SK Telecom Co Ltd (SKM) 2006 Q1 法說會逐字稿

[translated] Good evening. Today's conference call will consist of the opening speech by CFO, Mr. Ha Sung Min, on the earnings results of Q1 2006, and other matters of interest, followed by a Q and A session. The conference call will last about an hour and a half, and consecutive interpretation will be provided. Let me remind you that all the forward-looking figures are subject to change depending on the macro-economic and market situations.

Now let me present our CFO, Mr. Ha Sung Min.

[translated] Good evening. My name is Ha Sung Min, I'm the CFO of SK Telecom. I would like to thank all the participants for taking part in today's earnings conference for Q1 2006. It is my pleasure to have this opportunity to communicate with the investors and analysts.

Let me begin with the earnings highlights for Q1 2006.

Affected by the reduced number of business days and other seasonal factors, the revenue for the quarter edged down 3.3% quarter-on-quarter, however, in terms of year-on-year comparison, the revenue increased by 0.3% to reach 2,540.3 billion won, despite the caller-ID tariff cuts, boosted by the increased call charges from growing subscriber base in MOU, as well as the expanding wireless Internet revenue.

The wireless Internet revenue for the quarter was 663.2 billion won. The introduction of diverse data price plans, the steady revenue growth of popular services like Melon and Mobile Cyworld, together with our efforts to discover new revenue sources, helped expand the wireless Internet revenue by 21.1% year-on-year, and helped maintaining the same revenue level quarter-on-quarter, despite the seasonal factors. The proportion of wireless Internet out of total revenue, excluding interconnection fees, was 28.7%

The marketing expenses amounted to 440.2 billion won, or a 5.1% increase quarter-on-quarter, and a 1% increase year-on-year, to take up 17.3% of revenue. Although uncertainties in market competition persist in the current early stage of handset subsidy provision, we will continue to manage marketing expenses efficiently within the scope of maintaining the current market leadership.

The operating income rose 8.7% year-on-year to reach 667.9 billion won, supported by the increase in revenue. The quarter-on-quarter increase of 2% was possible, due to the reduction of both depreciation and the bad debt expenses. However, our net income reduced 8.5% year-on-year and 24.7% quarter-on-quarter, to record 337.2 billion won, due to the increase of one-off non-operating expenses, such as the change of severance pay system which began this quarter. The EBITDA rose 4.6% year-on-year, but decreased 8.2% quarter-on-quarter to mark 1,029 billion won.

Now let me turn to the areas of interest among market participants.

First, about our global businesses. The MBNO business in the US is completing the development of distribution channels, services and handsets. We plan to launch an all-out nationwide marketing activity, starting from May.

We believe our business in Vietnam, S-Telecom is well on its way to stable business, with the rapid increase in subscriber base from new price plans and enhanced marketing competitiveness.

SKT will make full effort to enhance the company value by successfully transferring our domestic experiences to other global businesses.

Next, let me update you on the satellite DMB business. Despite the commercialization of terrestrial DMB since the beginning of the year, the satellite DMB has exceeded the 500,000 subscriber mark, showing a smooth growth trend. We were able to reconfirm the potential of satellite DMB through the WBC broadcast which drew nationwide attention. Based on these experiences, we will expand TU-specific content and reorganize the TU channels to include exclusive sports broadcast among others, to reach the annual target of 1.2 million subscribers.

Also, the HSDPA is scheduled to be commercialized from May this year, with a coverage of 25 major cities. The network coverage will be expanded gradually to 84 cities by year end, through such efforts SKT seeks to secure the HSDPA subscriber base, and we confirm its leadership in the next generation network competition.

Lastly, regarding the treasury share buyback announced at the beginning of year, various timing options are being reviewed with the aim of shareholder value maximization through a close monitoring of the market climate and the stock price trend of SKT.

All the members of SKT have confidence that continuous growth based on our current market leadership, even in this changing environment, is possible. To that end, we are doing our utmost. We ask for your continued interest and support in this process.

Once again, I would like to thank all the investors and analysts for your unwavering support for SKT.

We will now begin the Q and A session. Please raise questions.

[translated] [OPERATOR INSTRUCTIONS]. The first question will be given by Mr. Matt Evans from CLSA. Please go ahead, sir.

In April, what was the churn rate and the average subscriber acquisition cost? And the second question is, could you tell us what the equity method losses from TU Media, SLD Telecom and Helio were in the first quarter?

