Sk Telecom Co Ltd Q4 FY2024 Earnings Call

Good afternoon. I am Hee Jun Chung, IRO of SK Telecom. Let us begin the Earnings Conference Call for the Fourth Quarter and Fiscal Year 2024. 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. It is my first time to greet you in 2025. I'd like to wish you a happy new year and good health and happiness in the new year. For SK Telecom, 2024 was all about operational improvements and artificial intelligence. While operational improvement efforts further strengthened our competitiveness in the telecom business, the AI Pyramid Strategy guided us in refining business models and establishing execution systems to lay the foundation to become an AI company. We focused on operational improvements not just to reduce costs but also to enhance our overall portfolio, processes and culture to strengthen the company's business fundamentals. Thanks to these efforts, the consolidated operating profit grew 4% year-over-year and the OP margin exceeded 10%. Let me now report on the consolidated financial results for 2024. Consolidated revenue reported KRW 17,940.6 billion, up 1.9% year-over-year. With sustained growth in all business areas, including fixed and mobile, enterprise and AI, our consolidated revenue has continued the upward trend since the spin-off in 2021. The MNO business saw a slight slowdown in its top-line growth, but customer-friendly roaming services contributed to MNO revenue growth, while significant growth in data center and B2B businesses such as cloud and AI-related services contributed to consolidated revenue growth. Operating income posted KRW 1,823.4 billion. Throughout the year, we successfully reduced major expenses such as marketing and depreciation costs through cost efficiency measures. To continue the trend, we are utilizing AI to further drive cost efficiency in key business areas and processes. Last year, we also rebalanced our business portfolio by phasing out low-profit businesses and increasing the share of high-profit ones, thereby laying the foundation for sustainable growth in the future, not just short-term operating income growth. Net income posted KRW 1,438.8 billion, up 25.6% year-over-year, thanks to the business portfolio restructuring and asset efficiency enhancement as part of the operational improvements. Next, let me report on AI-related highlights. In 2024, SK Telecom strengthened its global AI partnerships through equity investments in diverse AI-related domains. Specifically, we made strategic investments in Lambda and Penguin Solutions to utilize their expertise in the AI data center business. Furthermore, we're closely collaborating with global AI tech companies such as Perplexity and Anthropic for AI applications. Last month, we launched SKT GPU-as-a-Service that we have been preparing for a year with Lambda. This year, we will carry out AI business activities in earnest to achieve meaningful growth in AI-related revenue. In this regard, we have changed the classification of AI-related revenue. The entire business of SK Telecom is largely divided into two categories: telecom business and AI business, which includes AI applications and AI data center services. Previously, we showed figures on cloud and data center business, but starting from this year, we will announce quarterly sales of AI applications and AI data center services, to provide you with a more comprehensive view of AI business growth. In 2024, AI-related revenue grew 19% year-over-year. Going forward, we will continue to accelerate AI business growth through the construction of AI Infrastructure Superhighway and monetization efforts. Another pillar of our AI business is the applications which are now organized into two tracks, one for the domestic market and the other for global customers. After an overhaul in August last year, the domestic AI application was able to achieve a 160% growth year-over-year in total users, thanks to the application of AI in phone calls and multi-agent features. Having been unveiled in November last year, the global application presented a comprehensive daily management service model at CES 2025 and will launch a beta service in the first half of the year in the U.S. Finally, let me turn to shareholder return for 2024 and earnings guidance for 2025. The DPS for 2024 was determined by the Board at KRW 3,540, including the quarterly dividend of KRW 2,490 that was already paid out. It is subject to the approval at the Annual General Meeting of Shareholders in March. Our annual consolidated revenue target for 2025 is KRW 17.8 trillion. It represents approximately 1% growth year-over-year on a normalized basis after removing the impact of sales of certain subsidiaries late last year. We also aim to achieve a year-over-year growth in operating income through continuous operational improvements. This year, we anticipate significant economic, industrial and political changes both in Korea and globally. We will strengthen our fundamental competitiveness to cope with high uncertainty and pioneer the AI era through challenges and innovations, thereby further enhancing our corporate value. We look forward to your continued support and encouragement. Thank you.

I'm Kim Hoi Jae from Daishin Securities. I would like to ask two questions. First of all, in your opening speech, you already talked about your plans for AI-related businesses, but I'd like to understand. What would be the key focus areas for SK Telecom in conducting AI business? And if you can provide us with some guidance on AI-related revenue outlook, we will appreciate that. My second question is concerned with shareholder return. There were some concerns that SK Telecom's dividend per share might decline. However, you've decided to go ahead with a DPS of KRW 3,540, which is the same as the previous year, so I'd like to understand the background behind this decision. And also, if you can add some color on what we can expect for 2025 for shareholder return, including any plans on share buyback, I would appreciate that.

