SK Telecom Co Ltd (SKM) 2006 Q2 法說會逐字稿

[Translated] Good morning and good evening, first of all thank you all for joining this conference call and now we will begin the conference of the fiscal year 2006 second quarter earnings results by SK Telecom. Please go ahead sir.

[Translated] Good evening. Today's conference call will consist of the opening remarks by SKT's CEO, Kim Shin-Bae, including the financial results of Q2 of 2006, followed by a Q&A session. The conference call will last around one and a half hours with consecutive interpretation.

I would like to remind you that all the forward-looking information is subject to change due to macro-economic and market situations.

[Translated] Good evening, my name is Kim Shin-Bae, the CEO of SK Telecom. I would like to thank all the analysts and investors for taking part in today's earnings conference call for Q2 of 2006 despite your busy schedule.

Let me begin with the earnings highlights for the second quarter 2006. Firstly the second quarter revenue recorded 2,638.3 billion won, up 4% on a quarter-on-quarter and a year-on-year basis supported by the continuous growth in subscriber base. In the meantime the legalized operator subsidy to long-time customers has pushed up the retention related expenses significantly while the heated market competition of May and June resulted in an increase in subscriber acquisition cost over the period, driving up the overall marketing expenses. Against this backdrop the marketing expenses rose 5.4% compared to the previous quarter and 5.2% versus the same period 2005, to take up 22.7% of the revenue.

Affected by the marketing expense increase, the operating income decreased 7% quarter-on-quarter and 13% year-on-year to 619.3 billion won. The EBITDA came down 3% compared to Q1 and 10% compared to Q2 of 2005 to 997.3 billion won.

The second quarter net income went up 11% compared to Q1 which was affected by the one-off non-operating expense increase due to the change of severance system, however on a year-on-year basis the net income came down 20% to 373.3 billion won due to the operating expense increase.

That was a brief overview of the earnings results, now I would like to move on to the major business initiatives being pursued by SKT, as well as other current issues.

First of all let me share with you the current competitive landscape for mobile operators, as well as the outlook for marketing expense going forward.

At the outset of the legalization of the limited handset subsidy, SKT has anticipated a shrinking market for the new acquisitions including MNP, while the market for handset replacement by current subscribers to grow more actively. In fact the market appeared to go in that direction until April when the new handset subsidy rule came into effect, however the aggressive marketing by competitors during the May/June period has heated up the competition resulting in substantial growth of the new acquisition market.

Since the government penalty on operators in June, the overheated competition seems to be cooling down, however there still exists a possibility that aggressive marketing by competitors targeting SKT's customers would pick up again during the second half resulting in heightened level of competition.

SKT will continue to engage in market stabilization efforts, but in order to safeguard the mid- to long-term profitability, maintaining a market leadership is vital to the company's long-term future, therefore it may be unavoidable for the company but to react to a heightened level of competition, fueled by our competitors. In order to reflect such structural changes in the market landscape and the impact from the change in handset subsidy practice, we decided to change some of the annual guidance figures.

Firstly, the annual marketing expense guidance is changed from 17.5% to 20.5% of revenues, accordingly the EBITDA guidance is adjusted down to 4 trillion won from 4.4 trillion won, however we will do our best to achieve all the remaining items in our original annual guidance such as revenue and CapEx. We ask for your thoughtful understanding on the need to change some of our original annual guidance.

Next let me move on to global businesses. As you are well aware SKT acquired China Unicom's CBs on July 5. This investment is extremely meaningful in providing us an opportunity to test the viability of mobile telephony business in China, and in securing a bridgehead into a market with great potential but limited entry opportunities.

S-Fone in Vietnam has acquired about 750,000 subscribers as of the end of July, helped by the successful branding and differentiated service offerings. We anticipate the emergence of S-Fone as a major player in the ever-growing Vietnamese market through the national network rollout to be completed this year and the effective marketing activities.

Helio which launched services at the end of May has been quite successful in drawing interest and response in the US market through new services such as mobile blog and Korean SMS, together with star marketing. During the second half we plan to reflect the market insights gained during the initial marketing efforts, while targeting a wider audience through national media advertisements in order to further grow the subscriber base.

Following the entry into the markets in Vietnam and the US, a bridgehead in China has been secured enabling SKT to conduct global business at a meaningful scale. SKT's management is fully aware that this effect in these markets is critical in securing the growth and profitability of the company into the future. Therefore, we will concentrate all our efforts and resources into getting the existing global businesses on track for the time being.