[translated] Let me answer your second question first. Regarding the loss or gain on equity method, regarding TU Media during the first quarter, we incurred about 6.5 billion Korean won in losses, and also for SLD for S-Fone in Vietnam Business, we incurred the loss of 3.6 billion Korean won, and also for Helio, the US business, 10.4 billion Korean won in losses. So altogether for our invested companies overseas and within Korea, the overall loss amounted to about 7.8 billion Korean won.

And to answer your first question, our average churn rate was about 2.1%, but I would like to remind you that the MNP churn our ratio, after the introduction of the subsidy provision from our company, reduced by about 40%, although we do not have definite finalized numbers because we are not at the end of the month yet, but we will actively communicate with you using the fact sheet at the end of April regarding that point.

Could you also address the subscriber acquisition costs? The average commission or subsidy per gross add in April versus the first quarter?

[translated] And to answer that question, on the average, per subscriber subsidy amount so far stands at around 110,000 Korean won per person. And of course, after the introduction of the subsidies, our initial commission has reduced somewhat, while we are experiencing some increase of our extra costs for the subscribers that are changing their phones. So altogether I would say that on the average the subsidy amount is about once again 100,000 Korean won.

Thank you.

[translated] The following question will be given by Mr. Jong-in Yang from Korean Investment Securities. Please go ahead sir.

[translated] I have two questions. First of all, regarding the government regulation policy direction. Now recently there has been a lot of media report about the government going forward towards reducing the aggravated penalties for illegal handset subsidies to be placed on SKT for instance, and there have been discussions about possible reduction of interconnection fees and more deregulation regarding the approval of standards for tariff changes as well. So overall we get the impression that there is a trend possibly towards the alleviation of the asymmetric regulations. So I would like to ask the opinion of the management of SKT on that perspective.

And the second question is regarding the MMPs between 2G and 3G. So to answer that question I would like to first of all provide the proportion between those subscribers with the prefix number 011 versus 010, so what's the percentage range of those respective subscriber base? And so I'm wondering whether it would be possible for 011 prefix number holders to possibly do the number portability arrangement to WCDMA, whether that is technically possible or impossible?

[translated] Let me answer your first question regarding the government policy directions. You mentioned three things, which is the alleviation of the aggravated penalty scheme for telcos in Korea, and also the reduction possibly of interconnection fees, and alleviated requirements for tariff changes approvals.

So you used the expression, asymmetrical regulations, and this is our position. The overall market trend is that the telecommunications industry as a whole is reaching a rather stagnant stage I believe, and there has been an emerging convergence between telecommunications and broadcast. So I believe that the government also is trying to look at the overall industry's framework so that they could improve the framework further as a whole. So I believe that they are more focused now on activating the overall industry and also possibly encourage more investment in that particular industry. So we expect a gradual alleviation of such asymmetrical regulations imposed on the market-dominating players.

And let me answer your question about the proportion between the subscribers with the prefix number 010 versus 011. As of the end of March, the total number of subscribers for SKT was 19.73 million, out of which the 010 prefix holders amounted to about 6.18 million, which was equal to 31.3%.

And to answer your second part of the question. On April 17 this year, the government has decided to allow MNP on the prefix numbers of 010. But we do feel that since the 2G, which is the 011 prefix holders, takes up about 60% of the overall subscriber base, considering that fact I think that it would help if we could have those 2G holders to be allowed the MNP, so that we could possibly see more activated conversion to HSDPA and other future generation technologies.

And you asked whether this was technically possible. It is possible technically. But policy-wise it is only allowed so far on the 010 prefix holders.

[translated] The following question will be given by Mr. [Bill Thorne] from UBS, please go ahead, sir.

The first question relates to your wireless Internet revenues. I do realize you've seen an improvement year-on-year, but on a quarter-on-quarter basis it's quite flat. When do you think this could potentially go to single digit revenue growth business. Could it be as early as next year or do you feel HSDPA would reignite this line to start growing again. Is the first question. And the second question relates to non-marketing costs. It seems that marketing costs in Q1 were actually quite low, but the margin came out, I would say probably in line or slightly lower than consensus estimates, probably due to non-marketing related cost pressure. And this has been an issue that investors have been watching for a couple of years with very little improvement. So I think people do understand you are controlling marketing costs, but when can we truly see discipline in terms of non-marketing related costs, because that really could actually provide upside to your long-term profitability or arguably downside. So when can we actually see execution on non-marketing costs please?

