SK Telecom Co.,Ltd (SKM) Q2 2025 Earnings Report, Transcript and Summary

Good morning and good evening. Thank you all for joining the conference call for the SK Telecom Earnings Results. [Operator Instructions] Now we will begin the presentation on SK Telecom's Second Quarter of Fiscal Year 2025 earnings results.

[Interpreted] Good afternoon. I am Hee Jun Chung, IRO of SK Telecom. Let us begin the earnings conference call for the second 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.

[Interpreted] Good afternoon. This is Yang-Seob Kim, CFO of SK Telecom. Results of the joint public private investigation into SK Telecom cybersecurity incident were announced in early July, SK Telecom takes the findings of the investigation very seriously, and we sincerely apologize to our customers and investors for the concern we have caused. The executives and employees of SK Telecom have taken seriously our customers' voices that we have gathered on the ground after the incident and carefully consider the advice and recommendations of SK Telecom's Customer Trust Committee and SK Group's Special Committee on Information Protection Innovation. Above all, as a company responsible for our customers' daily lives, we have given careful consideration to convey our desire to continue to be with them. And through this process, we have announced the Accountability and Commitment Program. We have strengthened the customer assurance package, which includes the provision of a mobile device security solution free of charge to all subscribers to prevent any secondary damage resulting from the incident and protect against the sophisticated cybersecurity threats in the future. We have developed Information Protection Innovation Plan, where KRW 700 billion will be invested over the next 5 years to build a world-class information protection system. In addition, we have prepared the Customer Appreciation Package to express our appreciation to our customers for their loyalty, including 50% tariff discounts for August, additional 50 gigabytes of data every month until the end of the year and team membership discounts and benefits. Inevitably our 2025 earnings will be temporarily affected by the measures that we've been taking to respond to the incident, including USIM replacement for all subscribers, the Accountability and Commitment Program and M&O contract cancellation fee waivers. However, from the medium- to long-term perspective, we believe that our highest priority is to restore the trust of the customers, which is the foundation of our business through these efforts. We are determined to take this as an opportunity to strengthen our business fundamentals and ultimately enhance corporate value. Let me now report on the consolidated financial results for the second quarter of 2025. Consolidated revenue posted KRW 4,338.8 billion. MNO revenue fell due to net subscriber losses on the back of the cybersecurity incident and suspension of new subscriber sign-ups. With the additional impact of sales of certain subsidiaries at the end of last year, the consolidated revenue saw a decline of 1.9% year-on-year. The impact of the Customer Appreciation Package on earnings, including 50% tariff discounts and team membership discounts will be reflected in Q3 and Q4 when these benefits are provided. Operating income posted KRW 338.3 billion, down 37.1% year-on-year, as for USIM replacement costs according to accounting principles, theoretical maximum costs were reflected in the second quarter based on a conservative assumption that all customers could request USIM replacements. In addition, one-off costs totaling approximately KRW 250 billion incurred in the second quarter, including loss compensation for authorized dealers. Net income posted KRW 83.2 billion, down 76.2% year-on-year. Next, let me report on business updates. Fixed and mobile business saw a decline in the subscriber base due to the impact of the security incident and suspension of new subscriber acquisition for more than a month. The number of 5G subscribers declined by approximately 220,000 quarter-on-quarter to 17.02 million accompanied by the loss in the broadband and IPTV subscribers. The AI business revenue grew 13.9% year-on-year, partially offsetting the drop in telecom revenue. AIDC revenue posted KRW 108.7 billion, up 13.3% year-on-year, thanks to the increase in data center utilization rates. AIX revenue grew 15.3% year-over-year to KRW 46.8 billion on the back of the increase in B2B solution sales. With the cumulative subscribers surpassing a 10 million mark at the end of July, A. is building a basis for monetization by launching new features such as A.Note and briefing beta service. In June, SK Telecom announced a plan to establish a hyperscale AI data center together with AWS and SK Group affiliates. In the Ulsan region, where SK Group has secured sufficient land and electricity, we will build Korea's first and largest AI data center with the world's largest cloud company, AWS, to secure a hub for AI Infrastructure Superhighway. We aim to start the operation of Ulsan AIDC in 2027. Together with the data center in Seoul, we will secure a combined capacity of over 300 million -- 300 megawatts by 2030. In the future, data centers alone are expected to generate approximately KRW 1 trillion of annual sales following the increase in their utilization rates. SK Telecom will review and strengthen its core telecom business while continuing to grow its AI business and generate profits through AI. Finally, the Board of Directors resolved to set the second quarter DPS at KRW 831 with the record date of August 31. SK Telecom is firmly committed to facing the cybersecurity incident with a clear head and unwavering resolve and making thorough improvements. We ask for your continued interest and warm support of investors and analysts as we embark on a new chapter of growth and transformation with a renewed sense of purpose. Thank you. We will now like to begin the Q&A session.