Thank you for your questions. I’d first like to talk about AI-related revenue. At the end of last year, SK Telecom restructured the company into seven business units based on two pillars of telecom and AI. The AI business includes personal AI applications for consumers and AI data center services for businesses. You asked a question about AI-related revenue. And it is being materialized, first of all, in our B2B business such as AI data center services. The AI data center business unit includes not only the traditional data center business but also diverse AI-related products such as AI vision and AI customer care. In this category, we posted KRW 193 billion of revenue last year; and it is expected to grow about 30% this year. Revenue from AI data center services in 2024 was KRW 397.4 billion, up 13% year-over-year. It is mostly revenue coming from our conventional data center business operation, but we recently launched GPU-as-a-Service in partnership with Lambda, and we will pursue this business in earnest this year. We plan to conduct AI data center business more actively by establishing a cooperation system with global players as well as SK Group affiliates. We see a growing demand for AI data centers in the market, so we believe that the data center revenue can grow more significantly for this reason. We anticipate about a double-digit growth rate for the AI data center business this year. This year, we will also develop more concrete business models for our AI consumer applications. The personal AI service has established itself as a major agent service in Korea. And with the total users of 8.27 million, we’re currently working on expanding services to offer more diverse features. We plan to introduce a subscription-based paid service within this year. To sum it up: We will strive to grow our AI business revenue significantly. And for this, we will strengthen our execution capabilities in all AI-related business areas to produce meaningful results. Thank you. Let me now comment on our shareholder return policy. Regarding our dividend, the Board determined that the 2024 year-end DPS would be KRW 1,050, which is the same as what we had in 2023. And the annual DPS is the same as the prior year, which is KRW 3,540. As a CFO, I had to put a lot of thought into determining this year’s dividend. I understand that some shareholders expected an increase in dividend payout, but we decided to maintain the minimum dividend level expected by the market, considering the uncertain business environment. Our earnings improved in 2024, but in the context of rapidly changing economic and political circumstances both at home and abroad, we need to secure resources for investment to stay competitive in AI. Funds secured through operational improvements and business performance will be used to make investments for growth in AI data center services and other businesses. This year, we also need resources to acquire equity of SK Broadband. Going forward in 2025, what I can say is that our shareholder return is still the highest level in the industry. While we anticipate challenges regarding both politics and economics, we will continue to pursue operational improvements, including the liquidation of noncore assets, to seek better improvements. We are committed to maintaining a stable trend of cash dividend payout. Treasury share purchases and cancellations can be meaningful options when the stock is undervalued. However, for share buyback, we believe it is more effective to announce a medium-term plan rather than just carrying it out as a one-off event. We will consider a share buyback based on various factors such as stock price trends and market views.

I'm Lee Sun Jung from Bank of America. My first question is related to your AI business. You mentioned possibly introducing a subscription model for your personal AI service within this year. If you can provide us with more details, we'll be able to better understand how you're going to monetize using your AI business. And also you've recently launched your global application, Aster, and you mentioned it in your opening speech. If there’s any more detail that you can provide us with, it would be great. My second question has to do with the marketing situation. In the fourth quarter, I can see that your marketing cost has gone down. I'd like to understand any updates on the marketing or the market competition situation. The handset subsidy ban was lifted in December last year, so I'd like to better understand how your marketing strategy will unfold in the near future.

Thank you for your questions. Regarding your question on the personal AI service, the head of AI business strategy will address that. As for Aster, the head of AI growth strategy will address that question. The team head of marketing strategy will comment on your question regarding our marketing expenses.

So this is Kim Ji Hoon, head of AI business strategy. As you know, the personal AI service is Korea's leading AI agent service, with the largest number of customers in our customer base. For the past year, we focused on advancing the personal AI as a primary agent and we utilized a divergence strategy for external expansion. Before I comment on our plans for monetization, I'd like to elaborate more on this initiative and the kinds of approaches we're taking. We continue to advance the personal AI service as a primary agent so that we can offer improved phone service. We have been mobilizing our capabilities internally. For the evolution of this agent, we focus on making it not only capable of engaging in simple conversation or searching for users but also completing requested tasks. We will continue to test these functions to improve the user experience, and this is our priority. As we have established ourselves as a leading personal AI agent through service improvements last year, we believe that we have a strong foundation for paid services. No specific decisions have been made yet on how we're going to go about it, but our first consideration will be utilizing the subscription model. We're working on offering services for daily task management as well as search and combining it with other telecom features. We're crafting plans for specific services and are also considering various bundled offerings to create synergies with other services that SK Telecom is offering. When we have more details to share, we will ensure to communicate them with the market.

