore, SK Inc. 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 a one-time administrative penalty of up to 3.0% of the average of our annual revenue for the preceding three fiscal years.

 

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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 Inc. 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.

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, 2020, SK Group members owned in aggregate 26.8% of the shares of our issued common stock. The

 

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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, 2020:

 

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

   279,372 
  Central Research and Development Center   319,789 
  

Others(1)

   2,110,168 

Gyeongsang Provinces

  

Regional Headquarters

   384,281 
  

Others(1)

   1,009,527 

Jeolla and Jeju Provinces

  

Regional Headquarters

   265,614 
  

Others(1)

   803,005 

Chungcheong Province

  

Regional Headquarters

   565,761 
  

Others(1)

   796,600 

 

 

(1)

Includes cell sites.

Our registered office and corporate headquarters, of which we have full ownership, are located at SK T-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.

 

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.

 

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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 include fixed-line telephone services, broadband Internet services, advanced media platform services (including IPTV and cable TV services) and business communications services, (3) security services, which include physical and information security services, (4) commerce services, which include our open marketplace platform, 11st, our T-commerce business, SK stoa, and related ancillary services, and (5) other businesses, which include our portal service, mobility business, 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 monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services and value-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 our fixed-line telecommunication services segment, we earn revenue principally from our fixed-line telephone services and broadband Internet services and advanced media platform services (including IPTV and cable TV services) through monthly plan-based fees and usage charges as well as interconnection fees paid to us by other telecommunications operators for use of our fixed-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. Following the Tbroad Merger in April 2020, the cable TV and broadband Internet services of the former Tbroad have become a part of our fixed-telecommunication services segment.

In our security services segment, we generate revenue from our physical and information security services businesses through our subsidiary ADT CAPS. Revenue from our physical security services is generated through monthly plan-based fees and usage charges for value-added services paid by subscribers. Revenue from our information security services is derived primarily through consideration paid by customers under contracts for our information security platform and consulting services and solutions. ADT CAPS (formerly known as SK Infosec) is the surviving entity resulting from the merger of LSH with and into SK Infosec in December 2020 and the merger of Former ADT CAPS with and into SK Infosec in March 2021. We had acquired Former ADT CAPS, which operated our physical security business prior to such mergers, in October 2018 and SK Infosec, which operated our information security business prior to the mergers, in December 2018. See “Item 3.D. Risk Factors — Risks Relating to Our Business — We may fail to successfully complete, integrate or realize the anticipated benefits of our new acquisitions, joint ventures or other strategic alternatives or corporate reorganizations, and such transactions may negatively impact our business.”

In our commerce services segment, we derive revenue from our subsidiaries Eleven Street, which was spun-off as our new consolidated subsidiary from SK Planet in September 2018, and SK Stoa. Eleven Street generates revenue principally through third-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 through third-party seller fees earned (including commissions) for transactions in which it acts as a selling agent on SK stoa, its T-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, the mobility business of T Map Mobility and our “Nate” portal service operated by our subsidiary, SK Communications.

Following the spin-off of SK Telecom’s mobility business into T Map Mobility effective as of December 29, 2020, our mobility business, which was previously part of our cellular services segment, became a part of our others segment beginning on December 29, 2020.

 

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Furthermore, 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), the T-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunication services segment in the year ended December 31, 2018, 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 year ended December 31, 2018, 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 year ended December 31, 2018 in our consolidated audited financial statements have been recast to retroactively apply such changes in segmentation.

Our cellular service revenue and fixed-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 with K-IFRS (“segment operating profit”) in its assessment of the profitability of each reportable segment. The sum of segment operating profit for all five 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 with K-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-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:

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 2020, 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 2020, approximately 71% of our new subscribers elected to receive discounted rates in lieu of handset subsidies compared to 55% in 2019. As of December 31, 2020, 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 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.”

 

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Decrease in Interconnection Fees.    Our wireless telecommunications services depend, in part, on our interconnection arrangements with domestic and international fixed-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 2020 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 1.0% to Won 30,314 in 2020 from Won 30,630 in 2019, which represented a decrease of 5.0% from Won 32,247 in 2018. Our ARPU including MVNO increased by 1.8% to Won 27,895 in 2020 from Won 27,412 in 2019, which represented a decrease of 4.2% from Won 28,615 in 2018. The decreases in ARPU and ARPU including MVNO in 2019 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. The decrease in ARPU in 2020 was primarily due to an increase in subscriptions for IoT solutions by corporate customers, from which we derive lower revenue per subscriber. Such decreases were offset in part by an increase in subscribers that subscribe to our higher-priced unlimited data usage plans and 5G plans. The increase in ARPU including MVNO in 2020 was primarily attributable to the decrease in the proportion of MVNO subscribers, from whom we derive lower revenue per subscriber.

Effects of COVID-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 global COVID-19 pandemic, which has had, will likely continue to have, a significant negative effect on the Korean economy. For example, the travel restrictions imposed by governments in response to the COVID-19 pandemic has resulted in a decrease in revenue from roaming services, and the pandemic has contributed to lower customer demand for new wireless devices, resulting in a decrease in our wireless device sales revenue. In addition, an increase in unemployment among, and/or a decrease in disposable income of, our customers resulting from a deterioration of the Korean economy due to COVID-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 from COVID-19, a continued and prolonged outbreak of COVID-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 of COVID-19 and any possible recurrence of other types of widespread infectious diseases may adversely affect our business, financial condition or results of operations.”

Explanatory Note Regarding Presentation of Certain Financial Information under K-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 with K-IFRS as adopted by the KASB, which we are required to file with the FSC and the Korea Exchange under the FSCMA.

 

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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 with K-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, 2020 to the operating profit as presented in the consolidated statements of income prepared in accordance with K-IFRS.

 

   For the Year Ended December 31, 
   2020  2019  2018 
   (In billions of Won) 

Operating profit pursuant to IFRS as issued by the IASB

  1,104.6  1,007.3  833.8 

Differences:

    

Other income pursuant to IFRS that are classified as other non-operating income pursuant to K-IFRS:

    

Gain on disposal of property and equipment and intangible assets

   (35.6  (8.5  (38.9

Others

   (64.0  (94.3  (33.0
   (99.6  (102.8  (71.9
  

 

 

  

 

 

  

 

 

 

Other operating expenses pursuant to IFRS that are classified as other non-operating expenses pursuant to K-IFRS:

    

Loss on impairment of property and equipment and intangible assets

   208.8   65.9   255.8 

Loss on disposal of property and equipment and intangible assets

   41.5   47.8   87.3 

Donations

   16.8   17.6   59.0 

Bad debt for accounts receivable — other

   10.6   5.8   7.7 

Others

   66.6   66.6   30.1 
  

 

 

  

 

 

  

 

 

 
   344.3   203.7   439.9 
  

 

 

  

 

 

  

 

 

 

Operating profit pursuant to K-IFRS

  1,349.3  1,108.2  1,201.8 
  

 

 

  

 

 

  

 

 

 

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, 2020, 2019 and 2018.

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 of long-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, 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. Loss allowance

 

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amounted to Won 365.1 billion as of December 31, 2020 and Won 346.4 billion as of December 31, 2019. If economic or specific industry trends worsen beyond our estimates, the loss allowances we have recorded may be materially adjusted in the future. See note 7 of the notes to our consolidated financial statements.

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 36(3) of the notes to our consolidated financial statements.

Impairment of Long-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 of long-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 a long-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 or cash-generating units may be determined based on value-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, 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 estimated long-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 an impairment loss in the amount of Won 198.4 billion of our frequency usage rights in 2020. See note 17 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 any non-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 the acquisition-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 respective cash-generating unit and the determination of an appropriate discount rate in order to calculate present value.

In 2020, we recognized Won 0.5 billion of impairment losses on goodwill compared to Won 21.1 billion of impairment losses on goodwill in 2019. Impairment losses on goodwill in 2020 were mainly due to our recognition

 

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of impairment losses on goodwill relating to our consolidated subsidiaries Dreamus and Incross. 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.

As of December 31, 2020, the amount of goodwill allocated to our security services cash-generating unit, which is primarily derived from the acquisition of LSH, was Won 1,176.3 billion, which increased slightly from Won 1,173.4 billion as of December 31, 2019. 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 2025 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 7.1%. 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 2020. 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 16(2) of the notes to our consolidated financial statements.

See notes 4(11) and 16 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 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, 2020 and 2019, unused tax loss carryforwards of Won 1,042.1 billion and Won 1,023.9 billion, respectively, were not recognized as deferred tax assets because we did not believe that their realization would be probable. The increase of Won 18.2 billion in unrecognized tax loss carryforwards in 2020 compared to 2019 was primarily related to an increase in unrecognized tax loss carryforwards of SK Planet. See notes 4(24) and 32 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. 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.

 

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

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.

Determination of Lease Term

Under IFRS 16, we determine lease terms by including periods covered by an option to extend the lease if the lessee is reasonably certain to exercise such option and periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise such option. Such determination requires us to assess the likelihood that the lessee will exercise such options, which assessment in turn is made in consideration of whether the lessee would incur a penalty on termination that is more than insignificant. See “— Recently Adopted International Financial Reporting Standards - IFRS 16.”

Based on such assessments, we have concluded that it is reasonably certain that the underlying lease assets or related assets will generally be used by the lessee for the period of their useful lives, and we determine the lease terms of such assets based on such useful lives. For example, in the case of circuits that are part of telecommunication equipment that are leased by us, we have determined their lease term to be eight years based on the useful life of such circuits. In the case of real estate leased by us to install network equipment, we have determined their lease term to be eight years in the case of those related to 5G services and six years for other networks based on their respective useful lives.

Customer Relationship

In connection with the Tbroad Merger, we recognized the acquired customer relationships arising from the business combination as an identifiable intangible asset in 2020. The fair value of such customer relationships amounted to Won 374.0 billion as of April 30, 2020, the acquisition date. The fair value was estimated based on the multi-period excess earnings method (“MPEEM”), which is a valuation technique under the income approach that estimates fair value by discounting the expected future excess earnings attributable to an intangible asset using a risk-adjusted discount rate. The MPEEM uses significant unobservable inputs including estimated revenue per subscriber, future churn rate and weighted average cost of capital, which require a significant degree of judgment by our management. See note 12 of the notes to our consolidated financial statements.

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 recognize right-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 of low-value assets. Lessor accounting remains similar to previous accounting policies.

In the fiscal year beginning on January 1, 2020, we changed our accounting policy by applying the agenda decision, Lease Term and Useful Life of Leasehold Improvements (IFRS 16 Leases and IAS 16 Property, Plant and Equipment)—November 2019, published by the IFRIC on December 16, 2019. Prior to such change in accounting policy, we determined a lease term based on the assumption that the right to extend or terminate the lease is no longer enforceable if the lease contract requires the counterparty’s consent to be extended. Under the new accounting policy, we determine the lease term based on the non-cancellable period of a lease in addition to

 

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(i) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option and (ii) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option. In assessing the periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option, we consider whether we would incur a penalty on termination that is more than insignificant. We have retrospectively applied such change in accounting policy in connection with the IFRIC agenda decision and restated our consolidated financial statements as of January 1, 2019 and as of and for the year ended December 31, 2019.

The change in accounting policy had the effect of increasing our total assets and total liabilities as of December 31, 2019 by Won 590.7 billion and Won 597.4 billion, respectively. In the case of our consolidated statement of income for the year ended December 31, 2019, the change had the effect of decreasing our operating revenue and other income by Won 3.4 billion and decreasing operating expenses by Won 9.8 billion, resulting in an increase in operating profit by Won 6.4 billion and a decrease in profit before income tax by Won 1.7 billion. In addition, the change had the effect of decreasing our profit for the year by Won 1.2 billion and decreasing our income tax expense by Won 0.4 billion. In the case of our consolidated statement of cash flows for the year ended December 31, 2019, the change had the effect of increasing cash flows from operating activities by Won 48.9 billion, increasing cash flows from investing activities by Won 0.9 billion and decreasing cash flows from financing activities by Won 49.8 billion.

See notes 3 and 4(12) of the notes to our consolidated financial statements for further details regarding the effects of the change in accounting policy based on the IFRIC agenda decision and significant accounting policies related to leases.

