SK Telecom Co Ltd (SKM) 2004 Q2 法說會逐字稿

[participants speak in Korean] [through interpreter] Good afternoon. Today's conference call will consist of the opening speech, by SKT President Kim Shin Bae, covering the second quarter results for 2004, and other matters of interest, followed by a Q&A session. The conference call is scheduled to go an hour and a half.

Before we begin, let me remind you once again that all the forward-looking figures are subject to change, depending on the macroeconomic and market situation. Now let me present to you President Kim Shin Bae.

[through interpreter] Good evening. Thank you for taking part in today's conference call despite your busy schedule. The mobile telephone market in the first half of 2004 became unusually overheated from expanded marketing activities among operators to gain more [inaudible] subscribers, starting from January. As a result, the profitability of the operators suffered significantly, into the [inaudible] in marketing and other related costs. The market landscape, therefore, has temporarily taken a step back in terms of the original objective of the [NNP], which was the development of the telecommunications industry to enhance customer convenience and fair competition.

In order to stabilize the fiercely competitive market, the government took some tough regulatory measures, including suspension of new subscriber acquisitions by the three mobile operators, as well as SKT. Due to these factors, the management environment for the first half was challenging for all mobile operators, including SKT. However, with the launching of the two-way [MMP] in the second half, all parties are forming a consensus about the worrisome increase of cost from overheated competition, leading to more stability in the market.

Let me now go into the second quarter performance. The [expense] of steady growth of wireless Internet revenue- the revenue [inaudible] the second quarter dropped 0.1% year on year, and 0.7% quarter on quarter, to record 2.384t won, due to the retrospective of the lowered inter-connection rate of 49.4b Korean won. During the same period, the wireless Internet revenue was 417.2b, which was 36.5% increase year on year and a 6.5% quarter on quarter. Wireless Internet revenue continued its growth, to 19% of cellular revenue in the second quarter.

Due to the aforementioned market conditions, SKT invested more on marketing costs to lock in high-end subscribers and to maintain leadership in the new 010 prefix market, to record marketing expense of 24.1% of revenues. Such increased expenditure in marketing was the result of our strategic judgment that preventing churn out in the beginning of the asymmetrically introduced MMP] and maintaining market leadership would lead to long-term growth of the corporate value. However, the competition related costs going forward is expected to gradually decrease, as the market adjusts itself to a changing [MMP] environment.

The results of the first half, which were the [lowest] ever since the highly competitive year of 2000, [inaudible] the fierce competition during the [inaudible] [MMP] stage. However, the market is beginning to show signs of stabilization. Therefore, we expect the future business performance to increase.

These less-than-expected second quarter results will inevitably have an impact on the achievement of the annual management target. Therefore, we will have to revise certain parts of our annual guidance, which you [inaudible]

First, our revenue guidance will be revised from the earlier 10.2t won to 9.8t, reflecting factors including the inter-connection rate reduction and the [inaudible] of new subscriber acquisition. Our [inaudible] target will also be changed from 46,000 Korean won to 44,000 won.

Our annual marketing expenses will be adjusted, from 18% of revenues to 20% of revenues, while EBITDA margins will be lowered from 47% to 42%. However, our capex and wireless Internet revenue guidance will remain the same.

Next, let me talk about the relatively environment for the second half. I understand that there are some concerns in the market regarding the probability of strengthened regulations on SKT, following a series of recent government actions, including the inter-connection rate adjustment.

However, as you recall, SKT has announced in May its plan to maintain the market share of less than 63.3% until the end of 2005, and in June, three mobile operators declared their commitment to [inaudible] marketing. Our view is that the market is fast reaching stabilization. Accordingly, we expect that the additional regulatory risks on SKT to be gradually alleviated. To that end, SKT will do its utmost.

There some media reports that the government is considering the mobile rate cut to offset inflation. However, I would like to reassure that [inaudible] takes place, it will be cut to a minimum [inaudible].

Next, we will address the strategy to achieve the management targets for the second half.

Rather than [inaudible] subscribers, SKT will concentrate on improving the quality of the subscriber base, to focus on customer-centric management. At the same time, diverse services, centering on multi-media, will be developed to further raise RPU as well as our revenue.

As for the [inaudible] we expect for the second half, SKT will control its costs more tightly and expand the range of 18% of revenue, as the [MMP] and market are fast stabilizing.

We will also do our utmost to achieve the improved EBITDA margin of 44% in the second half.

Next, let me move on through the growth strategy.

In the case of core business, wireless Internet, we expanded the subscriber base in line with the original guidance by securing 5.4 million [inaudible] subscribers and 2.78 million [junior] subscribers, as of the end of June, 2004. We have also extended the clear applications of the wired to the wireless, introducing mobile instant messaging, mobile sky [rules], and others. Thanks to these efforts, we have not only enhanced the possibility of the growth in wireless Internet services, but we are already beginning to see the results.

