SK Telecom Hindered by COVID-19 "Reevaluating Management Plan" (Comprehensive Report 2)

[Asia Economy Reporter Seulgina Jo] SK Telecom could not escape the shock of the novel coronavirus disease (COVID-19) that swept the world. Operating profit in the first quarter plummeted by nearly 7%. This was the result of the continued burden of 5G investment, the roaming sector?one of its core businesses?being hit hard, and distribution channels virtually coming to a halt. SK Telecom is reviewing its management plan, judging that it will become even more difficult to predict the turnaround point if the COVID-19 pandemic prolongs.

On the 7th, SK Telecom, the first among the three major domestic telecom companies to announce its first-quarter earnings, reported quarterly results of 4.4504 trillion KRW in sales and 302 billion KRW in operating profit. Sales increased by 2.7% year-on-year, driven by growth in new growth sectors such as media and security. However, operating profit decreased by 6.4%. Net profit for the period was 306.8 billion KRW, down 17.9% due to the impact of equity-method gains from SK Hynix shares.

Yoon Poong-young, SK Telecom’s Chief Financial Officer (CFO), explained during the conference call held after the earnings announcement, "Due to economic uncertainty caused by COVID-19, we are reviewing our management plan," adding, "It has become even more difficult to predict the turnaround point." This aligns with SK Telecom President Park Jung-ho’s strong sense of crisis expressed at the end of March when COVID-19 was rapidly spreading, stating, "We have established a response system up to the worst-case scenario stage 3."

◆5G Investment Costs Hinder Amid COVID-19=The shock of COVID-19 is clearly reflected in the performance of SK Telecom’s core mobile network operator (MNO) segment. SK Telecom’s standalone sales rose 3.9% year-on-year to 2.9228 trillion KRW, but operating profit fell 15.7% to 257.9 billion KRW. The roaming business suffered the most significant blow due to a sharp decline in travel demand caused by travel restrictions in various countries.

Amid disappointing sales of Samsung Electronics’ Galaxy S20 series, which was highly anticipated, and the disappearance of seasonal demand such as school enrollment, the growth rate of 5G subscribers also noticeably slowed. SK Telecom expects the number of 5G subscribers this year to remain 10-15% lower than the initial forecast of 6 to 7 million. The large-scale 5G investment burden was also a factor that hampered profitability.

SK Telecom spent 306.6 billion KRW on capital expenditures (CAPEX) in the first quarter, a 7.5% decrease compared to the same period last year, just before the commercialization of 5G. Marketing expenses during the same period increased by 13.5% to 756.5 billion KRW compared to the first quarter of last year, just before 5G commercialization, due to accounting deferral of last year’s expenses. Compared to the previous quarter, marketing costs decreased by 6.7% due to reduced advertising expenses and market stabilization effects.

◆New Business Growth Continues... Expectation of Performance Improvement=However, new business areas such as media, security, and commerce continue to grow despite the COVID-19 shock. With social distancing leading to longer time spent at home, growth in internet TV (IPTV) businesses stood out. SK Broadband’s first-quarter sales rose 8.2% year-on-year to 823.5 billion KRW. Following the launch of the merged corporation at the end of last month, it plans to achieve annual sales exceeding 4 trillion KRW this year.

In the security business, including ADT Caps, sales increased, but operating profit declined by 4.5% due to the impact of closures and suspensions of small businesses. However, CFO Yoon explained, "Subsidiary performance outside of MNO is expected to improve compared to the previous year." On the same day, SK Telecom took a cautious stance on additional mergers and acquisitions (M&A) plans following the launch of the merged corporation between SK Broadband and T-Broad at the end of last month, stating it will focus on creating synergy from the merger.

Some evaluations suggest that maintaining quarterly operating profit in the 300 billion KRW range was a good performance. Initially, there were concerns that SK Telecom’s first-quarter operating profit could slide to the high 200 billion KRW range due to the combined burden of 5G investment and COVID-19.

Performance improvement is expected to begin in earnest from the second quarter. SK Telecom’s second-quarter operating profit consensus is estimated to be in the 320 billion KRW range. In the second half of the year, the company plans to aim for a turnaround even in the MNO segment. The recovery of consumer sentiment, which had been sluggish, along with the continuous release of new mid-range smartphones starting this month, are factors brightening the outlook for the MNO segment.

CFO Yoon emphasized, "We are making company-wide efforts to reduce non-essential costs, and if the COVID-19 situation stabilizes early, there will be little impact on the overall MNO situation," adding, "We will strive to achieve a turnaround in the second half through investment execution efficiency." He said, "It is true that the pandemic caused setbacks compared to the initial plan at the beginning of the year," but added, "Thanks to the diversified portfolio we have built, we will be able to flexibly overcome the unpredictable current situation."

This content was produced with the assistance of AI translation services.