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, 
   2020  2019  2018 
   (In billions of Won, except percentages) 

Operating revenue and other income

  18,724.3   100.0 17,843.5   100.0 16,945.9    100.0

Revenue

   18,624.7   99.5   17,740.7   99.4   16,874.0    99.6 

Other income

   99.6   0.5   102.8   0.6   71.9    0.4 

Operating expenses

   17,619.7   94.1   16,836.2   94.4   16,112.1    95.1 

Operating profit

   1,104.6   5.9   1,007.3   5.6   833.8    4.9 

Profit before income tax

   1,877.0   10.0   1,161.0   6.5   3,976.0    23.5 

Income tax expense

   376.5   2.0   300.3   1.7   844.0    5.0 

Profit for the year

   1,500.5   8.0   860.7   4.8   3,132.0    18.5 

Attributable to:

        

Owners of the Parent Company

   1,504.4   8.0   888.7   5.0   3,127.9    18.5 

Non-controlling interests

   (3.8  (0.0  (28.0  (0.2  4.1    0.0 

 

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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, 
  2020  2019  2018 
  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)

 9,801.2   52.6 9,532.4   53.7 9,770.4   57.9

Cellular Interconnection

  472.3   2.6   494.3   2.8   532.2   3.2 

Wireless Device Sales

  975.2   5.2   1,032.1   5.8   989.1   5.9 

Miscellaneous(2)

  1,047.0   5.6   1,118.8   6.3   1,087.2   6.4 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Cellular Services Revenue

  12,295.7   66.0   12,177.5   68.6   12,378.9   73.4 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Fixed-line Telecommunication Services Revenue

      

Fixed-line Telephone Service

  215.8   1.2   224.5   1.3   371.3   2.2 

Fixed-line Interconnection

  85.1   0.5   92.3   0.5   95.8   0.6 

Broadband Internet Service and Advanced Media Platform Service(3)

  2,227.1   11.8   1,807.5   10.2   1,760.4   10.4 

International Calling Service

  160.3   0.9   137.3   0.8   152.9   0.9 

Miscellaneous(4)

  717.4   3.9   677.8   3.8   441.9   2.6 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Fixed-line Telecommunication Services Revenue

  3,405.7   18.3   2,940.1   16.6   2,822.3   16.7 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Security Services Revenue(5)

  1,246.5   6.7   1,109.5   6.3   284.3   1.7 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Commerce Services Revenue(4) (6)

  792.9   4.3   710.7   4.0   728.4   4.3 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Others Revenue(5) (7)

  883.9   4.7   803.0   4.5   660.1   3.9 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Revenue

  18,624.7   100.0   17,740.7   100.0   16,874.0   100.0 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Revenue Growth

  5.0   5.1   (3.7)%  

Segment Operating Expense(8)

      

Cellular Services

  11,287.8   60.6   11,261.7   63.5   11,079.0   65.7 

Fixed-line Telecommunication Services

  3,161.6   17.0   2,804.4   15.8   2,576.8   15.3 

Security Services

  1,134.1   6.1   975.9   5.5   295.6   1.8 

Commerce Services

  781.9   4.2   708.7   4.0   813.4   4.8 

Others

  909.9   4.9   881.9   5.0   907.4   5.4 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Segment Operating Expense

  17,275.3   92.8   16,632.5   93.8   15,672.2   92.9 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Segment Operating Profit

      

Cellular Services

  1,007.8   5.3   915.8   5.1   1,299.9   7.7 

Fixed-line Telecommunication Services

  244.1   1.3   135.7   0.8   245.5   1.5 

Security Services

  112.4   0.6   133.6   0.8   (11.3  (0.1

Commerce Services

  10.9   0.1   2.0   0.0   (85.0  (0.5

Others

  (25.9  (0.1  (78.9  (0.4  (247.3  (1.5
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Segment Operating Profit

 1,349.3   7.2 1,108.2   6.2 1,201.8   7.1
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(1)

Wireless service revenue includes revenue from wireless voice and data transmission services principally derived through monthly plan-based fees, usage charges for outgoing voice calls, usage charges for wireless data services and value-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.

 

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(3)

Broadband internet service and advanced media platform service revenue includes revenues from our broadband Internet services as well as IPTV and cable TV services.

 

(4)

Miscellaneous fixed-line telecommunication services revenue includes revenues from business communications services (other than fixed-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), the T-commerce business operations of SK Stoa, which were previously part of our fixed-line telecommunications services segment in the year ended December 31, 2018, 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 year ended December 31, 2018 have been restated to retroactively apply such reclassification.

 

(5)

Security services revenue includes revenues from our former subsidiaries Former ADT CAPS and SK Infosec. Such revenues, which were previously part of our others segment in the year ended December 31, 2018, were separated into a new security services segment for the year ended December 31, 2019. As a result, our results of operations for the year ended December 31, 2018 have been restated to retroactively apply such new segmentation. We have subsequently combined LSH, Former ADT CAPS and SK Infosec into a single entity through a series of mergers that were completed in March 2021, and the combined entity, ADT CAPS, has become the principal consolidated subsidiary that operates our security business.

 

(6)

Commerce services revenue includes revenues from Eleven Street and SK Stoa.

 

(7)

Others revenue includes revenues from the marketing platform business operations of SK Planet, “Nate,” our online portal service operated by SK Communications, and other businesses. As a result of the spin-off of T Map Mobility, our mobility business, which was previously part of our cellular services segment, became a part of our other businesses segment beginning December 29, 2020.

 

(8)

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

2020 Compared to 2019

Operating Revenue and Other Income.    Our consolidated operating revenue and other income increased by 4.9% to Won 18,724.3 billion in 2020 from Won 17,843.5 billion in 2019 due to an increase in operating revenue, which was in small part offset by a decrease in other income, as discussed below.

Our consolidated operating revenue increased by 5.0% to Won 18,624.7 billion in 2020 from Won 17,740.7 billion in 2019, primarily due to increases in fixed-line telecommunications services revenue, security services revenue and cellular services revenue, and to a smaller extent, increases in commerce services revenue and others revenue.

Our consolidated other income decreased by 3.1% to Won 99.6 billion in 2020 from Won 102.8 billion in 2019, primarily due to a decrease in gain on business transfer in 2020 as compared to 2019. Such gain on business transfer in 2020 was mainly related to the transfer of the digital disease management business of Health Connect Co., Ltd. to Invites Healthcare Co., Ltd., while the gain in 2019 was mainly related to the transfer of our e-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 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, increased by 1.0% to Won 12,295.7 billion in 2020 from Won 12,177.5 billion in 2019. The increase in our cellular services revenue was due to an increase in wireless service revenue, partially offset by decreases in miscellaneous revenue, wireless device sales revenue and cellular interconnection revenue.

 

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Wireless service revenue increased by 2.8% to Won 9,801.2 billion in 2020 from Won 9,532.4 billion in 2019, primarily attributable to the increase in the number of subscribers who subscribe to our higher-priced 5G plans. The impact of such increase was partially offset by an increase in the percentage of wireless service subscribers who elected to receive discounted rates in lieu of receiving handset subsidies pursuant to the MDDIA as well as a decrease in MNVO subscribers.

 

  

Miscellaneous cellular services revenue decreased by 6.4% to Won 1,047.0 billion in 2020 from Won 1,118.8 billion in 2019, primarily due to the termination of certain social commerce businesses in 2020.

 

  

Wireless device sales revenue decreased by 5.5% to Won 975.2 billion in 2020 from Won 1,032.1 billion in 2019, primarily due to a decrease in sales of handsets as a result of lower customer demand for new devices, which was partly attributable to the COVID-19 pandemic.

 

  

Cellular interconnection revenue decreased by 4.5% to Won 472.3 billion in 2020 from Won 494.3 billion in 2019. The decrease was primarily attributable to continued decreases in interconnection rates and land-to-mobile call volume.

 

  

Fixed-line telecommunications services: The revenue of our fixed-line telecommunication services segment, which is composed of revenues from broadband Internet service and advanced media platform service (including IPTV and cable TV services), fixed-line telephone service, international calling service, fixed-line interconnection and miscellaneous fixed-line telecommunication services, increased by 15.8% to Won 3,405.7 billion in 2020 from Won 2,940.1 billion in 2019, primarily due to increases in our broadband Internet service and advanced media platform service revenue and miscellaneous fixed-line telecommunication services revenue, partially offset by decreases in fixed-line telephone service revenue and fixed-line interconnection revenue.

 

  

Revenue from our broadband Internet service and advanced media platform service (including our IPTV and cable TV services) increased by 23.2% to Won 2,227.1 billion in 2020 from Won 1,807.5 billion in 2019, primarily due to the inclusion of revenue of the former Tbroad following the Tbroad Merger as well as an increase in the number of IPTV subscribers to 5.7 million subscribers as of December 31, 2020 from 5.2 million subscribers as of December 31, 2019.

 

  

Miscellaneous fixed-line telecommunication services revenue increased by 5.8% to Won 717.4 billion in 2020 from Won 677.8 billion in 2019, primarily due to an increase in revenue from our business communications services.

 

  

Fixed-line telephone service revenue decreased by 3.9% to Won 215.8 billion in 2020 from Won 224.5 billion in 2019, primarily due to decreases in the number of fixed-line telephone subscribers (including subscribers to VoIP services of SK Broadband and SK Telink) to 3.8 million as of December 31, 2020 from 3.9 million as of December 31, 2019 and residential calling volume as a result of shifting consumer preferences toward wireless communication.

 

  

Fixed-line interconnection revenue decreased by 7.8% to Won 85.1 billion in 2020 from Won 92.3 billion in 2019, primarily due to a decrease in interconnection rates, as well as decreases in the number of fixed-line telephone subscribers and residential calling volume as described above.

 

  

Security services: The revenue of our security services segment, which is composed of revenues from our former subsidiaries Former ADT CAPS and SK Infosec (prior to its merger with Former ADT CAPS), increased by 12.3% to Won 1,246.5 billion in 2020 from Won 1,109.5 billion in 2019, primarily due to an increase in the number of subscribers to our CMS products as well as our acquisition of the security equipment construction and security services business of SK hystec inc. in July 2020.

 

  

Commerce services: The revenue of our commerce services segment, which is composed of revenues from 11st, our open marketplace platform, and SK stoa, our T-commerce network, increased by 11.6% to

 

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Won 792.9 billion in 2020 from Won 710.7 billion in 2019, primarily due to the expansion of the customer base and product sourcing capabilities of our SK stoa business as well as the growth in general merchandise volume of 11st.

 

  

Others: The revenue of our others segment increased by 10.1% to Won 883.9 billion in 2020 from Won 803.0 billion in 2019, primarily due to increases in revenue of FSK L&S and One Store Co., Ltd.

Operating Expense.    Our consolidated operating expense increased by 4.7% to Won 17,619.7 billion in 2020 from Won 16,836.2 billion in 2019, primarily due to a 6.9% increase in commissions to Won 5,347.1 billion in 2020 from Won 5,002.1 billion in 2019, a 16.3% increase in other operating expenses to Won 1,996.4 billion in 2020 to Won 1,716.4 billion in 2019, a 6.5% increase in labor costs to Won 3,006.2 billion from Won 2,822.7 billion in 2019 and a 3.5% increase in depreciation and amortization expenses to Won 3,991.1 billion in 2020 from Won 3,856.7 billion in 2019, partially offset by a 12.3% decrease in cost of goods sold to Won 1,608.5 billion in 2020 from Won 1,833.4 billion in 2019.

The increase in commissions was primarily due to the inclusion of commissions of the former Tbroad following the Tbroad Merger.

The increase in other operating expenses was primarily due to an increase in impairment loss on property and equipment and intangible assets to Won 208.8 billion in 2020 from Won 65.9 billion in 2019, which amount in 2020 mainly reflected impairment losses we recognized on frequency usage rights.

The increase in labor costs was primarily due to the additional personnel on payroll in connection with the Tbroad Merger as well as the expansion of our security and commerce businesses.

The increase in depreciation and amortization expenses was primarily related to our equipment and frequency usage rights for our 5G network.

The decrease in cost of goods sold was primarily due to a decrease in the number of wireless devices sold in 2020.

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 other non-operating expenses under K-IFRS. For more information on the difference between our consolidated operating expense pursuant to K-IFRS and pursuant to IFRS as issued by the IASB, see “ — Explanatory Note Regarding Presentation of Certain Financial Information under K-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 0.2% to Won 11,287.8 billion in 2020 from Won 11,261.7 billion in 2019, mainly attributable to an increase in marketing costs to promote our 5G services and increases in depreciation and amortization expenses of our equipment and frequency usage rights for our 5G network.

 

  

Fixed-line telecommunication services: The segment operating expense for our fixed-line telecommunication services segment increased by 12.7% to Won 3,161.6 billion in 2020 from Won 2,804.4 billion in 2019, primarily due to the inclusion of operating expenses of the former Tbroad following the Tbroad Merger.

 

  

Security services: The segment operating expense for our security services segment increased by 16.2% to Won 1,134.1 billion in 2020 from Won 975.9 billion in 2019, primarily due to an increase in expenses related to the launch of new security services in 2020.

 

  

Commerce services: The segment operating expense for our commerce services segment increased by 10.3% to Won 781.9 billion in 2020 from Won 708.7 billion in 2019, primarily due to increases in marketing expenses as well as commissions associated with the increase in general merchandise volume of our 11st business.

 

  

Others: The segment operating expense for our others segment increased by 3.2% to Won 909.9 billion in 2020 from Won 881.9 billion in 2019, primarily due to an increase in operating expense of FSK L&S.

Operating Profit.    Our consolidated operating profit increased by 9.7% to Won 1,104.6 billion in 2020 from Won 1,007.3 billion in 2019, as the increase in operating revenue and other income outpaced the increase in operating expense in 2020.