This is Lee Jae Shin, head of the AI growth strategy. For the global business of the personal AI agent, we unveiled the Aster service at the SK AI Summit last year. Currently, closed beta testing is ongoing. In January, we showcased a service demonstration at CES 2025. Unlike other AI services that simply respond to user prompts, Aster aims to be an agentic AI that not only responds but also executes daily tasks through user communication. We plan to start an open beta service in the U.S. for U.S. customers in the first half of the year, which will include key use cases such as creating meal preps and managing schedules. We are accelerating collaboration with various tech partners such as Perplexity and pursuing partnerships with global telecom companies who can benefit from agentic AI services. As we're still preparing for an official launch, please understand that it is too early to discuss any specific business models, but I would like to ask for your continued interest in this service development process. Thank you.

This is from the marketing strategy team. After the abolishment of the handset subsidy ban at the end of 2024, there were reports of certain sales offices offering significant subsidies, but this was a limited event primarily aimed at clearing out inventory. The current market situation is very different from when the subsidy ban was introduced. As the cost of handset shipments continues to rise and the customer replacement cycles lengthen, we’ve seen more stability in the market. In the fourth quarter, there were no indications of excessive competition in the market. The market is likely to wait for a new enforcement decree from the Korea Communications Commission to develop response strategies. We will continue to watch the market closely. Moving forward, we will strive to create momentum in the market to provide more personalized and differentiated value to our customers.

In the fourth quarter, there were no signs of over-competition in the market. The market is likely to wait for a new enforcement decree from the Korea Communications Commission to formulate response strategies. We will continue to monitor the market situation closely. Going forward, we will continue to create momentum in the market to offer more personalized and differentiated value to our customers.

In the fourth quarter, there were no signs of over-competition in the market. The market is likely to wait for a new enforcement decree from the Korea Communications Commission to formulate response strategies. We will continue to monitor the market situation closely. Going forward, we will continue to create momentum in the market to offer more personalized and differentiated value to our customers.

This is Jeong Jisoo from Meritz Securities. I would like to ask a question on the impact of operational improvements on your earnings. How much was the impact coming from the operational improvement initiatives in 2024? And what is your outlook on the impact of your operational improvement initiatives in 2025? If possible, please provide us with the guidance on the 2025 CapEx plan.

Thank you for the question. We have been implementing operational improvements across the company to ultimately strengthen our fundamental competitiveness of the telecom business and also secure basis for AI-related growth investments. Operational improvement can be achieved mainly through expense savings, capital expenditure efficiency, and also disposal of noncore assets. In addition to company-wide cost-saving efforts, we've also shifted our CapEx paradigm to focus on network quality improvement, enhancing customer experience while maintaining a strong 5G subscriber base. As a result, we were able to increase our operating income by 4% and reduced CapEx while maintaining a solid subscriber base. Net borrowings were reduced through free cash flow improvement. These efforts have helped strengthen our fundamentals for transforming into an AI company. We will continue with operational improvements this year so that this initiative is not short-lived but maintained sustainably. We'll develop growth plans optimized for each business model in our telecom and AI businesses and allocate resources balanced to achieve bottom line growth and cash flow improvements greater than what we achieved in 2024. Regarding our CapEx plan, we cannot disclose any specific number, but we're planning to optimize CapEx for efficient network operations, to benefit customers, and strategic AI growth investments. The medium- to long-term stabilization trend for CapEx will continue.

We will develop growth plans tailored to each business model in our telecom and AI sectors, ensuring resources are allocated effectively to drive bottom line growth and improve cash flow beyond our 2024 results. While we cannot provide a specific figure for our CapEx plan, we aim to optimize it for efficient network operations, customer benefits, and strategic investments in AI growth. The trend for CapEx stabilization in the medium to long term will persist.

We are optimizing for each business model in our telecom and AI sectors and are allocating resources to achieve growth in our bottom line and cash flow that surpasses what we accomplished in 2024. While we cannot share specific figures regarding our CapEx plan, we are focused on optimizing CapEx for efficient network operations to benefit our customers and make strategic investments in AI growth. The trend of stabilizing CapEx in the medium to long term will persist.

I am Kim Hong-sik from Hana Securities. My first question is about the recent trend in stock prices. There has been a reversal between KT and SK Telecom stock prices, which I think is mainly due to uncertainty regarding long-term dividend payouts from SK Telecom. This situation doesn't seem very encouraging for shareholders and investors. There are ongoing concerns about the future stock price trend of SK Telecom. What is your outlook on your stock price moving forward? Secondly, SK Telecom’s investor relations and press releases often mention becoming an AI company, but there aren’t many companies that can profit from AI. When I visit SK Telecom's sales offices, I don't get the impression that AI is a major focus. You have talked about using AI for profit generation for some time, so I would like to know if you have any plans related to B2C pricing or bundling AI with your mobile price plans.