[translated] Let me answer your first question regarding the wireless Internet related revenue first. On a quarter-on-quarter basis it is true that we've seen some stagnation there as opposed to the fourth quarter last year. But typically speaking, every year we've seen some seasonal factors during the fourth quarter each year, therefore relative less growth in the ensuing first quarter of the following year. And overall, if you look at the annual growth rate of SKT's wireless Internet portion, we are continuing to realize about 20% growth per annum. And so of course we do expect some additional increase with the introduction of HSDPA, but even without that factor, we still expect a steady growth in the wireless Internet revenue. So we do not foresee a single-digit growth in the near future as you stated, but rather a continuous robust growth.

And regarding your second question. You mentioned about the I guess still high number in terms of the operating income excluding depreciation other than the marketing expenses. On a year-on-year basis we've seen increase on the labor cost side and also the network access related interconnection fees. Now under the labor cost segment, we've paid out certain incentives and there has been some severance pay outlay, those things attributed to that. And regarding the network interconnection related expenses, we've seen an increase in that portion because of the rising subscriber number, and with the increasing traffic of calls, and also with the expansion of the network roll-out. And we also completely agree with you that we have to focus on the management of such expenses going forward, and therefore we will do our best to continue with our operation improvement efforts.

Thank you.

[translated] The following question will be given by Mr. [Tien Doh] from GIC. Please go ahead sir.

Thank you very much for the call. Three questions. The first is on [interconnection]. Can you tell me whether you are assuming a change in [technical difficulty] interconnection rate, and if so what change are you assuming?

The second question is just on tax breaks for HSDPA. Have those been decided yet?

And the third question is just on your effective tax rate. Last year [technical difficulty].

Excuse me Mr. Doh. This is Tae-Jin Park. You are breaking up. Your question cannot be heard by us clearly, so could you repeat the question once again?

Is that better?

No, you are still breaking up. The line that you are using may be somewhat poor. Could you try once again please? Thank you.

Hello, [technical difficulty].

Why don't you just go ahead with your questions and we will [decide] whether we are hearing it clearly or not.

Okay, that's fine. The first question is on your revenues and [technical difficulty]. Are you assuming a change [technical difficulty] interconnection rates, so what are you assuming [technical difficulty] HSDPA as a resolution of how much [technical difficulty]. And the third question is just your effective tax rate. Are you still keeping to your [28] guidance, given the slightly higher rates in the quarter?

Okay, the only question that I can comprehend is the third question that you are asking. Is the question about the effective tax rate for this [inaudible].

It is please, yes.

And are we still expecting 28% that we were guiding the market with?

That's right.

And the other two questions were?

The first question was just on are you assuming in your first quarter result a change in the interconnection rates, and what is the percentage you are assuming for the change?

And the second question was just on tax breaks for HSDPA. Have those been decided yet.

Okay, we got it.

[translated] To answer your first question regarding the interconnection fee, whether the interconnection fee reduction was already included in the assumption for Q1 results. To give you the flat out answer, no we didn't. We simply apply the same interconnection fee rates for the previous quarter, and we expect the decision on the change of possible -- possible change of the interconnection fees to take place during the month of July this year. So once it is determined, then we will then reflect it accordingly.

[translated] And to answer your question regarding a possible tax break on investments such as HSDPA, regarding this particular investment just as with other types of, new types of investment we are receiving deductions on the temporary investment items. So depending on how you calculated there would be pluses and minuses. So ultimately the end result is that we will be receiving a deduction of about 7%. And the effective tax rate is expected to be maintained at about 28%.

Okay. Mr. Doh, did you get the answer and can we move on to the next question please? Hello, operator. Can we move on to the next question, please?

[translated] The following question will given by Mr Henry [Crow] from Thames River, please go ahead sir.

Hello, thanks very much for the call. Just two questions. On the labor expense, please could you give out a split between how much was the severance pay, one-off, and how much was the bonus payment in billions of won?

And the second question is what the total number of employees was including permanent and temporary as at the end of December and as at the end of March?

[translated] To answer your question about the breakdown of the labor cost, let me remind you that the special severance pay expenditure that I mentioned earlier falls under the category of non-operating expenses, therefore it is not included effectively in the labor cost item as is specified. But to answer how much that costs, it costs us about 140 billion Korean won for the one off expenses.

And regarding the overall labor cost as mentioned at the beginning of the year we plan to maintain the guideline of about 4 to 5%.

To answer your question regarding the number of employees' as of the end of December the number was 4,383 versus at the end of March a figure of 4,480 so there was a slight increase in the total number of employees and it was mainly due to the hiring of new recruits.