 

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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 on K-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 with K-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-IFRS” and note 5(2) of the notes to our consolidated financial statements.

 

  

Cellular services: The segment operating profit of our cellular services segment increased by 10.0% to Won 1,007.8 billion in 2020 from Won 915.8 billion in 2019, due to the greater increase in segment operating revenue as compared to the increase in segment operating expense, for the various reasons described above. 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 increased to 8.2% in 2020 from 7.5% in 2019.

 

  

Fixed-line telecommunication services: The segment operating profit of our fixed-line telecommunication services segment increased by 79.9% to Won 244.1 billion in 2020 from Won 135.7 billion in 2019, mainly due to the aggregate impact of the Tbroad Merger as described above. As a result, the segment operating margin of our fixed-line telecommunication services segment increased to 7.2% in 2020 from 4.6% in 2019.

 

  

Security services: The segment operating profit of our security services segment decreased by 15.9% to Won 112.4 billion in 2020 from Won 133.6 billion in 2019, due to the greater increase in segment operating expense as compared to the increase in segment operating revenue, for the various reasons described above. As a result, the segment operating margin of our security services segment decreased to 9.0% in 2020 from 12.0% in 2019.

 

  

Commerce services: The segment operating profit of our commerce services segment increased by 445.0% to Won 10.9 billion in 2020 from Won 2.0 billion in 2019, due to the greater increase in segment operating revenue as compared to the increase in segment operating expense, for the various reasons described above. As a result, the segment operating margin of our commerce services segment increased to 1.4% in 2020 from 0.3% in 2019.

 

  

Others: The segment operating loss of our others segment decreased by 67.2% to Won 25.9 billion in 2020 from Won 78.9 billion in 2019, due to the greater increase in segment operating revenue as compared to the increase in segment operating expense as described above. As a result, the segment operating margin of our others segment improved to (2.9)% in 2020 from (9.8)% in 2019.

Finance Income and Finance Costs.    Our finance income increased by 69.7% to Won 241.2 billion in 2020 from Won 142.2 billion in 2019, primarily due to an increase in gain on valuation of derivatives to Won 101.3 billion in 2020 from Won 2.5 billion in 2019, which primarily related to an increase in valuation of warrants of Nano-X Imaging Ltd. held by SK Telecom TMT Investment Corp., as well as an increase in gain relating to financial assets at fair value through profit or loss to Won 35.8 billion in 2020 from Won 4.5 billion in 2019, primarily relating to shares of Oceanbridge Co., Ltd. held by Quantum Innovation Fund I. The effect of such increases was partially offset by a decrease in gain on settlement of derivatives to Won 7.8 billion in 2020 from Won 29.3 billion in 2019, which amount in 2019 was primarily related to the share exchange transaction with Kakao in October 2019.

Our finance costs increased by 13.5% to Won 497.2 billion in 2020 from Won 438.0 billion in 2019, primarily due to the incurrence of other financial fees of Won 44.7 billion in 2020 relating to the disposal of certain securities held for trading of Knet Culture and Contents Venture Fund, a consolidated subsidiary, and a loss on valuation of derivatives of Won 13.6 billion in 2020 primarily related to certain share subscription rights granted to financial investors of Eleven Street under an equity interest agreement, compared to no such costs incurred in 2019. The effect of such increases was partially offset by a decrease in interest expense to Won 399.2 billion in 2020 from Won 406.1 billion in 2019 as a result of a decrease in interest rates, as well as a loss on sale of other accounts receivable related to handset installment payments of Won 5.8 billion in 2019 compared to nil in 2020.

 

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Gains (Losses) Related to Investments in Associates and Joint Ventures. Gains related to investments in associates and joint ventures increased by 128.8% to Won 1,028.4 billion in 2020 from Won 449.5 billion in 2019, primarily due to an increase in share of profits of SK Hynix to Won 995.1 billion in 2020 from Won 416.2 billion in 2019. Such increase was due to an increase in SK Hynix’s profit for the year to Won 4,758.9 billion in 2020 from Won 2,009.1 billion in 2019.

Income Tax. Income tax expense increased by 25.4% to Won 376.5 billion in 2020 from Won 300.3 billion in 2019 primarily due to a 61.7% increase in profit before income tax to Won 1,877.0 billion in 2020 from Won 1,161.0 billion in 2019. Our effective tax rate in 2020 decreased to 20.1% from 25.9% in 2019, which was primarily attributable to an increase in the proportion of our gains related to investments in associates and joint ventures in our profit before income tax. When such gains are distributed to us in the form of dividends, the tax rate for such dividends is lower than our statutory tax rate. Our effective tax rates in 2020 and 2019 were lower than the maximum statutory tax rate of 27.5% for both years, primarily due to changes in unrecognized deferred taxes in 2020 and non-taxable income in 2019.

Profit for the Year. Principally as a result of the factors discussed above, our profit for the year increased by 74.3% to Won 1,500.5 billion in 2020 from Won 860.7 billion in 2019. Profit for the year as a percentage of operating revenue and other income was 8.0% in 2020 compared to 4.8% in 2019.

2019 Compared to 2018

Operating Revenue and Other Income. Our consolidated operating revenue and other income increased by 5.3% to Won 17,843.5 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 5.1% to Won 17,740.7 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 43.0% to Won 102.8 billion in 2019 from Won 71.9 billion in 2018, primarily due to the gain on the transfer of our e-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 1.6% to Won 12,177.5 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.

 

  

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 and land-to-mobile call volume.

 

  

Wireless device sales revenue increased by 4.3% to Won 1,032.1 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-priced 5G-compatible smartphones.

 

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Miscellaneous cellular services revenue increased by 2.9% to Won 1,118.8 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 our fixed-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 miscellaneous fixed-line telecommunication services, increased by 4.2% to Won 2,940.1 billion in 2019 from Won 2,822.3 billion in 2018, primarily due to increases in our miscellaneous fixed-line telecommunications services revenue and broadband Internet service and advanced media platform service revenue, partially offset by a decrease in fixed-line telephone service revenue.

 

  

Miscellaneous fixed-line telecommunication services revenue increased by 53.4% to Won 677.8 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 1,807.5 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 premium video-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 our former subsidiaries Former ADT CAPS and SK Infosec (prior to its merger with Former ADT CAPS), 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 revenue of Former ADT CAPS for a full year in 2019 compared to a partial year in 2018 following the addition of Former ADT CAPS as a new consolidated subsidiary 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, our T-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 increased by 21.6% to Won 803.0 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 4.5% to Won 16,836.2 billion in 2019 from Won 16,112.1 billion in 2018, primarily due to a 23.4% increase in depreciation and amortization expenses to Won 3,856.7 billion in 2019 from Won 3,126.1 billion in 2018 and a 23.3% increase in labor costs to Won 2,822.7 billion from Won 2,288.7 billion in 2018, partially offset by a 70.8% decrease in rent expenses to Won 154.8 billion in 2019 from Won 529.5 billion in 2018, a 3.7% decrease in other operating expenses to Won 1,716.4 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 our right-of-use assets following our adoption of IFRS 16, as well as the commencement of

 

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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 Former ADT CAPS in October 2018 and former 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 on right-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 in wireless-to-fixed-line and fixed-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 other non-operating expenses under K-IFRS. For more information on the difference between our consolidated operating expense pursuant to K-IFRS and pursuant to IFRS as issued by the IASB, see “ — Explanatory Note Regarding Presentation of Certain Financial Information under K-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 11,261.7 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 our fixed-line telecommunication services segment increased by 8.8% to Won 2,804.4 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 our ultra-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 Former ADT CAPS for a full year in 2019 compared to a partial year in 2018 following the addition of Former ADT CAPS as a new consolidated subsidiary 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 881.9 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.

Operating Profit.    Our consolidated operating profit increased by 20.8% to Won 1,007.3 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 on K-IFRS and the sum of segment operating profit for all five reportable segments differs from our consolidated

 

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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 with K-IFRS, see “— Explanatory Note Regarding Presentation of Certain Financial Information under K-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 29.5% to Won 915.8 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 our fixed-line telecommunication services segment decreased by 44.7% to Won 135.7 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 our fixed-line telecommunication services segment decreased to 4.6% 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 Former 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 44.5% to Won 142.2 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 13.7% to Won 438.0 billion in 2019 from Won 385.2 billion in 2018, primarily due to an increase in interest expense to Won 406.1 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, 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 2,009.1 billion in 2019 from Won 15,540.0 billion in 2018.

Income Tax.    Income tax expense decreased by 64.4% to Won 300.3 billion in 2019 from Won 844.0 billion in 2018 primarily due to a 70.8% decrease in profit before income tax to Won 1,161.0 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

 

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effective tax rates in 2019 and 2018 were lower than the maximum statutory tax rate of 27.5% for both years, primarily due to non-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 860.7 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.

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 0.5% in 2020, 0.4% in 2019 and 1.5% in 2018.

 

Item 5.B.

Liquidity and Capital Resources

Liquidity

We had a working capital surplus (current assets in excess of current liabilities) of Won 597.1 billion as of December 31, 2020 and Won 236.8 billion as of December 31, 2019. The increase in our working capital as of December 31, 2020 compared to December 31, 2019 was primarily attributable to an increase in short-term financial instruments, which was mainly due to the replacement of certain time deposits with short-term financial instruments upon their maturity. 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 and short-term investment securities of Won 2,947.0 billion as of December 31, 2020 and Won 2,268.1 billion as of December 31, 2019. We had outstanding short-term borrowings and current portion of long-term debt of Won 1,049.2 billion as of December 31, 2020 and 1,037.9 billion as of December 31, 2019. As of December 31, 2020, 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 1,369.6 billion as of December 31, 2020 and Won 1,270.8 billion as of December 31, 2019. 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 
  2020  2019  2018  2019 to 2020  2018 to 2019 
  (In billions of Won, except percentages) 

Net cash provided by operating activities

 5,821.9  4,035.0  4,332.6  1,786.9   44.3 (297.6  (6.9)% 

Net cash used in investing activities

  (4,250.4  (3,581.6  (4,047.7  (668.8  18.7   466.1   (11.5

Net cash used in financing activities

  (1,457.6  (686.7  (238.3  (770.9  112.3   (448.4  188.2 

Net increase (decrease) in cash and cash equivalents

  113.9   (233.3  46.6   347.2   N.A.   (279.9  N.A. 

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

  (15.1  (2.6  2.4   (12.5  480.8   (5.0  N.A. 

Cash and cash equivalents at beginning of period

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

Cash and cash equivalents at end of period

  1,369.6   1,270.8   1,506.7   98.8   7.8   (235.9  (15.7

 

N.A.

= Not available

 

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Cash Flows from Operating Activities.     Net cash provided by operating activities was Won 5,821.9 billion in 2020, Won 4,035.0 billion in 2019 and Won 4,332.6 billion in 2018. Profit for the year was Won 1,500.5 billion in 2020, Won 860.7 billion in 2019 and Won 3,132.0 billion in 2018. Net cash provided by operating activities in 2020 increased by 44.3% from 2019 primarily due to the increase in profit for the year as well as a decrease in accounts payable — other at the year-end 2020 compared to the year-end 2019. Net cash provided by operating activities in 2019 decreased by 6.9% from 2018 primarily due to an increase in prepaid expenses at the year-end 2019 compared to the year-end 2018.

Cash Flows from Investing Activities.     Net cash used in investing activities was Won 4,250.4 billion in 2020, Won 3,581.6 billion in 2019 and Won 4,047.7 billion in 2018. Cash inflows from investing activities were Won 428.9 billion in 2020, Won 755.2 billion in 2019 and Won 686.1 billion in 2018. Cash inflows in 2020 were primarily attributable to the net cash inflows from business combinations, which mainly related to the Tbroad Merger, as well as proceeds from disposals of property and equipment, primarily related to the disposal of certain training facilities to SK Hynix. 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 of short-term loans of Won 117.6 billion.

Cash outflows for investing activities were Won 4,679.3 billion in 2020, Won 4,336.8 billion in 2019 and Won 4,733.8 billion in 2018. Cash outflows in 2020, 2019 and 2018 were primarily attributable to expenditures related to the acquisition of property and equipment of Won 3,557.8 billion, Won 3,375.9 billion and Won 2,792.4 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 1,457.6 billion in 2020, Won 686.7 billion in 2019 and Won 238.3 billion in 2018. Cash inflows from financing activities were Won 3,499.6 billion in 2020, Won 2,047.3 billion in 2019 and Won 4,651.7 billion in 2018. Such inflows were primarily driven by proceeds from long-term borrowings, which provided cash of Won 1,947.8 billion in 2020, nil in 2019 and Won 1,920.1 billion in 2018, and the issuance of debentures, which provided cash of Won 1,421.0 billion in 2020, Won 1,633.4 billion in 2019 and Won 1,809.6 billion in 2018. In 2019, we also received proceeds of Won 300.0 billion from the disposal of our treasury shares to Kakao.