Thank you for your valuable questions. I'd like to comment on your first point concerning market cap. Back in 2021, SK Telecom underwent a spin-off, leaving behind noncore businesses like SK Hynix and T mobility with SK Square. The combined market cap of SK Square and SK Telecom is currently more than KRW 24 trillion. Following the spin-off, we continued to focus on AI and telecom business in order to improve our corporate value. Shareholder return is an important factor that influences stock price in the market. As you know, market valuation reflects shareholder return alongside other factors, including future growth potentials. We understand that 2025 will be a crucial year where we need to demonstrate the impact of AI business to the market. We will produce tangible results through AI investment and partnerships, showcasing our competitiveness. Starting from this Earnings Conference Call, we will also announce specific AI-related revenue and figures. The additional financial resources secured from business operation and operational improvements will be deployed toward growth investments, financial structure enhancement, and the acquisition of equity in SK Broadband. We will maintain the highest level of shareholder return in the industry while sharing growth investment benefits with shareholders. Regarding your second question, the marketing strategy team will provide more details.

I am from the marketing strategy team. To directly answer your query: We do not have any specific plans at this time regarding the inclusion of AI B2C services such as personal AI in our mobile price plans. However, as Mr. Kim, the head of AI business strategy, mentioned, we expect ongoing positive results from the personal AI service operation. A paid service will be launched this year. I believe these AI B2C services, which users find appealing, can greatly improve the competitiveness of our mobile network operator products. As more information comes out about the monetization of the personal AI service, we will consider the possibility of bundling it with our mobile pricing plans. Investors will recognize SK Telecom's product and service strengths through our attractive pricing offers. We will continue to enhance our competitiveness by creating diverse pricing plans to meet user needs and launching them in a timely manner.

I'm Kim Joonsop from KB Securities. I'd like to ask questions on your AI infrastructure and AI-related business. Recently, a very affordable AI model, DeepSeek, has emerged in the market. I am sure it has impacted your AI infrastructure business. Please elaborate on that and connect it with your AI data center business that you are pursuing at the SK Group level. My second question is related to your AI business. It is crucial for SK Telecom to demonstrate visible results from your AI business. I would appreciate it if you provide us with details on specific business models you are considering or pursuing as part of your AI-related business. You mentioned expecting 30% growth in revenue in 2025; which business models within AI are expected to contribute to this revenue growth?

Thank you for the question. The first question will be addressed by the head of AI data center development. The second question regarding AI business will be addressed by the head of AI business development.

I would like to comment on specific plans we are pursuing for AI data center business and the impact of affordable AI models like DeepSeek on growth in demand. As we enter the full-fledged AI era, we're seeing an evolution from traditional data center businesses toward AI-oriented infrastructure. The core of AI data centers is to provide consistent and scalable computing power for massive workloads, which requires advanced technology in high-performance computing, energy efficiency, and operation solutions. These capabilities cannot always be secured independently by companies, which is why we plan to build affordable and efficient AI data centers leveraging resources from major SK Group affiliates. The data centers we will provide will utilize advanced technology from within SK Group along with our partners. For instance, SK hynix offers leading chip solutions, while our energy affiliates provide low-carbon power generation. We aim to build the best AI data centers possible. Meanwhile, SK Telecom will focus on developing management solutions for optimal AI data center operation. Additionally, we expect to create and develop business opportunities based on our multi-functional platform. We are considering plans to build a hyperscale AI data center outside of Seoul and develop an AI data center hub in the Asia-Pacific region over the medium to long-term. Regarding DeepSeek, while the scale of investment has not been disclosed, the emergence of lower-cost AI models can stimulate growth in AI infrastructure of services. As service development costs decrease, companies are more likely to adopt AI. This will lead to increased computing demands for developing and training these AI models. Overall, we believe this trend positively impacts our AI infrastructure business.

Let me comment on your question on our current status and expected revenue for 2025 from our AI-related business. Our AI business consists of three main areas: existing B2B services such as AI vision and AI customer care; cloud computing services that provide processing power; and AI technology use cases supporting corporate clients' AI transformation. The AI cloud business accounts for around 66% of total AI revenue. Its revenue grew by over 20% in 2024. The AI B2B segment grew by more than 30% year-over-year in 2024, reaching KRW 60 billion. We aim to accelerate this segment with a target growth rate of over 30%. Lastly, the new use case is an emerging area where we collaborate among SK companies, focusing on automating tasks and applying AI across various sectors. This year, our target is to expand our applications into our SK Group affiliates before reaching external clients. The B2B revenue in 2024 was KRW 193 billion, and our growth target for 2025 is also set at 30%. While it remains a smaller portion of SK Telecom's total revenue, we will prove the potential for profit generation through significant revenue growth from our AI-related endeavors.

Thank you. With this, we would like to end this earnings conference. If you have any further inquiries, please contact the IR team. Thank you.