And could you just give us what the temporary number of employees was well for end December and end March, and also what the bonus payment was in the first quarter?

[translated] Regarding the number of regular workers versus the temporary workers I just have some vague numbers in mind right now, so in order to ensure accuracy of the numbers I would like to ask if you please contact our IR department and also same thing for our bonus payment.

Okay, and just follow from Tien Doh's questions on interconnect. You said you expect a 7% reduction; is that already reflected in your first quarter interconnection revenues?

No I think you are mixing the two answers we, the 7% that was mentioned was on the tax credit that we are expecting on the HSDPA like, that’s right.

Okay sorry, entirely my fault. But in your interconnection revenue assumption, are you using last year's rates or your estimates of this year's rates?

We are using the interconnection fee assumptions from the previous quarter, therefore we are not reflecting any possible reduction in this quarter's results. And as I mentioned earlier, the government has to still decide whether they will reduce or increase the interconnection fees. So decisions have not come yet so we expect that decision to come during the second quarter at which time we will unilaterally apply that change on our figures.

Thank you very much.

[translated] The following question will be given by Kyeong-mo Kim from Mirae Asset Securities. Please go ahead sir

[translated] Yes, I have a couple of questions. The first question is regarding your DRM related policies. There has been some controversy that SKT has been maintaining a very proprietary DRM policy so I would like to know what possible negative impact SKT will suffer once it opens up its DRM policies to other players?

My second question is that recently the Ministry of Information and Communication has been insinuating that they could possibly allow the discount package type of services for the market dominant players in terms of bundling of the services. So if that is realized we could possibly think that SKT might have limited options for partners in the fixed line area, so how do you assess that?

And number three question, SKT has been actively acquiring contents providers such as IHQ of which you've acquired shares, and I'm wondering by when can the market begin to see actual results that SKT is effectively utilizing these acquired content providers in its wireless Internet and also DMB business.

[translated] Regarding DRM policies, well this a very much strategy related area and we are cautiously watching the situation as we speak, so I will not be able to share with you the exact direction that we will go towards. However let me just simply say that DRM first came about in order to address the illegal music download market and the legal paid music download market is just emerging right now, and therefore SKT's policy is that we will manage our DRM policies in the direction where we could expand the overall pie of this legal paid music download market.

And regarding your question about the bundling services, I guess you could think that SKT might be in a less advantageous position in that regard but we actually think otherwise. If we feel that there are definite customer needs and they are also considering the regulations, if we feel that we need to provide such fixed line versus wireless line bundled services for the customers, we are fully prepared and we are confident that we could provide such services to our customers in the right time. So as we mentioned on several occasions in the previous conference calls our stance is still the same. If the needs are there we are willing to form alliance with Hanaro Telecom or KT or any other fixed line players.

Let me answer your question regarding the content related area. There has been a disclosure from SKT today that we have exercised our call option on IHQ, and you described it as acquisitions, but we are looking at it not as a short term synergy generating type of arrangement but rather an action to ensure long term advantage to deal with the convergence environment. So this was part of our strategic investment.

And also with regards to our content sourcing capabilities, I believe that with the acquisition of such shares we are already gaining certain bargaining power in the industry. So to a certain degree such synergy effects are already taking place and so be it acquisitions or fund related indirect investments we are trying to balance between the two so that we could hedge for whatever upcoming events in the future.

And so you asked as to by when we will begin to see some synergy related numbers, I believe that in that regard for us to see actual numbers to start really might require some more time.

[translated] The following question will be given by Mr Andrew Haskins from HSBC, please go ahead sir.

Hello thank you very much for the call. Two questions please. Firstly on commission levels. You break down your overall commissions into marketing commissions and other; if you look at marketing commissions, I understand initial commissions and I understand retention commissions, what exactly comes under the heading of monthly commissions and what exactly is included under the large heading of other commissions? That’s my first question, and then secondly, it's a very general question. What proportion of your customers subscribe to flat rate packages, whether in voice or data and do you see that figure rising? Thank you.

[translated] Yes let me first answer your question about the breakdown of our commissions. Under the large heading of other commissions there are the following type of areas that are covered. Number one, there is the information related commission which is paid out to our content providers in the amount of 90 billion Korean won. And also there is the outsourcing related expenses regarding our network and marketing activities that have been outsourced in the amount of 170 billion Korean won. And there are other minor types of operating related expenses underneath that as well.