With regards to the satellite [D&B], being preferred in line with our convergence strategy, we expect the remaining issues, like the revision of the [inaudible] decree of the Broadcast Act, handset development, and the retransmission of the terrestrial signals to being resolved smoothly. We are also expanding the base for mobile banking, by increasing the number of partnering banks to nine this year.

[inaudible] growth strategies through its subsidiaries, SK Communications became an undisputed, top-tier portal, ranking number [inaudible] in terms of page views, as of the end of June.

While it may take some time, we will pursue growth strategies with a long-term, prudent perspective, to achieve both growth and risk management in the end.

Let me now talk about the shareholder return policy.

At the [D&B] meeting held on July 23rd, SKT decided on the interim dividend amount of 1,001 per share, and the interim dividend will be paid out in August.

At the same time, we are closing monitoring the market for a possibility of treasury share buyback and cancellation, using the 386b won funded by the issuance of the overseas [CDE] in May. If and when such cancellation is unrealized by year-end, we will pay out the amounts in the form of special dividend, at the beginning of next year.

Lastly, I would like to extend my deep appreciation to all the investors, for your unwavering support for SKT, even in the challenging period.

We will now begin the Q&A session.

[Operator Instructions] The first question will be given by Mr. [Ned Evans] from [BLSA]. Please go ahead, sir.

Thanks very much for your call. My question is on marketing costs -- do you still intend to keep with the market share cap of 52.3%? The reason I ask that is because your guidance of 18% of sales marketing spend in the second half of the year seems pretty aggressive, given the market share cap. I think you're going to hit that pretty quickly, if you spend that much money. Why do you need to spend that much money? It seems you could quite easily stay within the original guidance of 18%, if you really want to. That's the first question.

My second question is governance and the [Wideban] potential acquisition that was discussed. I realize that this did not get put before the board of directors, and everyone appreciates that. But at the same time, my understanding from Professor [Nam] is that this was in quite an advanced due diligence. You had already valued the company and had done extensive work on it. What I think everyone would like to know is, why did the management of SKT still so naive about this issue, that they would even consider looking at this company? If you could give us into some insight in the process, or the thinking, that was going on there, that would be appreciated. Thank you.

[through interpreter] Let me first answer your question about the marketing costs. In the first quarter of this year, we expected-- we saw a churn out of the [MMP] subscribers, and we expected that phenomenon and trend to stabilize in the second quarter. But it actually continued to persist in terms of churn out under the [MMP] scheme. So, overall, the first half of marketing costs was rather high. And in the second half of this year, I think that it would be inevitable for us to expend a certain marketing cost in order to maintain certain leadership in the initial stage of two-way [MMP] but ultimately, we're not seeking to strenuously expand the subscriber base but rather to [elite] and contribute to the market stabilization, as well as the profitability improvement. That is why we are planning to maintain the level of marketing cost within the 18% level.

And during the suspension of operation period, it will be unavoidable to expend certain terminal change related expenses. However- however, in terms of the fourth quarter, we would do our utmost to maintain the clean marketing account policies, which have been expressed over and over again.

Regarding the wider [inaudible] dot com related issues, you talked about the term of being naive. However, I must tell you that we've conducted sufficient review on our part, to some degree, and we pursued and we reviewed the possibility of acquisition of [Widerdon.com] because we have been looking into our expanding our content-related business for SKT and also because we have been looking at possible expansion into the global systems, in terms of a wireless Internet. That is why we have reviewed the possibility in the first place.

To introduce to you a little bit about the company itself, it's a domestic, top-tier, wired, Internet related content aggregator company which as business relations and presence in over 10 Asian countries and some other countries around the world, so about a dozen or countries are related to the company's business profile. Therefore, they have previous experience exporting wireless Internet content overseas, and so we felt that this was in line with our global strategies, as well as our contents business strategy. And also, we had to consider the possibility that if this company were to be sold to a third-party, it would possibly interfere with our strategy with our contents business, so that is why we carefully approached this issue. However, I believe that there was over-emphasis on this issue, because this is an inter-related transaction with a major shareholder, and however, we felt that since we have internal mechanisms that are quite sufficient, under our company's structure, to prevent any illegal transactions or wrongful transactions with specially related parties, so we didn't expect too much misunderstandings to rise in the market. And we also felt that if we are going to possibly [inaudible] the company, we might as well do it when the acquisition size is smaller. That way, we could ensure more transparency in the management.

I believe that because [inaudible] we feel that we did not sufficiently communicate with the market, however, about the strategic legitimacy of this possible acquisition, so that is why we did not table this issue the BOD. And in the future, going forward, we will do our best to alleviate any concerns among the shareholders about this acquisition, and still, we're looking to the possible ways to alleviate concerns in the market. And there can be a solution to this matter -- always there is an option for further review, going forward.

Again, let me re-emphasize that unless we could come up with a way to completely alleviate the concerns in the market and to also convince the BOD members, we will definitely not pursue this [inaudible] very prudently.

The following question will be presented by Mr. [John Chung Lee], Pan Asian Economic Institute. Please go ahead.

