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.
[Foreign language]
Good afternoon, this is Yang-Seob Kim, CFO of SK Telecom.
[Foreign language]
Results of the joint public-private investigation into SK Telecom's 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.
[Foreign language]
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 considered 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.
[Foreign language]
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 sophisticated cybersecurity threats in the future. We have developed the Information Protection Innovation Plan, where KRW 700 billion will be invested over the next five 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 GB of data every month until the end of the year, and team membership discounts and benefits.
[Foreign language]
Inevitably, our 2025 earnings will be temporarily affected by the measures that we've been taking to respond to the incident, including using replacements for all subscribers, the Accountability and Commitment Program, and MNO 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.
[Foreign language]
Let me now report on the consolidated financial results for the second quarter of 2025.
[Foreign language]
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.
[Foreign language]
Operating income posted KRW 338.3 billion, down 37.1% year-on-year. As for using 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 using replacements. In addition, one-off costs totaling approximately KRW 250 billion incurred in the second quarter, including lost compensation for authorized dealers.
[Foreign language]
Net income posted KRW 83.2 billion, down 76.2% year-on-year.
[Foreign language]
Next, let me report on business updates.
[Foreign language]
Sixth, the mobile business saw a decline in the subscriber base due to the impact of the cybersecurity 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.
[Foreign language]
The AI business revenue grew 13.9% year-on-year, partially offsetting the drop in telecom revenue. AI DC 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-on-year to KRW 46.8 billion on the back of the increase in B2B solution sales. With the cumulative subscribers surpassing the 10 million mark at the end of July, Adot is building a basis for monetization by launching new features such as Adot Note and Briefing Beta Service.
[Foreign language]
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.
[Foreign language]
We aim to start the operation of Ulsan AI DC in 2027. Together with the data center in Seoul, we will secure a combined capacity of over 300 MW 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.
[Foreign language]
SK Telecom will review and strengthen its core telecom business while continuing to grow its AI business and generate profits through AI.
[Foreign language]
Finally, the board of directors resolved to set the second quarter DPS at KRW 830 with the record date of August 31.
[Foreign language]
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.
[Foreign language]
We would now like to begin the Q&A session.
[Foreign language]
Now the Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, that is star and two on your phone.
[Foreign language]
The first question will be provided by Hoi-Jae Kim from Daishin Securities. Please go ahead with your question.
[Foreign language]
I'm Hoi-Jae Kim from Daishin Securities. I would like to ask two 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. I would also like to understand in more detail the financial impacts of the incident on your earnings. Thank you.
[Foreign language]
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.
[Foreign language]
We humbly accept the government's announcement and the 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 for customers, and the Information Protection Innovation Plan to invest a total of KRW 700 billion for the next five years. The Head of Infrastructure Strategy will provide you with more details.
[Foreign language]
I'm the Head of Infrastructure Strategy. I'd like to give you more detail in terms of the responses and preventive measures.
[Foreign language]
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.
[Foreign language]
The Customer Assurance Package includes the SIM protection service that is provided to all customers as of May 14th, the highest level of the operation of the fraud detection system, and the USIM replacements for those who request them.
[Foreign language]
In addition, a world-class mobile device security solution used by militaries and government agencies is provided free of charge for one year, and further customer protection will be provided by introducing a cybersecurity damage compensation assurance program to compensate for all the costs related to the damage if that happens to customers in the future.
[Foreign language]
Also, through the medium and long-term Information Protection Innovation measures, SK Telecom will become a company with a very strong level of security.
[Foreign language]
Right after the incident, we restructured and improved the security system to ensure that there is zero malicious code, and installed next-generation security solutions such as EDR and NDR to our major systems to block any data leak and intrusion. Furthermore, USIM information encryption has been completed.
[Foreign language]
Going forward, we will continue to strengthen information security levels with KRW 700 billion of investment for the next five 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 multi-layered next-generation information protection systems based on the zero trust principle, strengthening personal information security beyond legal obligations, and operating a systematic internal and external verification framework.
[Foreign language]
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.
[Foreign language]
Next, let me respond to your question on the financial impact of the cybersecurity incident and our annual earnings guidance.
[Foreign language]
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.
[Foreign language]
The financial impact in the second quarter includes MNO revenue decline due to subscriber turnout and increase in costs due to the free eSIM replacements and compensation for sellers.
[Foreign language]
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.
[Foreign language]
The cost of replacing eSIM 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.