Cash outflows for financing activities were Won 4,957.2 billion in 2020, Won 2,733.9 billion in 2019 and Won 4,890.0 billion in 2018. Cash outflows for financing activities included repayment of long-term borrowings, repayment of debentures, payment of dividends, repayments of other long-term payables and acquisition of treasury shares, among other items. Repayment of long-term borrowings were Won 1,950.9 billion in 2020, Won 89.9 billion in 2019 and Won 1,780.7 billion in 2018. Repayment of debentures were Won 975.5 billion in 2020, Won 940.0 billion in 2019 and Won 1,488.0 billion in 2018. Payment of dividends were Won 742.1 billion in 2020, Won 718.7 billion in 2019 and Won 706.1 billion in 2018. Repayments of other long-term payables were Won 428.1 billion in 2020, Won 428.2 billion in 2019 and Won 305.6 billion in 2018. Acquisition of treasury shares was Won 426.7 billion in 2020.

As of December 31, 2020, we had total long term debt (excluding current portion) outstanding of Won 9,669.5 billion, which included debentures in the amount of Won 7,690.2 billion and bank and institutional borrowings in the amount of Won 1,979.3 billion. As of December 31, 2019, we had total long-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. For a description of our long-term debt, see note 18 of the notes to our consolidated financial statements.

As of December 31, 2020, we had (i) Won 6,974.8 billion aggregate principal amount of Korean Won-denominated debentures outstanding, of which SK Telecom issued Won 5,590.0 billion, SK Broadband issued Won 1,360.0 billion and SK Infosec issued Won 24.8 billion, and (ii) Won 1,632.0 billion aggregate principal

 

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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, 2020, substantially all of our foreign currency-denominated long-term borrowings and debentures, which in the aggregate amounted to 15.5% of our total outstanding long-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 foreign currency-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 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, and to create synergies among our businesses, including through the adaptation of AI technology.

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 2021. 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 2020, 2019 and 2018:

 

   Year ended December 31, 
   2020   2019   2018 
   (In billions of Won) 

Wireless Networks(1)

  1,878.6   2,514.3   1,735.6 

Fixed-line Network(2)

   818.3    815.8    776.8 

Others(3)

   860.9    45.8    280.0 
  

 

 

   

 

 

   

 

 

 

Total

  3,557.8   3,375.9   2,792.4 
  

 

 

   

 

 

   

 

 

 

 

 

(1)

Includes investments in wireless networks, primarily our 5G, LTE and Wi-Fi networks, as well as other capital expenditures related to our networks.

 

(2)

Includes all capital expenditures made by SK Broadband.

 

(3)

Includes non-network related investments such as capital expenditures for product development, upgrades of our information technology systems and equipment and investments in data infrastructure.

We set our capital expenditure budget for each upcoming year on an annual basis. Our actual capital expenditures in 2020, 2019 and 2018 were Won 3,557.8 billion, Won 3,375.9 billion and Won 2,792.4 billion, respectively. Of such amounts, we spent approximately 52.8%, 74.5% and 62.2% in 2020, 2019 and 2018,

 

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respectively, on capital expenditures related to building and enhancing our wireless networks. Our other non-network related capital expenditures in 2020, 2019 and 2018 primarily related to developing new products, upgrades to our information technology systems and equipment and investments in data infrastructure.

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 2021 to build and expand our 5G network and develop related technologies, as well as to further improve and maintain 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   31.1   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 2020, we made such annual payment in the amount of Won 27.8 billion. For more information, see note 17 of the notes to our consolidated financial statements.

We expect to spend a similar amount for capital expenditures in 2021 compared to 2020 for a range of projects, including investments to expand and improve our newly implemented 5G network, investments to maintain our LTE network and LTE-A services, investments to improve and expand our Wi-Fi network, investments to develop our IoT solutions and platform services business portfolio, including AI solutions, investments in data infrastructure, investments in research and development of 5G technology, investments in businesses that can potentially leverage our 5G network, and funding for mid- 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 November 2020, the MSIT announced plans to reallocate a total of 310 MHz of frequency bandwidths whose usage terms are due to expire in 2021 to KT, LG U+ and us, 95 MHz of which will be allocated to us. The final consideration to be paid by us for such reallocated bandwidths will depend on the number of 5G cell sites constructed by us until 2022, and the aggregate consideration to be paid by KT, LG U+ and us is expected to range between approximately Won 3.2 trillion and Won 3.8 trillion. We would be required to spend additional amounts on capital expenditures in connection with building out our networks on such reallocated bandwidths. 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 2021 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.

 

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Repayment of Outstanding Debt.     As of December 31, 2020, our principal repayment obligations with respect to long-term borrowings, bonds and short-term borrowings outstanding were as follows for the periods indicated:

 

Year Ending December 31,

  Total 
   (In billions of Won) 

2021

  1,049.8 

2022

   1,421.2 

2023

   1,737.7 

2024 and thereafter

   6,552.8 

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

We made a capital contribution of Won 65.0 billion in 2018 to Dreamus, a manufacturer of digital audio players and other portable media devices of which we had first acquired a 39.3% equity interest in August 2014. Dreamus also operates our music streaming service platform, FLO. As of December 31, 2020, we had a 51.4% equity interest in Dreamus.

In October 2018, we acquired Former ADT CAPS by acquiring a 55.0% interest in LSH, which owned 100% of Former ADT CAPS, for Won 696.7 billion. In December 2018, we merged NSOK with and into Former ADT CAPS. 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 Inc. In December 2020, we merged LSH with and into SK Infosec and held a 62.6% equity interest in SK Infosec as of December 31, 2020. We have subsequently merged Former ADT CAPS with and into SK Infosec in March 2021, and the surviving entity, SK Infosec, changed its name to ADT CAPS and has become the principal consolidated subsidiary that operates our security business.

We also increased our interest in id Quantique through the acquisition of additional shares with Won 55.2 billion in cash and Won 5.7 billion in contribution-in-kind in 2018 and capital contributions in cash amounting to Won 12.2 billion in 2019 and Won 6.4 billion in 2020, respectively. As of December 31, 2020, we held a 68.1% equity interest in id Quantique.

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, 2020 was Won 154.9 billion. This amount was reflected in our consolidated financial statements as a liability, which is net of deposits with insurance companies totaling Won 1,127.2 billion to fund a portion of the employees’ severance indemnities.

Also see “Item 6.D. Employees — Employee Benefits” and note 21 of the notes to our consolidated financial statements.

Dividends.     Total cash outflows for payments of dividends amounted to Won 742.1 billion in 2020, Won 718.7 billion in 2019 and Won 706.1 billion in 2018.

In April 2021, 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 641.9 billion.

 

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Contractual Obligations and Commitments

The following summarizes our contractual cash obligations at December 31, 2020, 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

 8,606.8  890.0  3,115.2  2,026.4  2,575.2 

Interest

  1,143.0   216.5   334.7   204.1   387.7 

Long-term borrowings

     

Principal

  2,044.7   49.8   43.7   1,951.2    

Interest

  313.3   65.9   185.0   62.4    

Lease liabilities

     

Principal

  1,451.5   354.4   486.9   295.3   314.9 

Interest

  85.7   11.5   22.3   21.8   30.1 

Short-term leases and leases of low-value assets

  23.4   23.4          

Facility deposits

  14.3   10.0         4.3 

Derivatives

  43.1   1.7   3.3   38.1    

Other long-term payables(2)

     

Principal

  1,626.0   425.3   444.5   382.3   373.9 

Interest

  17.2   4.9   6.5   3.9   1.9 

Short-term borrowings

  110.0   110.0          
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total contractual cash obligations

 15,479.0  2,163.4  4,642.1  4,985.5  3,688.0 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(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 19 of the notes to our consolidated financial statements.

See note 38 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 substantial in-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 T3K Center, located at our SK T-Tower corporate headquarters in Seoul and our Bundang office in Bundang-gu, Seongnam-si, Gyeonggi-do, Korea, which we established in May 2020 by reorganizing our former AIX Center. To more efficiently manage our research and development resources, our T3K Center is organized as follows:

 

Organization

  

Recent Areas of Focus

ESG Tech Product Hub  Planning and development of products based on technologies in environmental, social and corporate governance (“ESG”) areas; establishment of product-focused research and development system
5GX Intelligence CO  Development and standardization of new 5G technologies; development of MEC products and location-based technologies
AI Transformation CO  Transformation of mobile network operation business based on AI technology; planning and development of products based on AI and big data
T3K Innovation CO  Development of vertical full-stack products and vision AI technologies; discovery of new growth opportunities based on technology and enhancement of technological and corporate value
Loonshot Task Force  Discovery of future growth engines based on technology (including development of Korean-language model and development and commercialization of AI semiconductors)

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.

 

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

 

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must be independent non-executive directors. We currently have a total of eight directors, five of whom are independent non-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 least one-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 independent non-executive directors within the board of directors, the Independent Director Nomination Committee. Independent non-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. The total term of office of independent directors may not exceed six years, and when combined with the term of office at our affiliates, may not exceed nine years. Our shareholders may remove them from office by a resolution at a general meeting of shareholders adopted by the holders of at least two-thirds of the voting shares present or represented at the meeting, and such affirmative votes also represent at least one-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 and non-standing directors. The business address of all of our directors is the address of our registered office at SK T-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  Chairman of the Board of Directors, SK Hynix; Director, Nano-X Imaging Ltd.  Chief Executive Officer, SK Inc.; Head of Corporate Development Office, SK C&C Co., Ltd.; Head of Business Development Office, SK Telecom

Young Sang Ryu

  May 1970    2018    2024   Executive Director and President of Mobile Network Operations Division    Executive Vice President of Business Development Group, SK Inc.; Senior Vice President of Business Development Office, SK Telecom; Head of Corporate Center, SK Telecom

Our current non-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 Inc.; Chief Finance Officer, Head of Finance Division and Risk Management & Corporate Auditing Office, SK Inc.; Head of Business Management, SK Inc.

Jung Ho Ahn

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

 

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Name

  Month and
Year of
Birth
   Director
Since
   Expiration
of Term
   

Position

  

Other Positions

  

Business Experience

          Seoul National University  

Youngmin Yoon

   Dec. 1963    2018    2024   Independent Non-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   Independent Non-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   Independent Non-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   Independent Non-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 Infrastructure Center Head of Corporate Culture Division
Chungsik Kang Nov. 1971 PR Officer, Public Relations Office Project Leader, Communication Committee PR Team
Dae Hwan Ko Sept. 1961 Director of SK Academy Head of Business Support Office, SK Incheon Petrochem
Chang Gook Ko Jan. 1966 Officer of Corporate Relations Team, SUPEX Council Project Head of CPR Office 1, SK C&C
Gyeong Nam Kim Jan. 1974 Head of S&C Technology Group PI/Project Manager, HRL Laboratories
Seong Soo Kim Jun. 1966 Head of Mobile CO Head of Distribution Support Office
Seong Joon Kim Jul. 1970 Distribution, Mobile CO Representative, Service Top
Yeong Joon Kim Sept. 1972 Head of AI Technology Unit Head of AI Technology Unit
Yoon Kim Jun. 1971 Head of T3K Siri Manager, Apple
Jeong Gyu Kim Sept. 1976 Officer of Malaysia Regional HQ Project Leader, Global Business Development, SUPEX Council Project
Jeong Bok Kim Oct. 1965 Head of Metropolitan Infrastructure Office Head of Central Infrastructure Office

 

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Name

 

Month and
Year of
Birth

 

Position

 

Business Experience

Jung Hoon Kim Nov. 1963 Head of Cloud Infrastructure Group Naver Business Platform
Jiwon Kim Jun. 1985 Head of Vision AI Labs, T3K Innovation CO Professional Researcher, Samsung Advanced Institute of Technology
Jinwoo Kim Feb. 1971 Head of Global Business 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 Global Media Support, MNO Business Head of Media Business Support Group
Hyeon Kook Kim Dec. 1966 Daegu Regional CP 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 Communication Center 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 Inc.
Man Gang Ra Jan. 1972 Head of Motivation Group Head of Talent Management Team, HR Office
Byung Hoon Ryu Oct. 1980 Head of Corporate Strategy Group PM Group PM2 CoE
Jung Hwan Ryu Jun. 1970 Head of 5GX Infrastructure Group Head of Infrastructure Support Group
Gap In Moon May 1969 Head of Smart Device Group Head of Service Strategy Division Policy Group
Myung Soon Park Feb. 1969 Head of Infrastructure Value Innovation Group Head of Growth Technology Institute
Min Hyung Park Oct. 1968 Representative, SKTA Motorola Inc.
Yong Joo Park May 1965 Head of Compliance and Legal Group Seoul Central District Prosecutor’s Office
Jong Kwan Park Jul. 1970 Head of 5GX Intelligence CO Head of Core Network Lab, Network Technology Institute
Jong Suk Park Nov. 1971 Head of Business Planning Group Head of Business Planning Office, SK Broadband
Ji Soo Park Jun. 1976 Officer of Talent Development CoE, SUPEX Council Project Project Leader, HR Support Team, SUPEX Council Project
Jin Woo So Dec. 1961 Chairman of Talent Development Committee, SUPEX Council Project Representative, SK Planet
Suk Ham 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 Infrastructure Engineering Group Head of Daegu Infrastructure Office
Gwang Hyeon Song Mar. 1970 Head of Digital Communication Office Head of Business PR Team, Communication Office
Jae Seung Song Mar. 1979 Head of Corporate Development 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 IoT CO Head of Energy Business Team
Sang Soo Sim Aug. 1965 Head of Western Infrastructure Office Head of Infrastructure Division Network Business Support Group

