SK Telecom Co.,Ltd (SKM) Q1 2025 Earnings Report, Transcript and Summary

Good afternoon. I'm Hee Jun Chung, IRO of SK Telecom. Let us begin the earnings conference call for the first quarter of 2025. Today, we will first deliver a presentation on the financial and business highlights followed by a Q&A session. Please note that all forward-looking statements are subject to change depending on various factors such as market and management situations. Let me now present our CFO.

Good afternoon. This is Yang-Seob Kim, CFO of SK Telecom. Before I start the earnings presentation, I understand that there are great concerns among investors regarding the cybersecurity incident that happened last month. A joint public-private investigation team is currently looking into possible causes and scope of the incident and SK Telecom is doing its utmost to protect our customers from any damage or loss related to the recent incident. Immediately after detecting data leak, systems suspected of malware infection were isolated. Also, an enhanced fraud detection system is running at its maximum level to block suspicious authentication attempts. As of now, all the eligible SK Telecom customers have enrolled in USIM protection service. The dual layers of the FDS and USIM protection service bear the same effect of USIM replacement. Starting from today, the upgraded USIM protection service will be applied sequentially to provide protection during roaming as well. We are also looking for various ways to address the situation, including securing as many USIM chips as possible in the short span of time, along with the suspension of new subscriber sign-ups. We will keep the investors updated on matters related to the incident. Let me now report on the consolidated financial results for the first quarter of 2025. Consolidated revenue reported KRW 4,453.7 billion, down 0.5% year-over-year due to the sale of certain subsidiaries. Operating income posted KRW 567.4 billion, up 13.8% year-over-year. Profitability improved, thanks to the decline in marketing and depreciation costs as the 5G market matures. Net income posted KRW 361.6 billion, down 0.1% year-over-year. Next, let me report on business highlights. Fixed and mobile business saw a continued increase in 5G and broadband subscribers. AI business revenue grew 15.6% year-over-year, maintaining a growth momentum. AIDC business posted KRW 102 billion of revenue in the first quarter, up 11.1% year-over-year. It is firmly established as a successful business with more than KRW 100 billion of quarterly revenue. In the short term, we will quickly increase data center utilization rates while generating additional profit through services such as GPU as a Service. In the mid- to long run, we will prepare for hyperscale AIDC business. AIX revenue was KRW 45.2 billion, up 27.2% year-over-year. Along with the steady growth of AI cloud revenue, AI B2B business has contributed to earnings, thanks to the virtual consultation services and AI marketing services for financial institutions. Adot Biz is conducting a beta test and is scheduled for an official launch in the first half of the year after further improving functionality. In addition, we are determined to demonstrate business feasibility of Agentic AI within this year. Adot has strengthened the profit base with the cumulative subscribers surpassing 9 million in the first quarter. It is focusing on enhancing user convenience by adding Google Gemini and Liner Pro to the multi-LLM agent. Aster has completed an open beta service in the U.S. and is preparing for an official launch in the second half of the year. Let me now turn to shareholder returns. The Board of Directors resolved to set the first quarter DPS at KRW 831 with the record date of May 31. As a result of the amendments to the articles of incorporation approved at the AGM in March, the record date for quarterly cash dividends is designated after the dividend amount is determined in an effort to enhance predictability of cash dividends. In light of the recent cybersecurity incident, SK Telecom will conduct a thorough and comprehensive review of the business management and further strengthen fundamental competitiveness. Customers are the foundation of the company and customer value enhancement is ultimately linked to corporate value and shareholder value enhancement. We will mobilize all the resources within the company for customer protection so that we can regain and uphold the trust of our customers and shareholders have placed in us for over 40 years. Now more than ever, we ask for your continued support and encouragement. Thank you.

[Operator Instructions] The first question will be provided by Joonsop Kim from KB Securities.

I'm Kim Joonsop from KB Securities. I have 2 questions related to the recent cybersecurity incident. The first one is about customers switching to another mobile operators. I understand that the number of customers switching to other MNO operators has been increasing more than the historical level. So I'd like to understand the company's position and response measures. Secondly, you have recently decided to suspend new subscriber sign-ups related to the recent cybersecurity incident. I'd like to understand for how long the suspension will be maintained? And what will be potential impact of this decision on your revenue? And if you can answer these questions, it will help us understand the current situation.

Thank you for your questions. And as for your 2 questions, Mr. Yoon Jae-Woong, Head of Marketing Strategy, will answer them.

I am, Yoon Jae-Woong, Head of Marketing Strategy. In the beginning of this cybersecurity incident, it is true, yes, that there were some inconveniences and confusion due to the surge in customers demanding USIM replacements or enrolling in USIM protection service. And in this process, there was an increase in the number of customers who are switching to other networks. We will understand that the customer base is the most valuable asset of SK Telecom and a foundation for medium- to long-term profit generation. Therefore, it will be inevitable that we have to bear some expenses to regain the trust of our customers and lock them in. Currently, we are doing everything we can for customer protection and market stability, and we will continue to closely monitor the market situation and respond accordingly. Moving on to your second question. Against the backdrop of the recent cybersecurity incident in accordance with the administrative guidance by the Ministry of Science and ICT, we have suspended new subscriber sign-ups from May 5. As of now, it has not been decided whether and when we will be able to resume new sign-ups. However, the recent suspension was made to secure enough supply of USIMs for affected customers. And we have already 100% of eligible customers enrolled in the USIM protection service. And now the USIM protection service has been upgraded to provide protection for roaming customers. And starting from mid-May, we believe that we will be able to get a stable supply of USIM, and we have introduced a USIM reset function and have simplified the process for eSIM replacement. So we will be able to handle the demand for USIM and eSIM replacement going forward smoothly. And then we will discuss when we will resume the new sign-up together with the relevant government ministries on this matter. Upon your question on potential impact of this decision on our revenue will very much depend on for how long we will have to suspend new subscriber sign-ups. And so we are doing our best to stabilize the market as quickly as possible. And we will voluntarily disclose to the investors and to the market when we finally decide to resume new sign-ups.