And regarding our number of subscribers for our flat rate price bands we have no flat rate price band for voice, only for data and if I may compare the figures between the two years, as of March of 2005 the number of flat rate subscribers amounted to about 1.38 million people and one year later, which was at the end of March 2006, the number was 2.2 million.

And under the monthly commission, now this is what we pay to the dealers and agencies regarding the maintenance of those newly acquired subscribers. So all the paid amounts to the dealers that sold these phones or get the subscribers, 6% of that paid amount is paid for the following 48 months, that's what we call the management or the monthly commission, that is.

Thank you. Sorry, could I just check one thing, you said 2.2 million flat rate data subscribers now, and what was the figure one year before?

[translated] It was 1.38 million.

Thank you very much.

[translated] The following question will be given by Mr. [Mitchell Kim] from Morgan Stanley, please go ahead sir.

Thank you. I have two questions. First question is on subscriber acquisition costs. [I see for] Ha you mentioned that first quarter -- sorry the subsidies per subscribers coming in at somewhere around 110,000 won; can you clarify whether that number also includes commissions you pay to dealers as well as subsidies you provide to retail subscribers? And if so, if I look at your first quarter commissions on a gross add basis it's coming in at around 134,000 won, so does this mean that we should be looking for marketing costs to drop even lower than 17.3% of sales in the second quarter and going forward?

And related to that, if you could perhaps help us understand by giving us some numbers as to what are the proportion of new subscribers versus upgrades taking subsidies? I think that'll be helpful.

My second question is somewhat related, but it's on HSDPA related marketing. As I understand it you may be offering subsidies up to about 300,000, if you could confirm that? And also, if you do that how many HSDPA subscribers do you expect to gain by end of this year? And if so do you expect second half marketing costs to decline or to increase from first half marketing cost?

[translated] To answer your first question, when I said 110,000 Korean won per person subsidy, let me remind you once again that that was an average figure. And in that average figure we didn't include the commission paid out to dealers, however the actual payment of commissions, if you combine that, it was quite negligible.

You asked questions about our marketing expenses trend going into second quarter and also into the second half, let me answer these questions together. I believe that all of the marketing expenses you'll be most interested in the subsidy amount, however because the subsidy provision allowance has been only recently implemented we still have to closely watch the trend going forward. But the basic position of SK Telecom is that we will do our utmost to maintain market stability exercising our market leadership. But nevertheless I shall remind you, there is always a slight possibility of a slight increase of marketing expenses of course if you consider the dynamics with our competitors in our efforts to maintain our market leadership. But again let me remind you that possibility is rather low because our intention is to maintain the provision of subsidies at an extremely irrational level. So that is our expectations.

And you asked whether we could possibly perhaps reduce or increase our guidance after the second quarter. Rather than changing our guidance I think we would be basically trying to stick to our guidance that was announced at the beginning of the year.

Regarding the HSDPA WCDMA related subsidies, we are reviewing our 300,000 Korean won subsidy as you mentioned, and our target for the subscriber base until the year end, although it can change of course, is currently about 300,000 people.

And my question about the -- how many of the -- what proportion of the new subscribers versus upgrades are receiving subsidies?

[translated] As of April 26 the number of subsidies that have been provided to our subscribers was 630,000 cases. Of that subsidiary provisions as far as the ratio between the upgrade customers versus the new MMP new subscribers was 6 to 1, 6 being the upgrade of handsets versus 1 being MMP new acquisitions.

Okay, thank you.

[translated] The following question will be given by Mr. Hugh Chung from Goldman Sachs, please go ahead sir.

[translated] My first question is related to the data margin. Currently I believe that your EBITDA margin stands at about 41%; of that figure I was wondering what the contribution between voice and data as to such margin stands at and what is the trend of margin going forward? Do you expect that margin to increase? And also with the introduction of HSDPA, do you see a more upside in terms of margins because of HSDPA and if so by how much?

My second question is regarding your overseas businesses. You mentioned earlier Helio and Vietnam related businesses, aside from those already existing overseas business ventures, I'm wondering whether you have any change of investment strategy in global markets, so can you update on that please?

[translated] Regarding the data business related margin, we are not currently conducting separated accounting methodologies to calculate the exact attribution to such figures because we have to deal with the cost allocation issue as well. But our rough guess is that between 20 to 30% of our data margin comes from -- 20 to 30% of the margin comes from data and with the introduction of HSDPA of course we expect an increase of profitability.

Regarding your question about the global businesses and our investment strategies going forward, of course we are continuously looking for some strategies and opportunities within the region and among certain players in our region, and of course in reviewing such possibilities we will first of all always look at the synergy effect and also the strategic fit with our company and the target company and also ROI and other types of conditions such as how long it would take for us to reach breakeven point etc.