 

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Name

 

Month and
Year of
Birth

 

Position

 

Business Experience

Jeong Yeol Ahn Aug. 1969 Head of Supply Chain Management Group Head of Corporate Center, Eleven Street
Junehyeon Ahn Nov. 1969 Officer of Public Relations Team, SUPEX Council Project Corporate Relations Team, SUPEX Council Project Communication Committee
Maeng Seog Yang Mar. 1969 MR Business, MR Service CO Head of 5GX MNO Business Group
Ji Young Yeo Sept. 1966 Open Collaboration, ESG Innovation Group Head of New Business Promotion Division Design Thinking Team
Sung Jin Yeum Oct. 1972 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 Oct. 1970 Head of Creative Communication Group Head of Brand 2 Office, Hyundai Card
Kyung Sik Oh Mar. 1966 Head of Sports Marketing Group Head of Sports Marketing Group
Sehyeon Oh Jul. 1963 Head of Authentication CO Head of C&C DT Business Development Division
Woong Hwan Ryu May 1971 Head of ESG Innovation Group Head of Open Collaboration Center
Sung Eun Yoon Jan. 1973 Officer of PR, Public Relations Office Head of Corporate Relations Strategy Office Policy System Team
Yong Chul Yoon May 1965 Officer of PR, Public Relations Office Head of Department, MBC Newsroom
Poong Young Yoon Nov. 1974 Head of Corporate Center 1 Head of PM Group
Gab Jae Lee Feb. 1973 Central Regional CP Head of Central Marketing Office
Kang Won Lee Feb. 1970 Cloud Technology, Cloud CO 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 CO 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 T3K Innovation CO Head of Media Technology Institute
Joon Ho Lee Aug. 1968 ESG Business, ESG Innovation Group Head of Public Relation Office 2
Joong Ho Lee Nov. 1967 Head of Metropolitan Area CP Head of Busan Marketing Office
HyunA Lee Aug. 1971 Head of AI&CO Head of Conversational Commerce Division, SK Planet
Bong Ho Lim Dec. 1966 Head of Regional CP Head of Metropolitan Area Marketing Office
Hyoung Do Lim Jun. 1968 Head of Change Management Office Head of Policy Cooperation Office
Hong Sung Chang Mar. 1969 Head of Advertising/Data CO Head of Data Technology Institute
Jinsoo Jeon Apr. 1975 Head of MR Service CO Head of Media Labs
Dae Dug Jeong Sept. 1967 Tax, Finance Group Head of Tax Team
Doh Hee Jung Sept. 1974 AI Transformation Products & Business, AI Transformation CO Head of Data CoE Data Analysis Team 2
Jae Heon Chung Jun. 1968 Head of New Business Legal Group Chief Judge, Seoul Central District Court
Jae Hyun Chung Dec. 1959 Officer of ICT Advisory Board Head of ICT System TF
Chang Gweon Chung Jul. 1970 Head of Infrastructure Business Head of Infrastructure Engineering Group
Dong Hwan Cho Nov. 1970 Head of Cloud Transformation Center Head of Data CoE
Young Log Cho Jun. 1971 Head of CR & Growth Business Support Office Assistant to Head of External Cooperation Office

 

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Name

 

Month and
Year of
Birth

 

Position

 

Business Experience

Jae Yoo Cho Dec. 1979 Games, MR Service CO Representative, LINE Games Japan
Jongwhi Cha Nov. 1974 Head of Brand Foundation 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 Smart Factory CO Head of IoT Business Support Group
Woo Seong Chey Jan. 1974 Representative, SK Telecom Japan PL of Unicorn Labs Tokyo Office
Eun Sik Choi Feb. 1969 Western Regional CP Head of Distribution Innovation Support Group
Il Gyu Choi Nov. 1970 Head of Cloud CO Head of Public Business Unit
Jeong Hwan Choi Jun. 1968 Asset Optimization, Corporate Development Group Head of IR, Corporate Development Center
Chang Won Chey Aug. 1964 Vice President of SK Research Institute for SUPEX Management Chief Executive Officer, SK Chemical
Pan Chul Choi Jan. 1969 Cloud Business, Cloud CO Head of Enterprise Business Division Financial Business Team
Min Yong Ha Sept. 1970 Officer, Innovation Suite Head of Global Alliance Group
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 Subscription Service CO Head of Global Alliance Group
Geunman Heo Aug. 1966 Head of Infrastructure Solutions Group Head of Gangnam Quality Solution Team
Seok Joon Huh May 1973 Head of Private Placement Group Managing Director, L Catterton Asia (Singapore)
Eunah Hyun Nov. 1974 Head of Growth Legal, Corporate Center 2 Global Business Support Team, SK Inc.
Eric Hartman Davis Oct. 1980 Head of Loonshot TF Language Superintelligence Labs Head of Global AI Development Group
So Jeong Choi Apr. 1982 Subscription Media, Subscription Service CO Mobile Streaming, MNO Marketing Group
Gwan Woo Lee Jun. 1973 Head of Cloud Application Group Head of Data Development Operations Group
Tae Wan Kim Jan. 1979. Strategic Alliance, Global Business Group Strategic Alliance, Integrated Service Group
Yeong Sang Kwon Mar. 1971 Head of Policy Cooperation Office Head of Policy Cooperation Office
Seung Tae Hong Jul. 1971 RPA, Business Planning Group Leader, Portfolio Innovation Team, Business Strategy Group
Gyu Sik Lee Jan. 1970 Head of Competency Group Leader, Change 1 Cell, Change Office
Yong Jin Choi Feb. 1977 Head of AI Transformation CO Head of MNO DT Labs, AI/DT Technology Group
Jeong Tae Kim Aug. 1972 Head of Learning Center Head of Learning Center
Jihoon Kim Sept. 1978 Officer, Future Business Team, SUPEX Council Project Leader, Bundled Product Offering Team
Jaeho Yoo Dec. 1973 Portfolio Innovation Growth Business Group, Eleven Street
Jeong Hoon Lee May 1974 SKTA Business Development Investment Center 2 Group, SK Inc.
Yong Seok Lee Nov. 1961 Head of ESG Group, SK Research Institute for SUPEX Management PD, SK Research Institute for SUPEX Management

 

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Item 6.B.

Compensation

The aggregate of the remuneration paid and in-kind benefits granted to our directors (all standing directors, who also serve as our executive officers, and non-standing directors) during the year ended December 31, 2020 totaled approximately Won 10.0 billion.

The compensation of our directors who received total annual compensation exceeding Won 500 million in 2020 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  1,700   5,679  1     7,380 

Young Sang Ryu

 Executive Director and President of Mobile Network Operations Division  540   1,668   21      2,229 

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 and in-kind benefits granted to our executive officers (excluding all standing directors, who also serve as our executive officers) during the year ended December 31, 2020 totaled approximately Won 49.8 billion.

The compensation of the five individuals who received the highest compensation among those who received total annual compensation exceeding Won 500 million in 2020 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  1,700   5,679   1     7,380 

Jin Woo So

  Chairman of Talent Development Committee, SUPEX Council Project  1,200   1,163   2      2,365 

Young Sang Ryu

  Executive Director and President of Mobile Network Operations Division  540   1,668   21      2,229 

Yoon Kim

  Head of T3K  430   1,127   83      1,640 

Poong Young Yoon

  Head of Corporate Center 1  400   1,105   43      1,548 

 

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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. On February 25, 2021, 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 25, 2021. The following table summarizes the exercisable stock options granted to our directors and executive officers as of March 31, 2021:

 

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 President of
Mobile Network
Operations
Division
 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 
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   5,990 

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 
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   1,920 

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 
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   3,760 

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 
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   3,360 

Jong Ryeol Kang

 Head of ICT
Infrastructure
Center
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   2,048 
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   2,350 

Yoon Kim

 Head of T3K March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,874 
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   2,110 

Seok Joon Huh

 Head of Private
Placement Group
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,852 
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   2,260 

Dong Hwan Cho

 Head of Cloud
Transformation
Center
 March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,525 
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   1,770 

HyunA Lee

 Head of AI&CO March 26, 2020 March 27, 2023 March 26, 2027  192,260   1,525 
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   2,880 

Sang Kyu Shin

 Head of Corporate
Culture Center
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   1,530 

Jae Seung Song

 Head of Corporate
Development
Croup
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   2,650 

Myung Jin Han

 Head of
Subscription
Service CO
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   1,450 

Byung Hoon Ryu

 Head of Corporate
Strategy Group
 March 25, 2021 March 26, 2023 March 25, 2026  251,380   1,250 

 

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.

 

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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 independent non-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 independent non-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. Seok-Dong Kim is the chairman of the committee. 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 independent non-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. Seok-Dong Kim is the chairman of the committee.

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. Jung Ho Ahn is the chairman of the committee.

Compensation Review Committee

This committee oversees our overall compensation scheme for top-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. Yong-Hak Kim is the chairman of the committee.

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, Youngmin Yoon and Junmo Kim. Youngmin Yoon is the chairwoman of the committee.

 

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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, 2018

   33,999    5,910    39,909 

December 31, 2019

   34,548    5,995    40,543 

December 31, 2020

   34,847    6,250    41,097 

Labor Relations

As of December 31, 2020, SK Telecom had a company union consisting of 2,591 regular employees out of 5,232 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 a two-year duration, which is focused on employee benefits and welfare. Employee wages are separately negotiated on an annual basis. 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 were completed in September 2020 and resulted in an average monthly wage increase of 2.0% for SK Telecom employees. Our wage negotiations for 2021 were completed in March 2021 and resulted in an average monthly wage increase of 3.0% for SK Telecom employees. 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, 2020, the defined benefit obligation, which is the accrued and unpaid retirement and severance benefits, of Won 1,278.6 billion for all of our employees are reflected in our consolidated financial statements as a liability, of which a total of Won 1,127.2 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 2020 was set at 5.00% of SK Telecom’s profit before income tax on a separate basis, or Won 50.0 billion. 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.

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.

 

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Item 6.E.

Share Ownership

The following table sets forth the share ownership by our directors and executive officers as of March 31, 2021:

 

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  3,500     None   177,610 

Young Sang Ryu

 Executive Director and President of Mobile Network Operations Division  1,000     None   11,435 

Executive Officers:

     

Jong Ryeol Kang

 Head of ICT Infrastructure Center  784     None   4,398 

Gyeong Nam Kim

 Head of S&C Technology Group  206     None    

Seong Soo Kim

 Head of Mobile CO  300     None    

Seong Joon Kim

 Distribution, Mobile CO  300     None    

Yeong Joon Kim

 Head of AI Technology Unit  200     None    

Yoon Kim

 Head of T3K  1,000     None   3,984 

Jeong Bok Kim

 Head of Metropolitan Infrastructure Office  673     None    

Jung Hoon Kim

 Head of Cloud Infrastructure Group  150     None    

Jiwon Kim

 Head of Vision AI Labs, T3K Innovation CO  300     None    

Jinwoo Kim

 Head of Global Business Group  150     None    

Jinwon Kim

 Head of Financial Strategy & Management Group  700     None    

Hyuk Kim

 Global Media Support, MNO Business  300     None    

Hyeon Kook Kim

 Daegu Regional CP  500     None    

Heesup Kim

 Head of Communication Center  200     None    

Man Gang Ra

 Head of Motivation Group  500     None    

Byung Hoon Ryu

 Head of Corporate Strategy Group  500     None   1,250 

Jung Hwan Ryu

 Head of 5GX Infrastructure Group  450     None    

Gap In Moon

 Head of Smart Device Group  200     None    

Myung Soon Park

 Head of Infrastructure Value Innovation Group  150     None    

Yong Joo Park

 Head of Compliance and Legal Group  1,200     None    

Jong Kwan Park

 Head of 5GX Intelligence CO  200     None    

Jong Suk Park

 Head of Business Planning Group  500     None    

Suk Ham Sung

 Growth Business Support, CR & Growth Business Support Office  500     None    

Jin Soo Seong

 Head of Infrastructure Engineering Group  1,036     None    

Jae Seung Song

 Head of Corporate Development Group  200     None   2,650 

Gwang Hyeon Song

 Head of Digital Communication Office  200     None    

Sang Kyu Shin

 Head of Corporate Culture Center  500     None   1,530 

Yongsik Shin

 Head of IoT CO  408     None    

Sang Soo Sim

 Head of Western Infrastructure Office  300     None    

Jeong Yeol Ahn

 Head of Supply Chain Management Group  421     None    

Maeng Seog Yang

 MR Business, MR Service CO  200     None    

Ji Young Yeo

 Open Collaboration, ESG Innovation Group  316     None    

Sung Jin Yeum

 CR Support, CR & Growth Business Support Office  1,000     None    

Hui Gang Ye

 Head of Creative Communication Group  200     None    

Kyung Sik Oh

 Head of Sports Marketing Group  350     None    

Sehyeon Oh

 Head of Authentication CO  100     None    

Woong Hwan Ryu

 Head of ESG Innovation Group  200     None    

 