[through interpreter] Yes, first of all, I assume that it is quite unlike SKT that performances are not as high as expected, and I expect better performance during the second half.

I have the following two questions. First of all, regarding recent discussions about SKT's plans to strengthen and expand its subsidiaries handset business, could you discuss further about your plans and thoughts about your handset subsidiary relationship?

And secondly, my question goes to [D&B] business. You briefly mentioned something about that in your opening remarks, but there is a commercialization, the target date is in September, but could you be a little bit more specific? Would there be no change in terms of future schedules, and also, what are the progress in terms of content and of the handset development, and also regarding the re-transmission of the terrestrial handset content?

Let me first of all answer your question regarding the handset-related business. I believe that the global trends are major telcos around the world is to strengthen their alliance and partnership with handset makers. I believe that because of such trends, I believe that we have also reviewed a lot of ways to grow through its subsidiaries and also to look into new [inaudible] through its subsidiaries and we therefore came to the conclusion of working closely with SK Teletech in terms of handset development, and as we are all well aware, SK Teletech is specializing in the high-end niche market, with its true niche market strategy, in hopes to realize better profitability going forward.

Yes, let me answer your question about the [D&B] business. Currently, the information decree under the Broadcast Act is being revised on schedule, and we don't see any problems in keeping with the time line of trial private service in September and also commercialization in October.

In terms of content, we are in the process of negotiating with various providers per channel, and it is also going quite smoothly.

In terms of handset development, many domestic manufacturers are expressing their desire to possibly participate in this endeavor, for I believe that by the beginning of next year, we could have a quite expanded line-up of handsets waiting. And we are thinking about approaching this business on a monthly payment scheme for the end customers, by charging about 12,000 Korean won or 13,000 Korean won or so, and in terms of the retransmission of the terrestrial broadcast content, we still believe our trend is quite positive to license this, so we are listing as possibly quite good results going forward. And I believe that the terrestrial providing broadcast companies are also looking at this as an opportunity for them to get a new revenue source for content, through a different window. And also, I must remind you that STS and NBC are participating as shareholders in terms of the new media, which is a big venture point for this deal. So I believe they will fully cooperate and they will be more than willing to participate.

And also, I'm pleased of Sky Life. Yes, there were certain, I guess, repercussions from the SOs and some resistance from SO [inaudible]. However, it has been allowed by the government, as of the 26th of July, that retransmission of this content will be allowed.

The following question will be given Mr. Matthew Gemstone from Goldman Sachs.

Yeah, thank you very much. I just had two quick [inaudible] two marketing [inaudible] and secondly, with respect to the recently- the recent money you raised for the issue of the [extensible] bond. First of all, I'm just confused about why the first quarter's-- sorry, the second quarter's marketing expenses rose so much, [inaudible] versus 20 in the first quarter. I'm just having trouble understanding this, because your strategy in the new [MMP] environment [inaudible] subscribers, to my knowledge, in the beginning of the first quarter, so I don't see any change in the strategy in the second quarter.

Secondly, because at the end of the first government, there was the government investigation into illegal handset subsidies started, and then there were fears that the government is going to penalize all the [inaudible] handset subsidies, and to my knowledge, from that point on, and into the second quarter, there should have been a retreat in marketing expenses, not an increase.

And secondly-- thirdly, as you've alluded to yourself, in May, it [inaudible] long-term market share strategy, market share goal. So with those factors in mind, I'm just wondering if you could explain more specifically why, in the second quarter, we had such an increase in marketing expenses?

My second question relates to the money that was recently raised by the [EB] issuance and your earlier assurance that by the first quarter of next year, if the [inaudible] of shares, you will return to shareholders via a special dividend. What assurance do you have that there could be a possibility of foreign ownership in 14 months and could be listed, to enable share cancellation to take place?

And secondly, since you've already raised this money with the expressed intention of returning it to shareholders, wouldn't it be better to do that now, rather than waiting by doing a special dividend now? And related to that, what assurance do shareholders have that that money is going to tightly remain within SKT and not be used for other purposes?

Yes, let me answering your marketing cost-related question first. During the first quarter of this year, we expected the market to start stabilizing from second quarter on. However, contrary to our earlier expectation, our competitors resorted to utilizing unofficial marketing and sales channels, continuously into the second quarter, and also there was an overheating, in fact, in the competition in the new prefix market of 010 as well. It was actually quite inevitable for us to extend more marketing costs to maintain our position in the market, and we also felt that it would be quite helpful for SKT as a company to deal with it being expanded and and increased size of this unofficial sales channel utilized by our competitors, as soon as possible, therefore lead to quicker stabilization of the market. That's why we looked at the marketing expenditure as a link to long-term strategies, which will benefit the company. That is why we ended up expending more marketing costs during the second quarter, compared to the third quarter.

And if I may give you more detailed content about this cost, our initial commission increased quite a bit, actually, by 60 billion Korean Won, and our retention commission, in terms of the Rainbow Mileage points, was increased quite a bit, because of expanded use of this mileage program to buy the customers, because of the accumulated mileage points being bigger.