So we are still in the process of considering various options in the Asia zone, but our overall strategy direction has not changed since the last time I communicated with you. But looking back at our experiences, I'm sure you are already aware that we were in contact with a couple of possible acquisition target companies, but every time we conducted an in depth review and we came to the conclusion that the direction in that investment was not in fit with our company, so we scrapped out those options in the past. So even in the future we will continue to exercise discipline according to due process that is provided.

[translated] Let me just clarify, you said earlier 20 to 30% of the margin came from data, so can I just assume that that means that data took about 20 to 30% of the EBITDA margin or does that mean that data contributed to overall EBITDA in that regard, could you just clarify?

[translated] Let me clarify for you what my answer earlier was that looking at data alone, that was the profitability that we were looking at, but as we mentioned earlier because we do not currently have the accounting system that allows for exact cost allocation in that regard we do not have a specific accurate number on that margin contribution.

[translated] The following question will be given by Mr. Jong-su Kim from NH Investments, please go ahead sir.

[translated] Yes I have three questions. First of all you mentioned earlier about the new imposition of the severance pay calculation method which takes on the progressive scale instead of the simple scale of the past, and you mentioned that during the first quarter that severance pay outlay was about 140 billion Korean won, so I'm wondering how much of the future severance pay burden would that reduce going forward?

And my second question is regards to HSDPA with the CapEx expenditure. During the first quarter the CapEx expenditure only stated about 42 billion Korean won so I'm wondering whether we could expect a bigger CapEx execution during the second quarter and on. Recently the KT side has announced a more aggressive plan to introduce single band, single mode type of scheme in the near future, so when can we expect such aggressive plans from SKT?

My third question is with regard to your funding costs, currently although you are generating quite a bit of profit, your interest expenses is still bigger than your interest income, so do you have any future plans to reduce the funding cost and overall borrowing related expenses?

[translated] Let me answer your question about the severance pay and new change to the progressive scale instead of the simple scale. As you are well aware although I wish I could share with you all the detailed figures, but because this was a conclusion reached between the management and the labor union of SKT, I am not in a position to reveal the actual numbers. But let me reassure you that the company has come to this conclusion upon looking at the long term of profitability of the company and also the optimum make-up of the human resources of the company. So I ask you to trust the management on this decision.

Regarding the HSDPA related CapEx, it is true that during the first quarter what had been reflected was quite minimal in amount, but for the entire year our CapEx target for HSDPA is 570 billion Korean won. Usually during the first and second quarter we usually send out orders and make contracts but it is only reflected at a later time of the year, usually in the second half in terms of accounting. But let me reassure you that our annual target for this CapEx is 570 billion.

You mentioned about the single band, single mode plan of our competitor but with regards to SKT we are launching the DBDM which is the dual band, dual mode type of handset to be fully available for nationwide commercialization starting from May of 2006, and we will be offering differentiated services centering on the premium data services on this network. So SKT will not emulate our competitors' strategies but rather go along with our original plans looking at our company's strategies regarding DBDM, so accordingly we will execute our investment and roll out.

And let me answer your question about the interest burden of the company. Currently our borrowing, the total borrowing amount stands at about 9 trillion Korean won and this amount mostly consists of long term loans and as you are well aware those long term borrowings have the early repayment penalty provisions there as well. So we currently plan to just maintain our schedule in repaying such long term loans. And additionally, in order to pay off this borrowing then we have to consider the cash retention level of the company. By looking at the cash holding of the company and the operating requirements of the company I believe that the level of cash withheld within the company is at a very optimal level.

[translator] The following question will be given by Mr. [Sam Ho Yang] from Lehman Brothers.

[translated] Recently SKT's stock price has been going through a mayor re-rating I believe for the positive and what is mostly affecting such re-rating is not particularly the operation or the regulation related aspects of the company but rather your free cash flow distribution policies going forward. And in the beginning of the year you announced your plans to increase your payout ratio and also your intentions to buy back your treasury shares and also the fact that the management has shown prudence in your overseas strategies has proved well in the re-rating process of the share prices.

So going forward my question is, since such policies are leading to a possible rise of the stock prices, increasing the corporate value, do you have plans to further expand the share buyback in the future.

And secondly, you said that you currently hold cash of about 1 trillion won or so, but with the increase in earnings we expect increase of cash as well and do you plan to pay down your debt with such cash flow going forward because currently your debt amount stands at a flat line.