[Foreign language]
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 bears the biggest financial impact. We anticipate a decline in revenue and operating profit compared to Q2.
[Foreign language]
This is why we have lowered the annual revenue guidance from KRW 17.8 trillion - KRW 17 trillion, and this year's operating profit is also expected to underperform compared to the prior year.
[Foreign language]
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. We will regain the trust of our customers through a full implementation of the Accountability and Commitment Program and further enhance our corporate value. Thank you.
[Foreign language]
The following question will be presented by Wonseok Hwang from Shinha n Securities. Please go ahead with your question.
[Foreign language]
I'm Wonseok Hwang from Shinhan Investment Corp. I would like to ask two 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. 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. Thank you.
[Foreign language]
Thank you for your questions. Let me first answer your question on our dividend policy.
[Foreign language]
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 830, but regarding future dividends, the board will have discussions when we have more visibility for the whole year earnings.
[Foreign language]
As we announced on July 4th, we adjusted the 2025 annual revenue guidance down from KRW 17.8 trillion - KRW 17 trillion in consideration of the financial impacts of the cybersecurity incident on our earnings. Also, 2025 profit is expected to decline significantly compared to the prior year, so we are currently giving serious thought to our shareholder return policy.
[Foreign language]
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 the trust of our shareholders and shareholder value extremely important because they are valuable stakeholders for the company. Thank you.
[Foreign language]
Regarding your second question on strategies to win back customers, the Head of Marketing Strategy will respond.
[Foreign language]
I am Yoon Jae-Woong , Head of Marketing Strategy. Let me comment on our strategies to win back customers.
[Foreign language]
For about three months, from April 19th when the incident occurred until July 14th when the cancellation fee waiver period ended, we had 1.05 million MMP out and 330,000 MMP in.
[Foreign language]
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 turnout, and we executed marketing expenses at levels higher than normal focused on handset replacement.
[Foreign language]
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.
[Foreign language]
Also, to help customers return to SK Telecom without any burden, we are restoring their subscription years and membership grades if they come back within three years. Those who come back within this year will also enjoy benefits such as membership discount benefits as part of the Customer Appreciation Package.
[Foreign language]
In addition, the handset subsidy law was abolished on July 22nd, 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. Thank you.
[Foreign language]
[Foreign language]
[Foreign language]
The following question will be presented by Aram Kim from Shinhan Investment Corp. Please go ahead with your question.
[Foreign language]
I'm Aram Kim from Shinhan Investment Corp. I'd like to ask two questions regarding your new businesses. 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 for the Ulsan AI DC. 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. Thank you.
[Foreign language]
Thank you for your questions. I'd like to hand it over to Lee Hyun-Woo , Head of AI DC Development, for his responses.
[Foreign language]
I'm the head of the AI DC development. Thank you for your question on our AI DC 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 in AI computing facilities such as the GPUs that go into the data center.
[Foreign language]
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.
[Foreign language]
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 MW capacity by 2030 and expect an annual revenue of around KRW 1 trillion with increasing utilization rates.
[Foreign language]
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, this AI DC is expected to bear higher profitability compared to conventional data centers.
[Foreign language]
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. These factors are expected to increase the profitability of the Ulsan AI data center.
[Foreign language]
Before I hand it over back to the Head of AI DC Development, I'd like to comment on the impact of this particular project on our CAPEX guidance.
[Foreign language]
It is true that the recent decision to invest in the Ulsan AI data center and also investment in information protection will drive up the total CAPEX amount.
[Foreign language]
Due to the contract on Ulsan AI DC, 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.
[Foreign language]
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. Thank you.
[Foreign language]
Moving on to the question on SK Telecom's plans and opportunities regarding the Sovereign AI initiative by the government.
[Foreign language]
We have been actively participating in the government-led Sovereign AI projects, and we have been accumulating relevant references, and indeed some projects have already produced meaningful outcomes.
[Foreign language]
To give you more details, in May, we applied 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.
[Foreign language]
In July, we led the creation of a consortium which submitted a proposal to participate in a government project to develop and advance Sovereign AI Foundation models, and we were chosen as one of the five finalists.
[Foreign language]
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.
[Foreign language]
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.
[Foreign language]
Furthermore, we've 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.Call. These represent our efforts to boost AI technology independence and establish an AI ecosystem based on proprietary technologies.
[Foreign language]
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.
[Foreign language]
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.