Next let me briefly comment on HSDPA and WiBro. SKT has launched the commercial services for HSDPA in May, but we are still in the process of improving the handset lineup as well as the coverage. Once the network rollout in 84 cities around the country is completed at the year end, and other necessary conditions are met, we will launch active marketing to build up the subscriber base.

WiBro Commercial Services were also launched in June around the hot zone with high data demand; during the second half we plan to strengthen the business model by assessing the marketability of WiBro to enhance complementary functions with existing services rather than pursuing immediate mass-marketing.

Lastly, let me address the shareholder return policy. The BOD held on July 28, resolved on the buyback of Treasury shares worth 100 billion won for the purpose of share cancellation. Of the planned Treasury share buyback for 2006 in the amount of 200 billion won, the remaining 100 billion won worth of shares will be acquired as soon as the first batch of share buyback and cancellation is completed. SKT has opted for such a multi-step approach since the proposed share retirement directly affects the foreign ownership ratio. In light of such uncertain circumstances we felt that a phased approach would be more appropriate. I would like to also remind you again that the payout ratio of 40% will be executed this year, including the 1,001 interim dividend.

This concludes the overview of the earnings results and other major issues. Thank you.

[Translated] We will now begin the Q&A session. Please go ahead with questions.

[Translated] [OPERATOR INSTRUCTIONS].

The first question will be given Mr. Matt Evans from CLSA. Please go ahead sir.

Yes good afternoon. In the second quarter it's difficult for investors to get their head around exactly what happened on the marketing side. If you could try to give us more color on exactly what caused this sudden spike in centers, it would be helpful, and particularly why you felt it was rational to respond in the way you did rather than just letting the subscribers leave which you have been happy to allow happen, to some extent over the last 18 months, because that seemed to the profit-maximizing strategy, keep everyone's margins up but lose a little bit of market share as a trade off?

Related to that, with hindsight, given the fine that you received, are you still happy that your strategy was a rational one? I'll leave it there, thanks.

[Translated] To answer your question, regarding the subsidy issues, recently because of the launching of the legalized subsidy offering in the market, the retention expenses increased quite significantly. Especially after the month of May, our competitors have been quite aggressive in trying to acquire new accounts -- subscribers in the new acquisition and the MNP market, therefore the general competition in the market has heated up quite rapidly. So with -- unlike our previous expectation the new acquisition cost did not come down as fast as we expected, but rather the competition was quite fierce, and the reason why we decided to more actively deal with such competition in the market was to prevent our market leadership in the mid- to long-term funding damage from such early stage of the subsidy offering, in order to protect such leadership we decided to more actively deal with it.

Well there is two there, profitability and market share sometimes has a trade off effect, however if you look at the fact that market share in the mid- to long-term could also affect profitability, I would like to ask for your kind understanding about our recent decision to be more proactive in dealing with such competition. The current MNP and the subsidy environment is -- in which that if we lose the initial leeway in the market leadership in such a changing environment, then later on it would be more costly for us to recover the lost subscriber base at a later point. So in the current subsidy initial stage, rather than trying to be responsive and less aggressive against the competitive environment we decided to put out a more aggressive role ourselves because in light of the fact that we would be introducing new services such as HSDPA and other types of services, maintaining the mid- to long-term market leadership was quite critical for us, and as you are well aware this is not the first time that a subsidy has caused heated competition between the three mobile operators in the market.

Back in 2004, in the initial year, there has been quite heated competition then as well, however such heated competition started cooling down from 2005, decreasing the marketing expenses accordingly. So let me remind you of that and I'm sure that the current marketing environment will also begin to find balance in time, therefore leading to ultimate market stabilization.

SKT by no means has the intention to fuel the market heated competition even further and also the government has a strong commitment to put a stabilization in the market as well, so we expect positive results.

The following….

Good evening, I have actually three questions but hopefully these questions will be short.

First question is I just wanted to get a little bit more color on your thoughts CEO Kim, are you saying that for mid- to long-term leadership you are willing to endure pretty significant negative impact on share price, and you are willing to suffer through that, I think that's what I'm reading, so if you could add a little bit more color on what your perspective is on in supporting share price?

And secondly, given your revised downward guidance on EBITDA, we think that's obviously going to have impact on your net profit as well for this year, now last year you gave out 40% of net profit which was equivalent to I believe 9,001 dividend and you added also share buyback. Now, this means, based on the numbers you -- revised guidance, you have a serious risk of dividend coming in below last year's level. Is that something that we should be considering or at least bracing for, or is our dividend going to remain at the same level as last year or even higher?