Yes, with regards to your question about the [EB] issuance and the funding that followed, one, why we are holding on to these funds, was your question. We [inaudible] about the foreign ownership limit. It is still under the decision of a the capacity of the Korean government, so we have to wait and see how it comes out, and the Duhan [ph] is resuming once again, and the government is well aware of the fact that including SKT, also KT, and Hanrado [ph] are all going through certain management challenges because of the ceiling of the foreign ownership unit as being full at the moment. So again, as I told you earlier, we will pursue the calculation-- cancellation of treasury shares until the end of this year, and if this is not realized, we will definitely pay out the special dividend we said. And under the Korean law, we are not allowed to issue interim dividends more than once a year, by law, so therefore we will not be able to issue additional special dividends during this year. And you might be asking then, why we are not paying out this dividend at this particular juncture, but at the recently BOD, we have initially decided on the 1,000 won per share dividend for now, and we will still continue to seek buy back and cancellation of treasury shares until the end of this year, and if this is not realized, we will definitely go for a special dividend. And you might be worried that these funds will go elsewhere; it will be paid out to the investors. But I would like to reassure that we have the same sound government program assisting with outside directors, in case, who are constantly looking and monitoring the flow these funds, so I don't think you have anything to worry about, so I ask you not to worry. And as you are well aware, our outside directors, and two outside directors that officially resigned from the role last time, are still actively acting as our advisers to the BOD. So effectively speaking, we have a four to six ratio with regard to the outside director and a BOD structure. So once again, they will do their job. But also, we, the management of SKT, will definitely make sure that that situation will not take place.

And if I may elaborate just a little bit about your first question, the reason why the second quarter initial commission portion increased so significantly was because our competitors utilized a lot of the unofficial sales channels, aside from the official channel of using dealers, so we had to deal with this phenomena in the market, it was inevitable that we spend that expenditure.

The following question will be given by [inaudible] from Morgan Stanley. Go ahead, please.

Yeah, good evening to you, Kim. I just have one question, and it is I just want to say that you [inaudible] disappointed such a big drop in guidance for EBITDA margin [inaudible] direct marketing costs, I think that's one area. But the other surprise that you haven't really touched upon are part of your costs. I know times are tough, even for SK Telecom, but if we look at second quarter, and you've got the labor costs widening, lead time costs widening, outsourcing costs widening. I mean, you know, this is-- this is-- in a tough environment, everyone has tightened their belts, and part of the [inaudible] you're maximizing margin as much as possible, but I was just wondering, is there any- do you have any plans for perhaps controlling other costs, other operating costs? I know [inaudible] has had a similar situation, flat top line growth, and [inaudible] tried to cut capex and tried to bring labor costs down, so I'm just wondering whether you had any costs under-- did you have anything in the works, or when do you think it's necessary to start looking at trimming other operating costs, other than [inaudible]

As you mentioned, cost reduction is, of course, a very important and critical point that SKT is trying to improve, going forward. Our policy is the following -- recently we saw the significant rise in terms of marketing costs, as we had other factors in terms of cost pressure, so we've been trying to cut costs elsewhere, to offset benchmarks and cost expansion. So we have made certain change in the discipline in that. What used to be managed quarter by quarter in terms of cost management, we changed to a monthly mentioned scheme. So even if the budget is set quarter by quarter, we managing the cost actually implemented on a rolling basis on a monthly system.

Yes, regarding the second quarter related cost increase, we conducted an internal view on the initial components of such an impact, increase, ourselves, and let me be able to tell you the detailed information about that.

Under other commissions, there are [inaudible] related costs. In other words, in the forming alliance with banks to conduct a mobile banking business going forward, we had to pay initial entry commission to enter into the branches of these-- alliance, or partnering, banks. So to do that, during the second quarter alone, the increase of this particular commission increased by 20 billion, and however this is an initial [inaudible] set up cost. Therefore, going forward, such infrastructure-related expenditure will decrease.

And another item that requires our attention is the [CP] settlement cost, because our wireless Internet services are increasing, naturally in correlation we have to pay more settlement fees to the content providers. And also another factor related to other commissions included the marketer [inaudible] for [MMP] and also there were international roaming related commissions also involved as well. So overall, the other commissions increased by 60b Korean won during the second quarter.

But aside from these special factors, I believe that we are generally going pretty in line with 13% call revenue levels, quarter to quarter, in terms of these other commissions. So going forward, I think it will be quite manageable for us to maintain about this level.

And about the leased line related commission, it is because of the increase o the subscriber base and more usage of our services by our subscribers -- we are requiring the new stage of WAP base stations, as well as repeaters. And so it's also increasing for the leased line usage as well.

And under the legal cost, we had to pay out the [High V] payment and also we have this one-off [inaudible] celebrating the 20th anniversary of the foundation of our company, but this was a one-off incident.

But our annual target is to maintain the level of costs within the 5% level of revenue.