[Foreign Language] [Operator Instructions] The first question will be provided by Hoi Jae Kim from Daishin Securities.

[Interpreted] I'm Hoi Jae Kim, from Daishin Securities. I would like to ask 2 questions. First of all, I'd like to understand the specific response measures that you have been taking to respond to the cybersecurity incident in more detail as well as the prevention measures that you will continue to employ. And I would also like to understand in more detail the financial impact of the incident on your earnings.

[Interpreted] Thank you for your questions. First, I'd like to respond to your question on our response measures and future prevention measures regarding the cybersecurity incident. We humbly accept the government's announcement and their investigation results. In addition to quickly implementing the recommended corrective measures, we have also announced the Accountability and Commitment Program which includes the customer assurance package to thoroughly prevent any damage from customers -- a damage for customers and the Information Protection Innovation Plan to invest a total of KRW 700 billion for the next 5 years. And the Head of the infrastructure strategy will provide you with more details.

[Interpreted] I'm the Head of the infrastructure strategy, I'd like to give you more detail in terms of responses and preventive measures. First of all, after the cybersecurity incident, we introduced the customer assurance package to fundamentally prevent any damage from occurring to our customers so that they can be reassured. The customer assurance package includes the SIM protection service that is provided to all customers as of May 14, the highest level of the operation of the fraud detection system and the USIM replacements for those who request them. In addition, a world-class mobile device security solution used by militaries and government agencies is provided free of charge for 1 year and further customer protection will be provided by introducing a cybersecurity damage compensation insurance program to compensate for all the costs related to the damage if that happens to customers in the future. Also, through the medium and long-term Information Protection Innovation measures, SK Telecom will become a company with very strong level of security. Right after the incident, we restructured and improved the security system to ensure that there is 0 malicious code and installed next-generation security solutions such as EDR and MDR to our major systems to block any data leak and intrusion. Furthermore, USIM information encryption has been completed. And going forward, we will continue to strengthen information security levels with KRW 700 billion of investment for the next 5 years and put priority on IT security in our business management. To this end, we are working on the implementation of the Information Protection Innovation Plan, which includes restructuring of the security governance framework implementing multilayered next-generation information protection systems based on the 0 trust principle, strengthening personal information security beyond legal obligations and operating a systematic internal and external verification framework. Through all of these measures, we aim to strengthen our IT security and information security to the global top levels based on the cybersecurity framework by the National Institute of Standards and Technology of the U.S. Next, let me respond to your question on the financial impact of the cybersecurity incident and our annual earnings guidance. First of all, the financial impact of the incident started to be reflected in the second quarter and larger financial impact is anticipated in the second half of the year. The financial impact in the second quarter include MNO revenue decline due to subscriber churn out an increase in costs due to the free USIM replacements and compensation for sellers. With the suspension of new subscriber sign-ups to secure USIM chips for the existing customers, the handset subscribers as of the end of June fell 750,000 from the end of March, resulting in the drop of KRW 38.7 billion quarter-over-quarter in MNO revenue. The cost of replacing USIM for all customers, including MVNO subscribers free of charge was fully recognized in the second quarter and compensation was paid to the dealers to partially cover for damages incurred by the distributors due to the incident and suspension of new contract sign-ups and as a result, approximately KRW 250 billion of one-off expense incurred. The Accountability and Commitment Program will be implemented in full swing in the second half of the year. In particular, 50% tariff discounts are scheduled for the third quarter, which has -- which bears the biggest financial impact. So we anticipate a decline in revenue and operating profit compared to Q2. This is why we have lowered the annual revenue guidance from KRW 17.8 trillion to KRW 17 trillion and this year's operating profit is also expected to underperform compared to the prior year. So the financial impact of the cybersecurity incident this year will be substantial. However, it is important to protect our customer base, which is the biggest asset of SK Telecom. So we will regain the trust of our customers through a full implementation of the Accountability and Commitment Program and further enhance our corporate value.