Third question is perhaps a simple one. In July you lost about 10,000 subscribers, net subscribers, and if you could just add color as to why that happened, was there any kind of strategy behind that and perhaps you could add some comment on whether this has anything to do with increased subsidies for high end subscribers by LG Telecom and KT Freetel?

[Translated] Of course as the management of SKT we realize that the shareholder maximization -- value maximization involves not only the share price increase and also it involves the shareholder return policy in general and there is no question about that, but I was earlier explaining why we had to deal with such competition more aggressively, in that we felt that the mid- to long-term market leadership damage could ultimately erode the corporate value going forward. So that is why we feel that it is important to strike a balance between maintaining market share and the mid- to long-term profitability versus short-term profitability accordingly. Of course we will have to watch closely what will evolve in the market during the second half, but what is sure is that we will continue to maximize the shareholder value going forward.

And regarding your question about the dividend, because of the higher than anticipated marketing expenses, of course it will have some negative impact on the net profit, however as we announced in the beginning of the year we will maintain the 40% payout ratio as well as the 200 billion won worth of Treasury share buyback and cancellation. And as I mentioned during the opening remarks we will be executing the first batch of such share buyback and cancellation and such efforts going forward will offset whatever negative impact we would have on the dividend payout ultimately because of the reduced net profit by doing more in the market to maximize the shareholder value.

And regarding the month of July with reduction of net additions were the subscriber base from SKT, such a result came about because despite the heated competition in aggressive marketing coming from the competitors in the market, SKT has maintained -- are poised to continue to use the market stabilization as our top priority. So that is why we suffered certain turn out of subscribers in the MNP market, following the recent, I guess equalization type of situation in the market in the months prior to that.

Could I just ask for clarification on the second answer, so if just -- if your net profit was to come in at let's say 1.5 trillion, 40% of that will be 650, so are you saying that despite that you're willing to provide 9,000 won of dividend and consider 200 billion share buyback next year, that's either in declaration of 9,001 dividend this year and follow up with 200 billion of share buyback next year, that's -- I would really like clarification on that?

[Translated] What I said earlier regarding this year's dividend payout was regarding the payout ratio and not the absolute dividend payout amount so, as we mentioned since the beginning of the year, the 40% payout ratio will be maintained while we will pursue the 200 billion Korean won worth of share buy-back and cancellation.

And regarding the '07 shareholder return policy, we assume that it will be at a similar level as 2006, however, regarding the more detailed information about the payout ratio or other shareholder return for the next year it will be communicated to you in '07.

Thank you.

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

Yes, hi, I have three questions. First, regarding marketing, based on your guidance it seems that you're actually hinting SKT's marketing as percentage of sale may not decrease at all in the second half but still will be spending over 20%, does this imply that you are planning to raise your subsidy policy, or is your guidance on marketing the worst case scenario assuming that the market remains heated? And what would be the strategic implications of your -- if your subscriber market share falls below 50% yet the number -- your number of subscribers remain at least stable or still manages to grow?

Secondly, can we just get some clarification on your overseas strategy? Did we understand correctly that SKT does not plan to pursue any further overseas investments until you've shown the company's capable of handling overseas operations.

And the final question is a very simple one on HSDPA. A recent Internet survey indicated that 50% of all wireless users wouldn't be interested in HSDPA if they have to adopt a new number. Do you think there is any possibility for MIC to reconsider restricting number portability for 2G to 3G for 011 users? If not, if that's not the case, do you still think HSDPA appears promising to the management? Thank you.

[Translated] Let me answer your first question regarding the marketing expenses first. Going forward we do expect a certain number of subscribers who will be applying for the subsidy for changing their handsets as existing customers so, in terms of the handset change demand side, I believe that the subsidy payout in that regard will be about the same level as the second quarter this year. So, regarding the handset change-up retention, that will take up a lion's share of the entire marketing expenses portion and plus, depending on the market situation it might differ slightly but also in the MNP new acquisition market we do expect certain expenditures for subsidies for the new customers that we get to acquire. Therefore, according to our calculation, we do expect about 300 billion Korean won worth of additional marketing expenses on an annual basis occurring. That is why we had to adjust the annual guidance.

And you also asked whether we have a policy to increase the subsidy amount itself and, currently, we do have no such plan, of course we will have to watch carefully the future trend of the subscriber base and also the market situations, but for now, we have no such plans.