Just as a follow up, so [inaudible] if your top line continues to stay flat, do you see any area where you could possibly cut costs?

Yes, in terms of operating improvement initiatives, this is a continuous challenge, and again, it's a fact, SKT is putting a lot of effort in. So in terms of being the most efficient, as an operator, I believe that SKT would be the most efficient of all.

The following question will be given by [inaudible] from [inaudible].

[participants speak in Korean] Yes, you've offered us the second half marketing guidance. However, between the third quarter and the fourth quarter, I believe that the marketing guidance would be quite different from one another. Could you give a more detailed, specific guidance for the third quarter and the fourth quarter, respectively?

And also, during the third quarter, there will be these operation suspensions, and I'm wondering whether this will be a factor that will increase the marketing costs or decrease the marketing costs, so could you share the company's perspective on that, because I saw that in year 2002, it was an increasing factor.

And my second question was with regards to the flattening of the MOU and the voice telecommunications-related revenue. Do you think that this flattening trend would be a long-term trend, going forward -- what is your outlook?

Yes, you asked us to give some more detailed, separated guidance for third quarter and fourth quarter in terms of marketing costs. But I believe that by doing so, inadvertently, I think that I would be able to review the strategy for market operations for the company. So rather than giving you such such specific figures, and let me put it this way -- as you mentioned earlier, you asked about the factor of operations extensions for the third quarter, whether this could end up increasing or decreasing the marketing costs.

Well, in terms of the marketing cost itself, it would be decreased slightly. However, on this current [MMP] environment, there will be some increases in terms of the churn out related expenses. I believe that you are asking this question because you are concerned about the possibility of us repeating the same situation of fourth quarter 2002, where a significant increase of marketing costs took place. But I believe that the situation is quite different from now and then, because currently our rate-- new prefix 010 market is quite expanded, after the introduction of [MMP] in the first half, and from July on, the two-way [MMP] is taking place, and also the [D&B] services are being launched. Therefore, I believe that the dealers have better environments to make sales to customers compared to 2002. So we have no further plans to support them in terms of other assistance, for now.

Quarter on quarter, I believe that the MOU has edged down slightly, and it is mainly because of the in flow of certain subscribers with no more MOUs and our existing subscriber base, who use less calls compared to existing customers. However, and at the same time, I must remind you that because of the marketing environment change, because of the introduction of diverse price package programs, such as free holiday price plans, I believe that MOU is having less and less correlation with RPU.

But compared to the past, I believe that it will be difficult for us to put so much meaning on the MOU figures as in the past. So- and also, so therefore, we would focus more on increasing RPU rather than increasing, or trying to actively manage MOU, going forward. By introducing high-functioning, high-end handsets that supports June-related services, we could have possibly enhance RPU that way, and also we are trying to offer more multi-media services, such as mobile IM and mobile Cyworld [ph], as mentioned earlier, and these services would end up increasing RPU significantly.

The following question will be given Mr.[John Ling] from Merrill Lynch. Please go ahead, sir.

Yes, thank you for the opportunity. First of all, I just want to comment that when I saw that SKT's EBITDA margin was 36%, I thought it was mistaken for a PCS operator's EBITDA margin. So given that your marketing expense was so high, in second quarter, in your opinion, does the management believe the money or the expense was well-spent? What do you think the impact would have been on your top line, had you spent 100 billion less, 100 billion one less on your marketing, and what sort of assurances can you give the shareholders about your second half marketing efforts, of that- it's not going to be as bad? I know you mentioned 18%, but can we have a little bit more assurance?

Second question pertains to regulatory environment. It seems like, you know, for the past six months, there has been a really long, bad string of luck on relatively policies and the environment for SKT, and I mean, you can name merger condition, compliance period extension, interconnect adjustment, operating suspension, and most- most recently, the potential for a mobile tariff cut. Has the company's relationship with the regulators worsened this year, and what kind of signs or assurances do we have that there will not be any additional major regulatory policy disappointments for investors in SKT, and what-- what makes the management believe that the regulatory policy environment will be more stable? Thank you.

Yes, I believe that you asked the question about the possible scenario where we had not extended about the 100 billion Korean won in terms of marketing expense, what impact it would have had on the overall sales? Of course, it's quite difficult to answer, actually, but perhaps it might not have had immediate impact on the revenue. However, I believe that we are quite confident that if you look at the long-term view, maintaining the market leadership and the overall market prowess in this situation, of course, it's just a extension of market expense during the first half, I believe, really helped the company. And as with all competition, I believe that it is quite critical to maintain certain momentum in a competitive landscape. And in the second half, I believe that the situation will be quite different from the first half, now that the concept is [MMP] is a zero-sum game is expanding in the market, and the government commitment about clean marketing is strengthening. And as with SKT, other competitors are not in a situation to expand too much money into this market continuously, because of the financial limitations, and so I believe that SKT will definitely maintain its market leadership and continue to cut costs, going forward, to maintain such leadership.