[Foreign Language] The following question will be presented by [indiscernible] from Shinhan Securities.

[Interpreted] [indiscernible] from Shinhan Securities. I would like to ask 2 questions. The first question is related to your dividend payout plans. You already made an announcement regarding the second quarter dividend, but investors are interested in learning more about the full year dividend guidance. So if you can provide us with more details, we would appreciate it. And we would like to know if the level of dividend payout for the whole year will be maintained. The second question is related to your strategies to win back customers that you have lost, according to the presentation materials you provided, we can see that there was a decline of 750,000 people of MNO handset subscribers because of the incident. I'd like to understand if you have any specific strategies to win them back, including the payout of subsidies.

[Interpreted] Thank you for your questions. Let me first answer your question on our dividend policy. As you are already aware, the July Board determined the second quarter dividend per share to be the same as the prior quarter at KRW 831, but regarding future dividends, the Board will have discussions when we have more visibility for the whole year earnings. As we announced on July 4, we adjusted the 2025 annual revenue guidance, down from KRW 17.8 trillion to KRW 17 trillion in consideration of the financial impact of the cybersecurity incident on our earnings. Also, our 2025 profit is expected to decline significantly compared to the prior year. So we are currently giving serious thought to our shareholder return policy. Going forward, we will make decisions on dividends in consideration of various factors, but as we strive to regain customers' trust through the Accountability and Commitment Program, I'd like to reiterate that we consider trust of our shareholders and shareholder value extremely important because they are valuable stakeholders for the company. Regarding your second question on strategies to win back customers, the Head of Marketing Strategy will respond.

[Interpreted] I am Yoon Jae Woong, Head of Marketing and Strategy. Let me comment on our strategies to win back customers. For about 3 months from April 19, when the incident occurred until July 14, when the cancellation fee waiver period ended, we had 1.05 million MNP out and 330,000 MNP in. And despite the suspension of new subscriber acquisition and cancellation fee waivers, we also offered KRW 500 billion worth of the Customer Appreciation Package to minimize customer churn out, and we executed marketing expenses at levels higher than normal focused on handset replacement. For those who have already switched to other operators rather than trying to win them back with any quantitative targets or measures we are going to continue to regain their trust naturally by becoming a telecom operator with the strongest level of security. The customer assurance package and the information protection innovation plan are part of our efforts to regain their trust. Also to help customers return to SK Telecom without any burden, we will -- we are restoring their subscription years and membership grades if they come back within 3 years. And those who come back within this year will also enjoy benefit such as membership discount benefits as part of the Customer Appreciation Package. In addition, the handset subsidy law was abolished on July 22, so we can give additional subsidies to dealers and have more autonomy in terms of promotions. These may lead to a one-off increase in expenses, but we will operate the market in a way that can offer maximum substantial benefits to our customers through more sophisticated and personalized marketing.

[Foreign Language] The following question will be presented by Aram Kim from Shinhan Securities.