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Name

 

Position

 Number of
Shares
Owned
  Percentage of
Total Shares
Outstanding
  Special
Voting
Rights
  Options 

Sung Eun Yoon

 Officer of PR, Public Relations Office  200     None    

Poong Young Yoon

 Head of Corporate Center 1  800     None   6,347 

Gab Jae Lee

 Central Regional CP  300     None    

Kang Won Lee

 Cloud Technology, Cloud CO  100     None    

Kiyoon Lee

 Head of Customer Value Innovation Office  765     None    

Sang Gu Lee

 Head of Messaging CO  350     None    

Sang Heon Lee

 Head of Policy Development Office  377     None    

Jongmin Lee

 Head of T3K Innovation CO  200     None    

Joon Ho Lee

 ESG Business, ESG Innovation Group  300     None    

Joong Ho Lee

 Head of Metropolitan Area CP  200     None    

HyunA Lee

 Head of AI&CO  100     None   4,405 

Bong Ho Lim

 Head of Regional CP  150     None    

Hyoung Do Lim

 Head of Change Management Office  275     None    

Hong Sung Chang

 Head of Advertising/Data CO  250     None    

Jinsoo Jeon

 Head of MR Service CO  1,000     None    

Dae Dug Jeong

 Tax, Finance Group  350     None    

Doh Hee Jung

 AI Transformation Products & Business, AI Transformation CO  100     None    

Jae Heon Chung

 Head of New Business Legal Group  400     None    

Chang Gweon Chung

 Head of Infrastructure Business  450     None    

Dong Hwan Cho

 Head of Cloud Transformation Center  700     None   3,295 

Young Log Cho

 Head of CR & Growth Business Support Office  700     None    

Jae Yoo Cho

 Games, MR Service CO  600     None    

Jongwhi Cha

 Head of Brand Foundation Group  100     None    

Zonggeun Chai

 Head of Ethics Management Office  900     None    

Nag Hun Choi

 Head of Smart Factory CO  600     None    

Eun Sik Choi

 Western Regional CP  250     None    

Il Gyu Choi

 Head of Cloud CO  150     None    

Jeong Hwan Choi

 Asset Optimization, Corporate Development Group  400     None    

Pan Chul Choi

 Cloud Business, Cloud CO  100     None    

Min Yong Ha

 Officer, Innovation Suite  300     None    

Seong Ho Ha

 Head of Corporate Relations Center  1,000     None   4,945 

Hyoung Il Ha

 Head of Corporate Center 2  1,000     None   7,285 

Geunman Heo

 Head of Infrastructure Solutions Group  300     None    

Eunah Hyun

 Head of Growth Legal, Corporate Center 2  200     None    

Myung Jin Han

 Head of Subscription Service CO  1,000     None   1,450 

Seok Joon Huh

 Head of Private Placement Group  700     None   4,112 

Seung Tae Hong

 RPA, Business Planning Group  150     None    

Gyu Sik Lee

 Head of Competency Group  200     None    

So Jeong Choi

 Subscription Media, Subscription Service CO  100     None    

Gwan Woo Lee

 Head of Cloud Application Group  250     None    

Tae Wan Kim

 Strategic Alliance, Global Business Group  280     None    

Yeong Sang Kwon

 Head of Policy Cooperation Office  250     None    

Yong Jin Choi

 Head of AI Transformation CO  200     None    

Jihoon Kim

 Officer, Future Business Team, SUPEX Council Project  67     None    

Jaeho Yoo

 Portfolio Innovation  120     None    
  

 

 

  

 

 

   

 

 

 

Total

  37,178      234,696 

 

 

*

Less than 1%.

 

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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, 2020, approximately 66.7% of our issued shares were held in Korea by approximately 154,707 shareholders. According to Citibank, N.A. (“Citibank”), depositary for our ADRs, as of December 31, 2020, 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 6,791,254 shares of our common stock were held in the form of ADSs. As of such date, outstanding ADSs represented approximately 8.4% of our outstanding common shares.

The following table sets forth certain information as of December 31, 2020 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(3)
  Percentage of
Total Shares
Outstanding(4)
 

SK Inc.

   21,624,120    26.8  30.3

National Pension Service

   8,853,906    11.0   12.4 

Treasury shares(1) (2)

   9,418,558    11.7    

 

 

(1)

Treasury shares do not have any voting rights. In 2020, we repurchased 1,809,295 common shares under a share repurchase agreement with SK Securities Co., Ltd., a securities brokerage firm, dated August 28, 2020 (the “Share Repurchase Agreement”).

 

(2)

We repurchased an additional 288,000 common shares under the Share Repurchase Agreement in January 2021 and disposed of 120,990 treasury shares as bonus payment to certain of our officers and employees in February 2021. As of March 31, 2021, we held 9,585,568 shares in treasury.

 

(3)

Calculated based on 80,745,711 total issued shares, which include 9,418,558 treasury shares, as of December 31, 2020.

 

(4)

Calculated based on 71,327,153 total outstanding shares as of December 31, 2020.

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

  2020  2019  2018 
   

(As a percentage of total

issued shares)(1)

 

SK Group(2)

   26.8  26.8  26.8

SK Inc.

   26.8   26.8   26.8 

National Pension Service

   11.0   11.1   9.8 

 

 

(1)

Includes 9,418,558 shares, 7,609,263 shares and 8,875,883 shares held in treasury as of December 31, 2020, 2019 and 2018, 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 Inc. In November 2019, we sold 1,266,620 treasury shares to Kakao for approximately Won 300.0 billion. In 2020, we repurchased 1,809,295 common shares under the Share Repurchase Agreement.

 

(2)

SK Group’s ownership interest as of December 31, 2020, 2019 and 2018 consisted of the ownership interest of SK Inc. only.

 

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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, 2021, SK Inc. 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 Inc. 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 Inc. 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, 2021, the total number of our common shares outstanding was 71,160,143.

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 37 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, 2020.

SK Networks

As of December 31, 2020, we had Won 2.2 billion of accounts receivable from SK Networks. As of the same date, we had Won 108.2 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 1,023.0 billion in 2020, Won 1,088.4 billion in 2019 and Won 1,189.4 billion in 2018.

SK Inc.

We enter into agreements with SK Inc. from time to time for specific information technology-related projects, and we also pay SK Inc. for use of the SK brand. The aggregate fees we paid to SK Inc. for such information technology services and the use of the SK brand amounted to Won 380.3 billion in 2020, Won 396.0 billion in 2019 and Won 397.5 billion in 2018. We also purchase various information technology-related equipment from SK Inc. from time to time. The total amount of such purchases was Won 76.5 billion in 2020, Won 95.4 billion in 2019 and Won 151.5 billion in 2018. We are a party to several service agreements with SK Inc. relating to the development and maintenance of our information technologies systems.

In December 2018, we acquired SK Infosec from SK Inc. 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 Inc. 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 496.5 billion in 2020, Won 607.5 billion in 2019 and Won 493.8 billion in 2018. As of December 31, 2020, we had Won 89.9 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.

 

Item 8.

FINANCIAL INFORMATION

 

Item 8.A.

Consolidated Statements and Other Financial Information

See “Item 18. Financial Statements” and pages F-1 through G-99.

 

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Legal Proceedings

FTC Proceedings

On February 24, 2021, the FTC imposed a fine of Won 6.4 billion on us and issued a correctional order in connection with the payment by SK Telecom of a portion of sales commissions for IPTV services of SK Broadband in the course of selling bundled rate plans that combine our wireless services with IPTV services in violation of the Fair Trade Act. While we expect to pay the fine by the due date, we plan to apply for a stay of execution of the correctional order and initiate administrative proceedings in connection with the correctional order and the fine.

KCC Proceedings

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.

On June 4, 2020, the KCC imposed a fine of Won 4 million on us and issued a correctional order for obtaining consent from subscribers for collection of personal information through contracts with material omissions in violation of the Location Information Act of Korea. On July 8, 2020, the KCC imposed a fine of Won 22.3 billion on us and issued a correctional order for providing handset subsidies that were in excess of their officially announced amounts and were discriminatory in nature, as well as 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 in violation of the MDDIA. On September 9, 2020, the KCC imposed a fine of Won 76 million on us and issued a correctional order for false, exaggerated or deceptive advertising in violation of the Telecommunications Business Act.

With respect to the fines imposed by the KCC set forth above, we have paid such fines in full. 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.

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, could be approved by a resolution of our board of directors. We replaced the interim dividend system with a quarterly dividend system pursuant to an amendment to our articles of incorporation at our annual general meeting of shareholders held on March 25, 2021. 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 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.”

 

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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)     

2016

  10,000   706.1    70,609,160 

2017

   10,000    706.1    70,609,160 

2018

   10,000    717.4    71,869,828(1) 

2019

   10,000    730.1    73,136,448(2) 

2020

   10,000    715.1    71,327,153(3) 

 

 

(1)

The number of shares entitled to the interim dividend was 70,609,160.

 

(2)

The number of shares entitled to the interim dividend was 71,869,828.

 

(3)

The number of shares entitled to the interim dividend was 73,136,448.

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 of non-voting shares are entitled to receive dividends in priority to the holders of common shares. The dividend on the non-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 for non-voting shares, the holders of non-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 of non-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 no non-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 exceed one-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 a non-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 than one-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 FSCMA and our articles of incorporation provide that, in addition to annual dividends, we may pay quarterly dividends. Unlike annual dividends, the decision to pay quarterly dividends can be made by a resolution of the board of directors and is not subject to shareholder approval. Any quarterly dividends must be paid in cash to the shareholders of record as of March 31, June 30 or September 30 of the relevant fiscal year.

Under the FSCMA, the total amount of quarterly 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 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

 

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amount of legal reserve that should be set aside for the current fiscal year following the quarterly dividend payment. Furthermore, the rate of quarterly dividends for non-voting shares must be the same as that for our common shares. In addition, no quarterly dividends can be paid if there is a concern over the net assets of the current fiscal year falling short of the aggregate 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 current fiscal year 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.

Our obligation to pay quarterly 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, 2021, 71,160,143 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 represents one-ninth of one share of our common stock. As of March 31, 2021, ADSs representing 6,600,692 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 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 on Form 20-F.

 

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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 of non-voting stock, par value Won 500 per share (common shares and non-voting shares together are referred to as “shares”). Under our articles of incorporation, we are authorized to issue up to 5,500,000 non-voting preferred shares. As of March 31, 2021, 80,745,711 common shares were issued, of which 9,585,568 shares were held by us in treasury. From September 2020 to January 2021, we repurchased 2,097,295 common shares under the Share Repurchase Agreement, and we disposed of 120,990 treasury shares as bonus payment to certain of our officers and employees in February 2021. We have never issued any non-voting preferred shares. All of the issued and outstanding common shares are fully-paid and non-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 independent non-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 least one-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 do not 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. The total term of office of independent directors may not exceed six years, and when combined with the term of office at our affiliates, may not exceed nine years.

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

 

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the date set for the payment thereof, (c) in cases of no par value shares, the amount to be included in the paid-up capital out of the issuance price of new shares and (d) the method of subscription to new shares by no later than two 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 of non-voting preferred shares may request a general meeting of shareholders only after the non-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 of non-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 do not 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 least one-fourth of our total

 

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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 least two-thirds of the voting shares present or represented at a meeting, and such affirmative votes must also represent at least one-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 of non-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 the non-voting preferred shares, approval of the holders of non-voting preferred shares is required. We may obtain the approval by a resolution of holders of at least two-thirds of the non-voting preferred shares present or represented at a class meeting of the holders of non-voting preferred shares, where the affirmative votes also represent at least one-third of our total issued and outstanding non-voting shares. In addition, if we are unable to pay dividends on non-voting preferred shares as provided in our articles of incorporation, the holders of non-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 of non-payment of dividends is made until such dividends are paid. The holders of enfranchised non-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 of non-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

 

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purchase the shares of such dissenting shareholders within one month after the expiration of the 20-day period. The purchase price for the shares is required to be determined through negotiation between the dissenting shareholders 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 the two-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

When sending a written notice for the general meeting of shareholders, we must attach our annual report prepared under the FSCMA and audit report prepared under the Act on External Audit of Stock Companies. Alternatively, we may inform the shareholders of the annual report and audit report by email or uploading them to our website one week before the general meeting of shareholders. Furthermore, at least one week before the annual general meeting of shareholders, we must make our business reports and audited non-consolidated financial statements available for inspection at our principal office and at all of our branch offices. In addition, copies of business reports, the audited non-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 report within 90 days after the end of our fiscal year, (2) a mid-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. A non-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, a non-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 by non-residents or non-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

 

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Restrictions and Requirements.” In addition, certain foreign exchange controls and securities regulations apply to the acquisition of securities by non-residents or non-Korean citizens. See “Item 10.D. Exchange Controls — Korean Foreign Exchange Controls and Securities Regulations.”