The following question will be presented by Seung Woong Lee from Yuanta Securities.

I am Lee Seung Woong from Yuanta Securities. I'd like to ask some questions that are rather follow-up questions to the previous questions. In short, I'd like to understand the overall financial impact of the recent cybersecurity incident on your earnings performance. I know that a lot of the factors have not been finalized. So there's a lot of uncertainty, but if you can guide us and provide us with some color on what factors and what situations and what factors that we need to consider as investors to understand potential financial impact. And moving on to your first quarter dividend amount, you decided to maintain it to the same level as the previous quarter. I'd like to understand if the recent incident will have any impact on your shareholder return policy.

Thank you for your questions. I would first like to address your question on the overall financial impact of the recent incident on our performance. I understand that the investors would like to very much know the potential impact -- financial impact of the recent cybersecurity incident on our earnings performance. But at this point in time, we don't really have any specific details to share with you. But what I can do is to cover some of the related areas and potential measures that may have some financial impact, and then I'll be able to provide you with more details as progress is made regarding the investigations and also market situations. First of all, as for USIM replacement, we are working based on the assumption that all 24 million customers may want to get their USIM replaced. So we're accelerating the shipments of USIMs as much as possible, and we're also developing financial plans accordingly. And regarding any potential negative impact on our revenue, this may be expected due to some mobile carrier change or suspension of new subscriber sign-ups, but the size of such impact is dependent on future telco switch trends and when we will be able to resume new subscriber sign-ups. So please understand that we will not be able to offer any specific numbers at this point. Also additional potential costs such as administrative penalties may be considered, but whether such costs would be incurred is again dependent on so many factors, including the results of the ongoing joint investigation led by the Ministry of Finance and IT and investigation by the Personal Information Protection Commission and potential amounts are also difficult to estimate at this point in time. Negative financial impact due to the recent cybersecurity incident may be inevitable. However, we believe that it is crucial for us to put in all the available resources as quickly as possible to stabilize the market and regain trust from our customers. And this will be the best way in the long run to minimize any potential losses and recover our corporate value. Moving on to your question on potential change to our shareholder return policy. We understand that market participants would like to know whether there will be any change to our shareholder return policy due to the recent incident. Certain levels of financial impact would be inevitable related to the recent incident, but it is rather too early to estimate any potential financial impact with any certainty. So what I can say is that our basic principle of maintaining stable dividends for shareholder returns remains the same.

The following question will be presented by Soojin Kim from Mirae Asset Securities.

Thank you for the opportunity to ask questions because questions were already asked regarding the recent cybersecurity incident, I'd like to ask a question on your business situations and plans. For your AIDC business, it recorded a double-digit growth rate on a year-over-year basis. So I'd like to understand your future AIDC operation and expansion plans. And if you can give us some color on the profitability of AIDC business, it would be great.

Thank you for your questions. As for your questions, Mr. Lee Hyunwoo, Head of AIDC Development, will address them.

I'm Hyunwoo, Head of AIDC Development. As for your question on our medium- to long-term AIDC or DC business expansion plan, as of now, we are operating 8 data centers, including the Yangju data center, which recently opened in February. Furthermore, we are working on a project to build a hyperscale AI data center in regional headquarters or in regional hubs in close cooperation with the global big tech, and our target is to open hyperscale AI data centers by 2027. And when we have more detailed plans, we will communicate them with the market. In addition, we already have put in place plans to establish new data centers in the Seoul metropolitan area. So we have a pipeline until 2030 for capacity expansion, and we will continue to increase our data center operational capacity gradually. Furthermore, with the full-fledged opening of the AI era, we understand that the existing co-location-based data center business model is quickly switching to a new AI data center business model, and we expect the new types of demand in the market will continue to emerge. So we are working to proactively establish our new data center business models to respond to these demands. To give you more details. We already launched the subscription-based GPU as a service at the end of last year so that customers can quickly get access to AI data centers with high-performance GPUs. And as I mentioned earlier, we are cooperating with a global big tech company so that we can establish Korea's first hyperscale AI data center. In addition, we are building and developing new business models, including a modular AI data center business model where those who need quick access to low capacity AI data center can utilize as well as the dedicated AI data center business model where customers who want to possess their own AI data centers can receive a tailored turnkey projects. So in summary, we will continue to supply AI data center in order to meet changing needs in the market while establishing the AI infrastructure domain as a foundational business for SK Telecom. Moving on to your second question on the profitability of our data center business in terms of EBITDA margin, I would first like to mention that our data center business is classified as B2B business for SK Broadband, and for this reason, it will -- it's difficult to separate the -- and calculate EBITDA margin for data center business only in consideration of allocation of indirect costs and expenses. However, what I can say is that AI or data center business EBITDA margin is slightly higher than the consolidated EBITDA margin of SK Broadband.

Thank you. Now we would like to conclude the earnings conference call for SK Telecom. If there are any additional questions, please contact the IR team. Thank you.