Relating to the regulatory risk, I'm sure that you are well aware of the previously implemented actions by the government, including the differentiated application of the inter-connection rate and frequently usage fee, as well as the asymmetrically introduced [MMP] system and also there were a set of restrictions regarding the merger agreement with [CKT] Telecom, and so most of these uncertainties or risks have been already exposed to the market. And of course, the merger agreement related to monitoring by the government has been extended by two more years. However, as the dominant player in the market, we are already being subjected to such regulations a lot, already, so I don't think that there will be too much more impact that could influence the fundamentals of the company. And SKT has already announced its plans to maintain the MS within the 62.3% range, and also I believe that because of the suspension of new subscriber acquisition, which had been announced already, I believe that that would have some impact in the market. And also, going forward, the fierce competition among operators to obtain and secure more subscribers will be alleviated, going forward.

And also, on 21st of July, there was a commission meeting of the government, the commission that is overseeing the telecom-related policies in the market. I believe that if you look into the results of this committee, you will see that the government is highly evaluating SKT's self-improvement measures and efforts. And of course, there is the mobile rate cut issue that is remaining.

But other than that, I don't think that there would be any further government regulatory risks that could possibly remain. So in effect, I believe that we are alleviating a lot of uncertainties in the market, rather.

This question will be given my [inaudible] of ING. Please go ahead, sir.

Hello, thank you for the call. I have one question -- I don't think it relates to regulatory risk moreso as it does to maybe company group risk. SK group announced in May that it would spend 15 to 20 trillion won by 2007, and in July, it also announced that would spend 10 trillion won in telecom-related businesses by 2007. Can you provide some detail or some color so as to reassure investors that we are not going to see another surprise related to capex increase for SK Telecom, similar to the events in January, 2003? Thank you.

I think that you're referring to the 10 trillion won announcement, which was mentioned earlier. However, I need to remind you that that figure covers the entire specialty-related companies to SK Group, in the telecommunications area. Therefore, it is not specifically SKT-related figure in terms of capex. And also, as you are well aware, when SKT decides to invest on a special initiative, we have a separate subcommittee called the Investment Deliberation Review Committee, under the BOD, which reviews all the plans of capex investment as well as the progress reports of the ongoing capex initiatives. And whenever there are plans to implement further investment, there are intense deliberations and review of these matters, in a very prudent fashion. And at the beginning of each year, we are announcing annual guidance on capex every year, so I could reassure you that there will be no such surprises for the investors going forward.

The next question will be given by Mr. [inaudible] from [inaudible] Securities. Please go ahead, sir.

[participants speak in Korean] [through interpreter] I believe that growth in new businesses through subsidiaries seems to be an important strategy for SKT, and- but in general, in the market, there is always a discount factor for the holding company of these subsidiaries, because there might be the growth potential for the company itself, if it seeks to grow through a subsidiary, but there is always that possibility that the shareholders value might be eroded in the process. So I'm wondering, unlike other holding companies in the market, what measures or what strategy SKT has in order to protect the shareholder value, as well, going forward?

My second question -- you have expressed your plans to expand your business through subsidiaries in areas such as handset manufacturing, [D&B] and portal areas. Aside from these businesses already expressed, are there any other new growth areas that you are thinking of?

The third question is, is that in an effort to enter into new business areas through handset manufacturing, core business, and [D&B] as such businesses, there are always risks that you might be accused of monopolizing the market. Do you have plans to deal with such risks, going forward?

I believe that you are a little bit concerned about SKT relating to enhancing the shareholder value through its strategy of growing through subsidiaries. I believe that when we enter into new business, or when we invest in a subsidiary, we are constantly working on maximizing the synergy effect with SKT, so that is our top priority. Therefore, I believe that this type of investment and growth strategy through subsidiaries will definitely contribute to the value enhancement of SKT itself. And also, I must remind you that investing and growing through subsidiaries could actually give us a risk hedging effect about the future uncertainty as well.

And another question you raised was, what other new growth areas we are thinking of, aside from those expressed already, such as handset manufacturing. We are looking at, aside from the mobile banking and the [D&B] business, and the like, we are also looking at the digital home related business, as well as the ubiquitous business solution market, and the local market. So these are additional [axis] that we are looking for, in terms of the future growth potential.

However, we will not be able to give you more specific information about these other areas in terms of how much investment we are thinking of and how much momentum we could actually add to the general growth of the company, because we are currently studying these possibilities at the moment. So once these studies are completed, we will communicate them with you as soon as possible.

And unlike most holding companies in other industries, SKT has above 80 to 90% equity holding of the subsidiary, so this should definitely help the value of SKT, going forward, as well. And also, if we are entering into the related business areas, but if those business areas have very specific and different labor force characteristics and other business characteristics, it will be more effective to approach the market with a subsidiary then for us to directly enter into the market. As you mention, there are always risks of having to deal with the monopoly-related risks, and this is an area we are constantly reviewing at the top priority level, so I would-- I actually appreciate the comment, and I would consider that comment as telling us to continue to review such options in the future, and we will do so.