[Interpreted] I'm Kim Aram from Shinhan. I'd like to ask 2 questions regarding your new business First of all, you made an announcement to build an AI data center in Ulsan. I'd like to understand the overall annual investment plans and the actual revenue projections that you have the Ulsan AIDC. I would also like to understand if this project will have an impact on the medium- to long-term CapEx guidance. The second question is related to your AI business. SK Telecom was selected as a company that is responsible for the national AI model development by the government, I'd like to understand what specific plans and preparations you are making regarding sovereign AI development.

[Interpreted] Thank you for your questions. I'd like to hand it over to Hyunwoo, Head of AIDC Development or his responses.

[Interpreted] I'm the head of the AIDC development. Thank you for your question on our AIDC investment plans and revenue projections. First of all, SK Broadband, our subsidiary, will carry out investments to design and build Ulsan AI data center and AWS will invest AI computing facilities such as the GPUs that go into the data center. And most of the investments by SK Broadband will be made from the second half of 2025 until 2028. Please understand that we cannot disclose any specific annual investment plans due to the agreement with AWS for confidentiality. Also, please understand that we cannot share with you any specific revenue projection numbers for Ulsan AI data center alone, but given the overall AI data center business plans of SK Telecom, we aim to secure a total of more than 300 megawatts capacity by 2030 and expect an annual revenue of around KRW 1 trillion with increasing utilization rates. The Ulsan AI data center features ultra-high rack density to support strong computing power for AI and advanced solutions to support the operation, including structural design and cooling systems Therefore, AIDC is expected to bear higher profitability compared to conventional data centers. We also will secure a stable supply of massive amounts of electricity from SK Multi Utility, which is a district electricity business operator, and we can shorten the construction period by utilizing a large ground area that we have secured in Ulsan, and these factors are expected to increase the profitability of the Ulsan AI data center. Before I hand it over back to the head of AIDC development, I'd like to comment on the impact of this particular project on our CapEx guidance. So it is true that the recent decision to invest in Ulsan AI data center and also investments in Information Protection will drive out the total CapEx amount. Well, due to the contract on Ulsan AIDC, we cannot disclose any specific figures, but the groundbreaking is scheduled for the second half of the year. As a result, SK Broadband's CapEx is expected to be up nearly 10% year-over-year. However, thanks to the structural factors such as the completion of nationwide 5G network, this year's combined CapEx of SK Telecom and SK Broadband is expected to continue to maintain a stable trend this year and onward.

[Interpreted] Moving on to the question on SK Telecom's plans and opportunities regarding the sovereign AI initiative by the government. We have been actively participating in the government-led sovereign AI projects, and we have been accumulating relevant preferences. And indeed, some projects have already produced meaningful outcomes. To give you more details in May, we apply to the GPU lease support project to secure national AI infrastructure, and we were chosen as a supplier of AI data center featuring NVIDIA's advanced GPUs. And in July, we led the creation of a consortium, which submitted a proposal to participate in the government project to develop and advance sovereign AI foundation models, and we were chosen as one of 5 top finalists. In addition to participating in these national AI projects, we're also making efforts to capture new business opportunities and secure policy support in line with the government's initiatives to promote the AI industry. For instance, in June, we announced a plan to build an AI data center in Ulsan, which is expected to contribute proactively to the government's initiative to build an AI highway and create a national AI innovation hub, thereby positioning SK Telecom as an important partner for the government in terms of AI policy implementation. Furthermore, we released A.X 3.1, our own Korean-specific LLM as open-source to support AI adoption in diverse domestic and foreign business sectors, and we tested Rebellion's AI chip ATOM for our AI services, including A.co. This represents our efforts to boost AI technology independence and established an AI ecosystem based on proprietary technologies. We already declared a vision at last year's SK AI Summit that we would realize independence of the domestic AI ecosystem through Korean sovereign AI development and create new business opportunities in this ecosystem as a key player. Based on our prepared capabilities, we will establish ourselves as a leading AI company representing Korea.

[Interpreted] With that, we would like to conclude the second quarter earnings conference call for SK Telecom. If you have additional inquiries, please contact us. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]