And also a related question, regarding the overseas investment, aside from possibly reviewing another acquisition opportunity, how big is the potential of your increasing equity investment in your existing overseas business such as Vietnam and the US?

[translated] Regarding the shareholder return policy, as we mentioned in the beginning of the year, our pay out ratio for cash dividend for 2006 will be around 40% and it will be accompanied by our treasury share buyback of about 200 billion Korean won.

Regarding the timing of such actions, we are closely monitoring the market trends so that we can maximize the shareholder value through such actions.

And regarding our future shareholder return policy for 2007, we expect that to be around the same level as 2006. Of course that is assuming that we get the approval from DOD. But assuming that there will be that approval, it will be about the same level.

And once again on the actual specific ways in which we will conduct such shareholder return, rather than trying to predict the future, we will update you on that as things develop in the future.

You mentioned something about the FCS, free cash flow, and of course we have to consider these financial ratios. We calculate and we try to maintain certain financial ratio targets considering the company-wide stability first. So our basic principle is to keep a balance between the three pillars; No. 1 the financial ratios; No. 2 shareholder return and No. 3 growth. And regarding our overseas investment, we think for Vietnam we are in the process of executing about 280 million Korean -- million dollars' worth of investment upon receiving DOD approvals. Currently we do not have a plan for recapitalization for Vietnam and likewise for Helio we are fully launching our commercial service as of May of this year, and for now we do not have additional recapitalization plans as of yet.

[translated] And a final question. You talked about the one-off labor costs related expense of 140 billion Korean won, and I'm sure that would bring down the overall profit, therefore impacting the shareholder return ultimately. So I'm wondering, would you just pay out after reflecting the payment of 140 billion won, or would you adjust the figure so that the shareholder return will not be affected by this payment?

[translated] The payment of special severance pay item will obviously impact the net income figure which will be slightly lower as a result. And we based our pay out ratio on this net income amount, therefore dividend will be made after this reflection is made on net income.

[translated] The following question will be given by Mr. [John Kim] from Merrill Lynch. Please go ahead sir.

Yes, thank you for the opportunity. I have three questions. First is on marketing since there's been several questions on handset subsidies already. This one's rather simple. Could you share some light on how is your average acquisition costs for subscribers who are not eligible for handset subsidies are trending in April?

Second question pertains to SKT's existing overseas operations with Helio starting operations as you mentioned in May, and SKT is putting more money into S-Fone in Vietnam. I imagine SKT's equity method losses from these areas will have greater impact on your '06 earnings. So considering it's still very early in the process, can the management provide some ball park guidance for your gains or losses from your equity method affiliates so that the market has a better visibility on your earnings in '06.

Final question pertains to your share price. Given that SKT's share price has done very well over the past few weeks, I'd like to hear the management's thinking on SKT's recent share price performance, and what the management believes the market expectations are to sustain your current share price and possibly even take it higher. Thank you.

[translated] Let me answer your question about those average acquisition costs of the new subscribers that are not eligible to subsidies. After the introduction of the handset subsidy program, the initial commission which is paid out for those uneligible new subscribers has come down quite significantly, so it's quite negligible that amount. And I believe that this trend will continue in the future.

And regarding your question about the overseas investment and our feature prediction about the gain or loss based on equity method. Because these are our subsidiaries, it's not our custom to provide financial projections on our subsidiaries, and also because they are in their early stage of their business, we expect quite a bit of ups and downs in their initial stage of business, so I don't think it's appropriate for us to provide that figure. But on a quarterly basis, we will do our utmost to provide and communicate with you more and exact results per quarter after the fact of these subsidiaries.

Regarding your question about the stock price, I believe that the recent rise in momentum of the stock price of SKT is indeed a positive news, not only for the investors but also for the company. If I may look at the possible drivers for such a positive momentum. Number one, it could be the fact that SKT still maintains robust growth rate mainly based on the data usage increase, despite the fact that we experienced CID decrease recently.

And also, secondly, with regards to our internal operations, the company has been doing its utmost to curb the expenses and costs. That includes of course the subsidy payment, and I believe that the market is fully aware of that effort.

And thirdly, in deciding on our global business investment, we are following a very disciplined principle and I believe that the market is realizing our discipline. So I believe that all in all those factors were reflected in our recent stock prices. And SKT top management will do our utmost to maintain the current positive momentum of share prices.

Can I actually follow up on the second question with respect to your overseas affiliates? If it's actually difficult to provide any guidance, which I do understand, then would it be possible going forward for you to actually communicate in greater detail about some key operating data points with respect to your overseas affiliates?