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 of non-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 37 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 by non-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 a non-resident to collect such claim to enable the recovery of the relevant debt back to Korea; and

 

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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 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 be de-listed from the foreign stock market or actually listed on, or de-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 the one-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

 

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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.

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 such non-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;

 

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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;

 

  

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.

For over-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 an over-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

 

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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.

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 a non-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 a non-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.

 

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Item 10.E.

Taxation

United States Taxation

This summary describes certain 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 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 a mark-to-market method of accounting for securities holdings;

 

  

a bank or other financial institution;

 

  

a life insurance company;

 

  

a tax-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

 

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“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 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. As described below under “Passive Foreign Investment Company Rules”, we believe that we may be classified as a PFIC with respect to our taxable year ending December 31, 2020 and that there is a significant risk that we will be a PFIC for the current and future taxable years. Accordingly, U.S. holders of commons shares or ADSs should consult their own tax advisors regarding the availability of the reduced dividend tax rate for dividends with respect to our common shares or ADSs.

Distributions of additional shares in respect of common shares or ADSs that are made as part of a pro-rata distribution to all of our stockholders generally will not be subject to U.S. federal income tax.

Sale or Other Disposition

Subject to the discussion below under “Passive Foreign Investment Company Rules,” 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. 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, we believe that we may be classified as a PFIC for U.S. federal income tax purposes for our taxable year ending December 31, 2020 and that there is a significant risk that we will be a PFIC for the current and future taxable years. 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.”

You should consult your own tax advisors regarding our classification as a PFIC for 2020 or in the current or future years.

If we are classified as a PFIC, and you do not make a mark-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 a step-up in the basis of your shares or ADSs at death.

 

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Although the determination of whether we are a PFIC is made annually, if we are a PFIC for any taxable year during which a U.S. holder holds our common shares or ADSs, such U.S. holder will generally be subject to the unfavorable rules described above for that year and for each subsequent year in which such U.S. holder holds the common shares or ADSs (even if we do not qualify as a PFIC in such subsequent years). However, if we cease to be a PFIC, a U.S. holder can avoid the continuing impact of the PFIC rules by making a special election to recognize gain as if such U.S. holder’s common shares or ADSs had been sold on the last day of the last taxable year during which we were a PFIC. U.S. holders should consult their own tax advisor about the advisability of making this election.

A U.S. holder may be able to avoid the unfavorable rules described above by electing to mark its ADSs to market, provided the ADSs are treated as “marketable stock.” The ADSs generally will be treated as marketable stock if the ADSs are “regularly traded” on a “qualified exchange or other market” (which includes the New York Stock Exchange). Further, it should also be noted that only the ADSs and not the common shares are listed on the New York Stock Exchange. Consequently, a U.S. holder that holds common shares that are not represented by ADSs may not be eligible to make a mark-to-market election in respect of those common shares. If the U.S. holder makes a mark-to-market election, the U.S. holder 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 its ADSs at year-end over the U.S. holder’s basis in those ADSs. If at the end of the U.S. holder’s taxable year, the U.S. holder’s basis in the shares or ADSs exceeds their fair market value, the U.S. holder will be entitled to deduct the excess as an ordinary loss, but only to the extent of the U.S. holder’s net mark-to-market gains from previous years. A U.S. holder’s adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. In addition, any gain the U.S. holder recognizes upon the sale of the U.S. holder’s ADSs in a year in which we are a PFIC will be taxed as ordinary income in the year of sale and any loss will be treated as an ordinary loss to the extent of the U.S. holder’s net mark-to-market gains from previous years. If a U.S. holder makes a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a “qualified exchange or other market” or the Internal Revenue Service (“IRS”) consents to the revocation of the election. If a U.S. holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the U.S. holder will not be required to take into account the mark-to-market gain or loss described above during any period that such corporation is not classified as a PFIC. Because a mark-to-market election generally cannot be made for any lower-tier PFICs that we may own (unless shares of such lower-tier PFIC are themselves “marketable”), a U.S. holder who makes a mark-to-market election with respect to our common shares may continue to be subject to the general PFIC rules with respect to such U.S. holder’s indirect interest in any of our non-United States subsidiaries that is classified as a PFIC. U.S. holders are urged to consult their own tax advisors about the availability of the mark-to-market election, the consequences of not making a mark-to-market election for the first year during which a U.S. holder holds interests in our common shares or ADSs and we are a PFIC, and whether making the election would be advisable in their particular circumstances.

Although a U.S. holder can also avoid the unfavorable PFIC rules described above by electing to treat its common shares or ADSs as interests in a qualified electing fund (“QEF”), we do not intend to provide the information that would allow a U.S. holder to make such an election. Accordingly, in the event that we are treated as a PFIC, a U.S. holder will not be able to make a “QEF election.”

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.

The U.S. federal income tax rules relating to PFICs are complex. U.S. holders are strongly urged to consult their own tax advisors regarding our potential classification as a PFIC and regarding the U.S. federal income tax consequences of acquiring, holding and disposing of our common shares or ADSs if we are so classified, including the advisability of making a mark-to-market election, if available.

 

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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 a 16-day period that includes the ex-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.

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 a non-U.S. financial institution, as well as securities issued by a non-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 its non-U.S. status in connection with payments received within the United States or through a U.S.-related financial intermediary.

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 are non-resident individuals or non-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

 

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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 a Non-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 such Non-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 by Non-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 the Non-resident Holder’s country of tax residence.

However, a Non-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 the Non-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 such Non-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.

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 0.43% of the sales price (or 0.5% of the sales price if such shares were sold before April 1, 2020; 0.45% of the sales price if such shares were sold before January 1, 2021). 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) 0.23% of the sales price of such shares (or 0.25% of the sales price if such shares were sold after June 3, 2019 and before January 1, 2021) (including agricultural and fishery

 

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special surtax thereon) if traded on the KRX KOSPI Market or (2) subject to certain exceptions, 0.43% of the sales price of such shares (or 0.5% of the sales price of such shares were sold before April 1, 2020; 0.45% of the sales price if such shares were sold before January 1, 2021) 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 a Non-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 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 a non-resident from the transfer of securities issued by a Korean company is often eliminated.

Each Non-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 a non-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 such non-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 such non-resident issued by a competent authority of the non-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 a non-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 such non-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 a non-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.

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.

 

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Item 10.H.

Documents on Display

We file reports, including annual reports on Form 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 at 1-800-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 SK T-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 a floating-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 2020. In addition, we have entered into fixed-to-fixed cross currency swap contracts to hedge the foreign currency risks of US$400 million of bonds issued in July 2007, US$17.2 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 into floating-to-fixed interest rate swap contracts to hedge interest rate risks with respect to Won 12.3 billion of borrowings from December 2016, Won 25.0 billion of borrowings from December 2017 and Won 37.5 billion of borrowings from December 2018. See note 22 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 7.5 billion, with a decrease of 10.0% in the exchange rate having the opposite effect, as of December 31, 2020. For a further discussion of our exchange rate risk exposures, see note 36(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, 2020:

 

  Maturities 
  2021  2022  2023  2024  2025  Thereafter  Total  Fair Value 
  (In billions of Won, except for percentage data) 

Local currency:

        

Fixed-rate

 952.6  1,387.8  2,787.4  848.1  847.4  2,133.5  8,956.8  9,431.4 

Average weighted rate(1)

  2.66  2.20  2.93  2.41  1.92  2.38  

Variable rate

  84.3   

 
  37.4            121.7   121.7 

Average weighted rate(1)

  2.22     1.48           
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

  1,036.9   1,387.8   2,824.8   848.1   847.4   2,133.5   9,078.5   9,553.0 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Foreign currency:

        

Fixed-rate

  12.4   6.2   865.5         431.3   1,315.4   1,489.8 

Average weighted rate(1)

  1.70  1.70  3.80        6.63  

Variable rate

              324.8      324.8   324.8 

Average weighted rate(1)

              1.15     
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sub-total

  12.4   6.2   865.5      324.8   431.3   1,640.2   1,814.6 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 1,049.3  1,394.0  3,690.3  848.1  1,172.2  2,564.8  10,718.7  11,367.6 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

(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 0.5 billion with a 1.0% point decrease in interest rates having the opposite effect, as of December 31, 2020. For a further discussion of our interest rate risk exposures, see note 36(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, 2020, 2019 and 2018, 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 94.6 billion, Won 40.8 billion and Won 29.4 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.

 

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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 (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 a per-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 2020, we received US$782,300 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 in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2020. 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 in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as of December 31, 2020. 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, 2020.

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, 2020 is included in Item 18 of this Form 20-F.

Changes in Internal Control Over Financial Reporting

Beginning January 1, 2020, we changed our accounting policy by applying the agenda decision, Lease Term and Useful Life of Leasehold Improvements (IFRS 16 Leases and IAS 16 Property, Plant and Equipment) — November 2019, published by the IFRIC on December 16, 2019 and implemented significant new systems, processes and internal controls over lease accounting to assist us in the application of such change. Other than as

 

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discussed above, there has been no change in our internal control over financial reporting during 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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, 2020 and 2019:

 

   Year Ended December 31, 
   2020   2019 
   (In millions of Won) 

Audit Fees

  5,157   4,299 

Audit-Related Fees

   16    3 

Tax Fees

   372    305 

All Other Fees

   93     
  

 

 

   

 

 

 

Total

  5,638   4,607 

“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 audit services of documents related to the use of certain government grants in 2020 and assurance services, including verification of the consistency of financial information submitted to relevant governmental authorities with our consolidated annual financial statements, in 2019.

“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 benchmarking services related to new types of business association models for the purpose of enhancing social values in 2020.

Pre-Approval of Audit and Non-Audit Services Provided by Independent Registered Public Accounting Firm

Our audit committee pre-approves all audit services to be provided by KPMG Samjong, our independent registered public accounting firm. Our audit committee’s policy regarding the pre-approval of non-audit services to

 

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be provided to us by our independent auditors is that all such services shall be pre-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 be pre-approved. In addition, prior to the granting of any pre-approval, our audit 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 not pre-approve any non-audit services under the de minimis exception of Rule 2-01 (c)(7)(i)(C) of Regulation 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

The following table sets forth information regarding purchases by us of our common shares during the fiscal year ended December 31, 2020.

 

Period

  Total Number of
Shares Purchased(1)
   Average Price Paid
per Share(2)
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   Approximate Value
of Shares that May
Yet Be Purchased
Under the Plans or
Programs(3)
 
               (In billions of Won) 

September 1, 2020 – September 30, 2020

   496,870   239,411    496,870   381.0 

October 1, 2020 – October 31, 2020

   612,425    234,594    612,425    237.4 

November 1, 2020 – November 30, 2020

   420,000    228,741    420,000    141.3 

December 1, 2020 – December 31, 2020

   280,000    242,734    280,000    73.3 
  

 

 

     

 

 

   

Total

   1,809,295   235,818    1,809,295   73.3 
  

 

 

     

 

 

   

 

 

(1)

Repurchases made in the open market pursuant to the Share Repurchase Agreement, pursuant to which we are authorized to repurchase up to Won 500 billion of our common shares from August 28, 2020 to August 27, 2021.

 

(2)

Average price paid per share is a weighted average calculation using the aggregate price, excluding commissions and fees.

 

(3)

Remaining under the Share Repurchase Agreement at the end of the period.

 

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.

 

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NYSE Corporate Governance Standards

  

Our Corporate Governance Practice

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.

Audit Committee

  
Listed companies must have an audit committee that satisfies the independence and other requirements of Rule 10A-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

 

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NYSE Corporate Governance Standards

  

Our Corporate Governance Practice

  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-5 

Consolidated Statements of Financial Position as of December  31, 2020 and 2019

  F-6 

Consolidated Statements of Income for the years ended December  31, 2020, 2019 and 2018

  F-8 

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018

  F-9 

Consolidated Statements of Changes in Equity for the years ended December 31, 2020, 2019 and 2018

  F-10 

Consolidated Statements of Cash Flows for the years ended December  31, 2020, 2019 and 2018

  F-13 

Notes to the Consolidated Financial Statements for the years ended December 31, 2020, 2019 and 2018

  F-15 

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, 2020 and 2019

  G-3 

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018

  G-5 

Consolidated Statements of Changes in Equity for the years ended December 31, 2020, 2019 and 2018

  G-6 

Consolidated Statements of Cash Flows for the years ended December  31, 2020, 2019 and 2018

  G-8 

Notes to the Consolidated Financial Statements for the years ended December 31, 2020, 2019 and 2018

  G-9 

 

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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 Form 20-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 (incorporated by reference to Exhibit 2.3 to the Registrant’s Annual Report on Form 20-F filed on April 29, 2020)
  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 on Form 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/ Joongsuk Oh

Name:   Joongsuk Oh
Title:   Senior Vice President, Head of IR Planning

Date: April 29, 2021

 

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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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, 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, 2020, 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, 2021 expressed an unqualified opinion on the effectiveness of the Group’s internal control over financial reporting.