Next question will be given by Mr. [Min Goo Ka] from JP Morgan. Please go ahead, sir.

I have two brief questions. First of all, regarding the labor cost increase during the second quarter -- quarter on quarter wise, it has increased quite a bit. Of course, there were the one-off incentive bonus that was issued in the first quarter, but I believe that there was no such factor in the second quarter, and if you look at the line item, it says regular salary increase, but I believe that the manpower, the number wise, is about the same, and we think that the basic salary of the employees, we have increased that significantly, so you can see that's the reason for that.

And second question -- other commissions, you talked about the [CP] government's commission. Could you be more specific about the amount?

Let me correct the interpretation, first, about the first question -- I meant the increase of labor costs year on year, not quarter on quarter.

Yes, regarding your first question, the second quarter labor costs for 2004 amounted to 96.3b. Year on year, it was an increase by 27.4b. But quarter on quarter, it's actually a decrease by about 66b. The reason why there was such an increase year on year was because the labor-- the salary, I guess, the compensation negotiations results of 2003 was not reflected in the quarter of last- same quarter last year, but it was only reflected in the last quarter of 2003, so that salary increase was not reflected in the previous year's figures. And this year, we've had promotions and other [inaudible] lists of the employees, which led to the increase of the regular salary-related cost increase.

To answer your second question, [CP] government expenses for the second quarter was 76.5b, which was a 14% increase compared to the previous quarter.

The following question will be given by Mr. [Henry Crow] from Thames River Capital. Please go ahead.

Good evening. Thank you very much for the call. And I had a few questions. The first is to confirm the wireless data revenue targets -- you mentioned [inaudible] does that mean two trillion won revenue target? The second question is just looking at the July net additions, what RPUs the new adds from KTF are coming in on? The next question is just on interconnect -- what you believe the regulator will actually continue it's interconnect cuts, such that you actually lose money on a net-net basis. And then the last two questions -- you talked about the handset investment. Perhaps you could just talk how much you would be prepared to invest in the handset business? And on [D&B], whether you could give us some numbers on revenue targets, EBITDA, break-even point, and capex for that?

Regarding the [inaudible] related outlook, for the year 2005, compared to other operators, I believe that interconnection rate adjustment will be improving significantly, so if you look at the mid- to long-term, because of the characteristics of this particular model that we are dealing with, the differentiation range or the asymmetric range in portion to SKT and other operators will narrow, going forward.

And we are still reviewing the investment potential and plans for the handset business, so I ask for your patience on those figures. And for [D&B] business, we're looking at reaching a break-even point by year 2006. When it comes to detailed figures on EBITDA and capex and other financial figures, I will arrange for the IR team to get back to you on those specific numbers.

Next question will be given by Mr. Sullivan from Oak Tree Capital. Please go ahead, sir.

Hey, Kim, thank you very much for the call. Just a quick question regarding retention costs -- you mentioned earlier in your comments that the costs went up in the second quarter, as you saw increased usage of the program because of mileage accumulation. Can you just help us -- how should we think about that line item? Is that-- is there any information in terms of the outstanding mileage balance in total? Is that a deferred cost? I mean, how should we be thinking about that in terms of planning the second half?

Regarding the retention commission, those accumulated points are encouraged to utilized and used through free minutes of phone calls or net content utilization, so the scope of such usage is being expanded, you could consider, and so just understand it as the redemption of these accumulated points being larger. And more detailed figures will be provided to you by the IR team as well.

Do you have an estimate of the total outstanding liability, either in minutes or usage points, or however you're measuring it?

I could simply tell you that we have about 100b won worth of provisioning for that.

Thank you very much.

The following question will be given by Mr. [Jung Wan Ta] from [inaudible]. Please go ahead, sir.

[participants speak in Korean] [through interpreter] You have shared with us for the year, and I'm curious about the underlying assumptions. First of all, how much mobile rate cuts did you put into this scenario to come up with this guidance, and what was your assumption about MOU potential?

We did not consider or factor in the mobile rate cuts in this assumption, because we only expect a very minor reduction at that, and if that is the case, we will do our utmost to revise the targets.

Of course, if the reduction size of the mobile rate cut is a lot bigger then we might have to consider revisiting those guidance figures once again, but we will consider that at a later point.

Our assumption for MOU, under the revised guidance, was 199 minutes. However, as I mentioned earlier, because of the free holiday package and other types of price plans are being offered, the correlation between MOU and RPU is going down continuously, so I ask you to focus more on the RPU figures.

The following question will be given [inaudible] from [inaudible] Funds. Please go ahead.

Hi, three questions for you. One, given that you reduced your guidance for '04, can you give us some sense for what we should expect in '05, in particular in revenue growth and EBITDA margin? Second, it seems as though you're pursuing a strategy of maintaining market share at almost any price, which as a shareholder, I find somewhat concerning. If the competitive environment doesn't improve, and you find yourself with a choice between maintaining market share at 52% and maintaining marketing expense at 24% of sales, or reducing marketing expense and losing market share, which will you choose? And then the last question is, why is management not more focused on improving the cash flow here? For example, through reducing capex, which seems quite high as a percent of sales, relative to almost any telecom in the world, and returning more cash to shareholders through a potentially higher dividend payout ratio as a percentage of cash flow?