[translated] As mentioned earlier, we will do our best to more accurately communicate on the results -- actual results of our subsidiaries going forward.

[translated] The following question will be given by Mr. [Jong Hun Behr] from UBS, please go ahead sir.

Yes, hi. Thank you very much for the call. My first question is on subsidies. You mentioned that 630,000 subscribers received subsidies in the first month. Do you expect this pace to continue going forward? If not, what would be a reasonable assumption?

Second question is on your subsidiary, SK Communications. My understanding is that you cannot list the company in '06 due to the merger that it had early this year. Do you have any plans to list the company in '07 or over the long term?

Finally, could you please share with us some data points regarding your Vietnam business such as subscriber number, penetration rate, and market share? Thank you.

[translated] Let me address the subsidy issue. It's been about a month since we introduced a subsidy in the market starting from March 26 so it's still too early for us to assess the market definitely. However so far the trend has been that the upgrade of handsets, the number of subscribers to upgrade their handsets is -- has been rising steadily, whereas the new acquisitions and MMP related customers are on the decrease. And such trend has not been fluctuating too much so that has been a sort of a trend so far. And also because of that SKT will continue to focus on retaining long-term subscribers.

And regarding SK Communications, as you stated earlier, we have no plan to list the company during 2006. And also regarding 2007 and beyond, we do not have specific plans to list the company so far. Of course mid- to long-term wise of course the IPO potential is always there, but what I'm saying is that there hasn't been anything concrete that has been decided.

And also let me elaborate on what you stated earlier. You mentioned that there was an MNA in the beginning of the year but let me clarify that that was not an MNA but a rather strategic alliance. And I believe that there was such discussion in the market because there has been some alliance forming related discussions between SK Communications and Yahoo for mutual benefits.

Let me now provide you with some more data points regarding our Vietnam business. Currently the Vietnams [inaudible] economic growth rate stands at about 7 to 8% and the penetration rate of handsets in that country is about 12%, we were told. But let me remind you that this figure may not be that accurate, and for your information the population of the country is about 80 million. And SLD is a telecom business that we are investing in is number four player in the country with 3.3% market share. And as of April 2006, which was a couple of days ago, the number of subscribers stood at 480,000 people.

And to elaborate, we are expecting about 500,000 subscribers as of the beginning of May and end of the year target is about 1 million. And as we are beginning to see more reinforced marketing and network capabilities that I believe that it would be quite possible.

[translated] The last question will be given by Mr. [Song Ling Chen] from Samsung Securities, please go ahead sir.

[translated] I have three questions. Number one, you mentioned that you plan to pursue the dual band, dual mode policies going forward. So related to that I'm wondering whether your roll-out plan will end at expanding WCDMA to 84 cities by the year end, or do you also plan to further roll out into next year to cover the entire nation. If you are to cover the entire nation then how much CapEx can we expect for WCDMA in next year? And also with that nationwide roll-out what additional -- how much additional expense can we expect in your operation of the dual networks?

And my third question is regarding your opinion about which one of the regulations -- asymmetric regulation that the government is imposing on you, you consider to be the most unfair?

[translated] Let me answer your first and second questions together. Regarding the nationwide roll-out or HSDPA related plans, once again our business model will be to maintain the dual band, dual mode strategy. And as we go along we would further make decisions accordingly about the future plans so I think it's too early for us to talk about whether we would have a nationwide network fully ready by when or how much CapEx is required, or how much OpEx is required for managing a dual network, so once again we will decide as we go along.

And regarding the regulation related policies, even the government lately has not been using the terminology such as asymmetrical or effective competitive system etc. And I believe that the change of language on their part could signify that there has been some changes and we expect more market friendly policies coming from the regulators rather than focusing so much on who gains what and who loses what etc.

And with regards to I guess some asymmetrical regulations that are still there, interconnection fees and also MMP issues between 2G and 3G, might be some outstanding issues, but even on those items we expect alleviation of regulations on those areas so that we could see more and more deregulations.

Thank you very much for staying with us until the end of the conference call, and we received some valuable questions from analysts and investors today, and we will review such questions internally so that we could further reflect your opinions and questions to our management policies in the future. And as I said earlier SKT will continue to maintain its market leadership and try to improve the market situations going forward so that we could ultimately lead to company value, expansion and also the shareholder value maximization. Thank you very much.

[translated] This concludes the conference call for Q1 2006, thank you very much.