Changes in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, during 2019 and 2020, the Group changed its method of accounting for leases as of January 1, 2019 due to the adoption of IFRS 16, Leases, and the related interpretations published by International Financial Reporting Interpretations Committee, respectively.

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 Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

F-2


Table of Contents

(i)    Evaluation of impairment analysis for goodwill in the security services cash generating unit

As discussed in Notes 4 (11) and 16 to the consolidated financial statements, the amount of goodwill that is allocated to the security services cash generating unit (“CGU”) amounts to ₩1,176,274 million as of December 31, 2020. 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 on value-in-use (“VIU”).

We identified the evaluation of impairment analysis for goodwill in the security services CGU as a critical audit matter. Estimation of key assumptions involves a high degree of subjectivity and uncertainty and therefore, involved a high degree of subjective and complex auditor judgment. Specifically, estimates of revenue growth rates, labor costs, perpetual growth rate and discount rate used to estimate the VIU of the security services CGU were challenging to test.

The following are the primary procedures we performed to address this critical audit matter.

 

  

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Group’s goodwill impairment analysis. This included controls related to the development of revenue growth rates, labor costs, perpetual growth rate and discount rate assumptions.

 

  

We performed sensitivity analyses over both the discount rate and the perpetual growth rate applied to the discounted cash flow forecast to assess the impact of changes in these key assumptions on the Group’s determination of the VIU of the security services CGU.

 

  

We evaluated estimated revenue growth rates and labor costs by comparison with the financial budgets approved by the Group and comparing the forecasted revenue growth rates and forecasted labor costs prepared in prior year with the actual results to assess the Group’s ability to accurately forecast.

 

  

We involved our valuation professionals with specialized skills and knowledge, who assisted in (1) evaluating estimated revenue growth rates, labor costs and perpetual growth rate by comparison with industry reports as well as historical performance and (2) evaluating the discount rate by comparing with the discount rate that was independently developed using publicly available market data for comparable entities.

(ii)    Evaluation of fair value of intangible assets - Customer relationships

As discussed in Note 12 (1) to the consolidated financial statements, as a result of the merger between SK Broadband Co., Ltd., a subsidiary of SK Telecom Co., Ltd., and Tbroad Co., Ltd. and Tbroad Dongdaemun Broadcasting Co., Ltd., the Group recognized customer relationships as identifiable intangible assets. The fair value of customer relationships amounts to ₩374,019 million as of April 30, 2020, the acquisition date. The Group estimated the fair value of customer relationships using the multi-period excess earnings method (“MPEEM”), which estimates fair value by discounting the expected future excess earnings attributable to an intangible asset using risk adjusted discount rate.

We identified the evaluation of fair value of customer relationships as a critical audit matter. The evaluation of the fair value involved a high degree of challenging and complex auditor judgements. Specifically, the estimated revenue per user of relevant revenue streams, estimated future churn rates and discount rates used to estimate the fair value of customer relationships were challenging to test as minor changes to those assumptions would have had a significant impact on the fair value of the customer relationships.

 

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The following are the primary procedures we performed to address this critical audit matter:

 

  

We evaluated the design and tested operating effectiveness of certain internal controls related to the Group’s process for determining the fair value of customer relationships. This included controls related to determination of estimated revenue per user of relevant revenue streams, estimated future churn rates and discount rates.

 

  

We assessed estimated revenue per user of relevant revenue streams and future churn rates by comparing them with the actual results subsequent to the acquisition date.

 

  

We performed sensitivity analyses over both the estimated revenue per user of relevant revenue streams and estimated future churn rates applied to the discounted expected future excess earnings to assess the impact of changes in these key assumptions on the Group’s determination of the fair value of customer relationships.

 

  

We involved our valuation professionals with specialized skills and knowledge, who assisted in (1) assessing the estimated revenue per user of relevant revenue streams and future churn rates by comparing them with the acquirees’ historical performance; and (2) assessing the discount rates by comparing with the discount rates that were 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, 2021

 

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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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes (collectively, the consolidated financial statements) and our report dated April 29, 2021, 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, 2021

 

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SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Financial Position

As of December 31, 2020 and 2019

 

(In millions of won)  Note   December 31,
2020
   December 31,
2019
 

Assets

      

Current Assets:

      

Cash and cash equivalents

   35,36    1,369,653    1,270,824 

Short-term financial instruments

   6,35,36,38    1,426,952    830,647 

Short-term investment securities

   11,35,36    150,392    166,666 

Accounts receivable — trade, net

   7,35,36,37    2,188,893    2,230,979 

Short-term loans, net

   7,35,36,37    97,464    66,123 

Accounts receivable — other, net

   3,7,35,36,37,38    979,044    903,509 

Contract assets

   9,36    100,606    127,499 

Prepaid expenses

   3,8    2,128,349    2,018,690 

Prepaid income taxes

   32    1,984    63,748 

Derivative financial assets

   22,35,36,39    8,704    26,253 

Inventories, net

   10    171,443    162,882 

Advanced payments and others

   3,7,35,36    151,602    220,687 
    

 

 

   

 

 

 
     8,775,086    8,088,507 
    

 

 

   

 

 

 

Non-Current Assets:

      

Long-term financial instruments

   6,35,36    893    990 

Long-term investment securities

   11,35,36    1,648,837    857,215 

Investments in associates and joint ventures

   13    14,354,113    13,385,264 

Property and equipment, net

   3,14,15,37,38    13,377,077    12,933,460 

Goodwill

   12,16    3,357,524    2,949,530 

Intangible assets, net

   17    4,436,194    4,866,092 

Long-term contract assets

   9,36    47,675    64,359 

Long-term loans, net

   7,35,36,37    40,233    33,760 

Long-term accounts receivable — other

   3,7,35,36,37,38    332,803    351,663 

Long-term prepaid expenses

   3,8    1,063,711    1,239,865 

Guarantee deposits

   3,7,35,36,37    172,474    164,652 

Long-term derivative financial assets

   22,35,36,39    155,991    124,707 

Deferred tax assets

   32    105,088    109,057 

Defined benefit assets

   21    3,557    1,125 

Other non-current assets

   7,35,36    35,701    32,122 
    

 

 

   

 

 

 
     39,131,871    37,113,861 
    

 

 

   

 

 

 

Total Assets

     47,906,957    45,202,368 
    

 

 

   

 

 

 

 

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, 2020 and 2019

 

(In millions of won)  Note   December 31,
2020
   December 31,
2019
 

Liabilities and Shareholders’ Equity

      

Current Liabilities:

      

Accounts payable — trade

   35,36,37    372,909    438,297 

Accounts payable — other

   35,36,37    2,484,466    2,521,474 

Withholdings

   35,36,37    1,410,239    1,350,244 

Contract liabilities

   9    229,892    191,225 

Accrued expenses

   3,35,36    1,554,889    1,424,833 

Income tax payable

   32    219,766    5,450 

Derivative financial liabilities

   22,35,36,39    77     

Provisions

   3,20,38    69,363    86,320 

Short-term borrowings

   18,35,36,39    109,998    20,603 

Current portion of long-term debt, net

   18,35,36,39    939,237    1,017,327 

Current portion of long-term payables — other

   19,35,36,39    424,600    423,839 

Lease liabilities

   3,35,36,37,39    359,936    371,742 

Other current liabilities

     2,595    319 
    

 

 

   

 

 

 
     8,177,967    7,851,673 
    

 

 

   

 

 

 

Non-Current Liabilities:

      

Debentures, excluding current portion, net

   18,35,36,39    7,690,169    7,253,894 

Long-term borrowings, excluding current portion, net

   18,35,36,38,39    1,979,261    1,972,149 

Long-term payables — other

   19,35,36,39    1,142,354    1,550,167 

Long-term lease liabilities

   3,35,36,37,39    1,076,841    919,265 

Long-term contract liabilities

   9    30,704    32,231 

Defined benefit liabilities

   21    154,944    172,258 

Long-term derivative financial liabilities

   22,35,36,39    375,083    1,043 

Long-term provisions

   3,20,38    81,514    78,841 

Deferred tax liabilities

   3,32    2,709,075    2,463,861 

Other non-current liabilities

   3,35,36,37    92,802    90,052 
    

 

 

   

 

 

 
     15,332,747    14,533,761 
    

 

 

   

 

 

 

Total Liabilities

     23,510,714    22,385,434 
    

 

 

   

 

 

 

Shareholders’ Equity:

      

Share capital

   1,23    44,639    44,639 

Capital surplus and others

   12,23,24,26    278,444    607,722 

Hybrid bonds

   25    398,759    398,759 

Retained earnings

   3,27    22,981,913    22,228,683 

Reserves

   28    40,139    (329,576

Equity attributable to owners of the Parent Company

     23,743,894    22,950,227 

Non-controlling interests

     652,349    (133,293
    

 

 

   

 

 

 

Total Shareholders’ Equity

     24,396,243    22,816,934 
    

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

    47,906,957    45,202,368 
    

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Income

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won except for per share data)  Note   2020  2019  2018 

Operating revenue and other income:

      

Revenue

   3,5,37    18,624,651   17,740,716   16,873,960 

Other income

   3,5,30,37    99,648   102,821   71,950 
    

 

 

  

 

 

  

 

 

 
     18,724,299   17,843,537   16,945,910 
    

 

 

  

 

 

  

 

 

 

Operating expenses:

   3,37     

Labor

     3,006,172   2,822,673   2,288,655 

Commissions

   8    5,347,086   5,002,066   5,002,598 

Depreciation and amortization

   3,5    3,991,083   3,856,662   3,126,118 

Network interconnection

     770,712   752,334   808,403 

Leased lines

   3    294,722   263,367   309,773 

Advertising

     431,679   434,561   468,509 

Rent

   3    173,294   154,843   529,453 

Cost of goods sold

     1,608,470   1,833,362   1,796,146 

Others

   3,5,30    1,996,447   1,716,411   1,782,404 
    

 

 

  

 

 

  

 

 

 
     17,619,665   16,836,279   16,112,059 
    

 

 

  

 

 

  

 

 

 

Operating profit

   5    1,104,634   1,007,258   833,851 

Finance income

   3,5,31    241,196   142,155   256,435 

Finance costs

   3,5,31    (497,193  (437,955  (385,232

Gain relating to investments in subsidiaries, associates and joint ventures, net

   5,13    1,028,403   449,543   3,270,912 
    

 

 

  

 

 

  

 

 

 

Profit before income tax

   5    1,877,040   1,161,001   3,975,966 
    

 

 

  

 

 

  

 

 

 

Income tax expense

   3,32    376,502   300,268   843,978 
    

 

 

  

 

 

  

 

 

 

Profit for the year

     1,500,538   860,733   3,131,988 
    

 

 

  

 

 

  

 

 

 

Attributable to-:

      

Owners of the Parent Company

     1,504,352   888,698   3,127,887 

Non-controlling interests

     (3,814  (27,965  4,101 

Earnings per share

   3,33     

Basic earnings per share (in won)

     20,463   12,127   44,066 

Diluted earnings per share (in won)

     20,459   12,127   44,066 

See accompanying notes to the consolidated financial statements.

 

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SK TELECOM CO., LTD. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2020, 2019 and 2018

 

(In millions of won) Note  2020  2019  2018 

Profit for the year

  1,500,538   860,733   3,131,988 

Other comprehensive income (loss)

 

  

Items that will never be reclassified to profit or loss, net of taxes:

    

Remeasurement of defined benefit liabilities

  21   (2,637  (72,605  (41,490

Net change in other comprehensive income (loss) of investments in associates and joint ventures

  13,28   271   (19,269  (16,330

Valuation loss on financial assets at fair value through other comprehensive income

  28,31   579,678   (17,943  (130,035

Items that are or may be reclassified subsequently to profit or loss, net of taxes:

    

Net change in other comprehensive income (loss) of investments in associates and joint ventures

  13,28   (114,478  75,763   1,753 

Net change in unrealized fair value of derivatives

  22,28,31   19,138   40,681   32,227 

Foreign currency translation differences for foreign operations

  28   (20,150  (5,618  12,291 
  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss) for the year, net of taxes

   461,822   1,009   (141,584
  

 

 

  

 

 

  

 

 

 

Total comprehensive income

  1,962,360   861,742   2,990,404 
  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss) attributable to:

 

   

Owners of the Parent Company

  1,869,075   891,051   3,000,503 

Non-controlling interests

   93,285   (29,309  (10,099

See accompanying notes to the consolidated financial statements.

 

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SK TELECOM CO., LTD. and