Let me answer your second question first. We have announced our commitment to maintain the market share within the 52.3% range until the end of next year, but the move behind announcing such a statement was because our competitors were quite concerned that our market share could actually reach 60% or 70%. Therefore, it does not mean by any means that we are willing to pay any cost to maintain this market share. I believe that maintaining the market leadership and achieving profitability, between the two factors, there always has to be certain balance. The first half of 2004 was quite an unusual year, so we do not think that this trend will continue, and I do not think that this type of trend should continue. Maintaining market leadership is directly related to maintaining future profitability. Therefore, we will continuously focus on profitability and value oriented management.

Answering your third question, about the cash flow improvement and you asked us whether we had any plans to adjust the capex investment figure to improve cash flow. Capex is quite vital for future competitiveness and future growth potential, so we believe this is a very critical infrastructure for the company. Therefore, because of temporary profitability issues, to adjust capex quite drastically all at once, while I believe that is something that we should be quite prudent about.

Regarding the payout ratio, if we compare ourselves with other major domestic companies in Korea, our payout ratio level is actually quite competitive, because major corporations in Korea are paying out about 15% to 25% and therefore, our 25% figure is not at all a low level, we believe, and even if you consider a comparison between other telcos, still, it is quite favorable, we believe.

You asked the first question, regarding our revenue and EBITDA-related outlook for year '05 -- it is still quite early to give you that guidance yet, I believe, because we only start working on the following year's guidance in the month of September. So once things start materializing more fully, then we will communicate those figures with you.

The last question will be given by Mr. [Tae Young San] from [Samsung Investments].

[participants speak in Korean] [through interpreter] Yes, I have a couple of questions. You just mentioned that you will not be able to share with us the EBITDA margin guidance for the next year. Then you restated the question -- what does the company think that the sustainable EBITDA margin going forward would be? And then considering that this year was quite an abnormal year, I'm wondering how much recovery the company can make? So I would like to know your assumption on that.

Second question is with regards to capex to sales -- what is the long-term target for such a ratio?

Third question, about the payout ratio, you just mentioned that your current payout ratio is not at all at a low level, compared to other companies, but the market is quite concerned about SKT's extension of its business through subsidiaries, so I believe using the current SCF, you will be able to invest into areas and also pay out additionally. So even in a symbolic way, do you have any plans to increase the payout ratio?

It would be very difficult for us to comment on next year's EBITDA margin once again, because this is a very cautious matter that we are discussing. We will have to look at the second half results, and based on that, we would have to look at the future guidance. In the initial stage of [MMP], we had to do a lot of analysis about the long-term impact, but the only thing I could say for sure, right now, is that once [MMP] system fully takes root in the market [inaudible] second half of this year, beginning of next year, the situation would be a lot improved.

Regarding the long-term capex to sales ratio, after last year, we have been continuously cutting this amount, and even this year, we are maintaining it within the level of 17%, as we mentioned. However, in line with the technological developments and the need to introduce more and more services, it will be difficult for us to set in stone certain figures in a long-term perspective, when it comes to capex. That would be quite difficult to do. But I can tell you that we will try to maintain around 17% level in the near future, and we will look at the return ROI on certain investments, before deciding on any capex decisions and we have a capex deliberation committee under the BOD, which will do its role as well.

On the payout ratio related question, our shareholder return policy consists of dividends and also share to share buyback and cancellation, and our basic policy is to maintain the 25% basic payout ratio, to maintain stability and as when the situation arises, we would review the cash flow situation and always look at the possibility of treasury share buyback and cancellation.

We are about to wrap up today's conference call, but before we do that, we will hear from the CEO on his closing remarks.

As I mentioned earlier, the first half of this year was a very unusual situation, marked by one-way [MMP], and because of those factors, we will not meet our original expectation and due to that, we will inevitably having to put in a situation to change our annual guidance.

However, in the second half, including myself, all the top management of SKT will do its utmost to increase our revenues through the RPU increase and through tight controlling of cost factors, so that we could fully achieve the revised guidance targets for the year. And also, the second half will be different from the first half, in that the mobile telephony market will be more stabilized. Therefore, it will be quite possible for us to achieve these new guidance's.

And during today's conference call, there were a lot of opinions and recommendations raised by all the participants, and we take all your comments in a humble manner, and we will definitely review and look into these matters, so that we could more flexibly deal with the market changes, going forward.

Based on the [inaudible] related knowledge and experience as a mobile operator, SK Telecom will do its utmost to prepare prudently for the next decade, so that we could continue to enhance the shareholder value.

To that end, I ask for your continuing support and attention. Thank you very much.

This concludes today's conference call. Thank you very much.