And regarding your question about the overseas businesses, for now our priority is basically on the existing global businesses in Vietnam, in the US and in China so we will do our best to improve their robust performance going forward so that we could gain the trust from the investors regarding our global business capabilities. Of course, if there is an extremely attractive offer in the market things might shift a little bit, but for now, we definitely have high priority on maintaining our existing global businesses.

[Translated] And regarding the question about the HSDPA, of course I believe that customers or the subscribers in general have not been accurately communicated about the differentiated services or the handset line-up and various other contents which they could be provided with through HSDPA. Of course, assuming that all the services that they receive are similar to that of EBDO services, of course people will not find this service to be attractive but, regarding HSDPA, there are numerous opportunities such as videophone and new types of content and chipset-based convergence services. And so once these new lines of handsets are introduced to the customers, along with differentiated services, I believe that there can be potential nevertheless.

And for your information, the Government currently is not allowing the MNP between 2G and 3G technologies in the mobile telephony but since over 60% of the entire mobile subscribers in the country are using the 2G prefix numbers, if such MNP is allowed for HSDPA I believe that it will help greatly vitalizing the HSDPA market.

I'm sorry but can you actually elaborate on why the management seems so committed or obsessed with 50% subscriber market share rather than absolute number of your subscribers or the number of subscriber increase?

[Translated] Well I wouldn't say that we are obsessed with the market share number per se, it's only that in the current stagnant mobile telephony market in terms of subscriber growth, it is quite difficult for us to exactly comment on what type of absolute number of subscribers would be the best number for our company. It was simply more convenient for us to address the issue through the figures such as market share so that's why we use that number.

Thank you.

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

[Translated] My questions might overlap with the previous questions but my first question has to do with the marketing expenses increase. I'm wondering how much of that expanded marketing expenses reflects the actual need to expend such a figure of amount and how much of that is including a type of warning to the rest of the competitors in the market. So, in other words, of the expected increase in the marketing expenses, how much leeway do you have as opposed to the actual need, was my question?

And the second question has to do with the wireless Internet ARPU which is currently coming down slightly, so do you still maintain the annual guidance for the wireless data-related revenue side as well?

And number three question is whether SKT has plans to extend in the revision A of EBDO going forward?

[Translated] I believe that you asked some very poignant and to-the-point questions and maybe too to-the-point because, as you pointed out earlier, our market expense increase figures do have certain signaling implications there and because of that I cannot elaborate specifically how much leeway we have indeed but what I could share with you for sure is that SKT will play the leadership to make the market stabilization efforts which refrains from unnecessary competition so that we could lead to more normalization of the market.

To answer your second question regarding the wireless Internet ARPU coming down, there can be a couple of factors leading up to it. As you are well aware, there are numerous customer value maximizing data price plans out there and those things have played an effect as well and we've been trying to reduce costs by reducing the number of overall promotions that we've been launching, and thirdly, we've been cleaning up the adult content -- that are being provided through the wireless Internet services. So, temporarily, it might seem like the [net] related revenue is on a downward trend, however, as the data fixed price plan subscriber number continues to rise and as we begin to introduce new types of diverse content and also as we begin to introduce the HSDPA high speed services and other types of conversion services, we believe that the growth potential and the upward trend of such growth for wireless Internet will go up again, so therefore we will do our best to maintain the original guidance for the wireless Internet side.

And regarding your third question, we currently have the plan to focus on HSDPA for now. Therefore we have no current plan to invest in the Revision A.

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

Yes, the first question relates to your China strategy, I guess for you to build some credibility for this strategy you need to help Unicom improve its CDMA performance. At the time of announcing the convertible bond deal the company officially stated that the first area would be to strike a joint handset sourcing deal; can you give some elaboration as to whether you remain confident that this will be executed and give some proximity in terms of timeline and exactly how this will be achieved given China's source is generally low to low-end handsets and in Korea you're generally sourcing EBDO handsets which are currently not sold in the China market, so any elaboration as to how you will help Unicom improve the CDMA performance would be useful.

The second is -- relates to your overall guidance which, to be fair, is quite surprising. It does imply that the second quarter was not an abnormally bad period but that could be the normal level of margins as you indicate because that's -- if you do the math it implies about a 37% EBITDA margin for the second half whereas a few months ago you were talking about 42% margin. This does sound somewhat like NTT DoCoMo strategy a couple of years ago which has not proven to be successful in terms of either long term earnings achievable or corporate value, so I question where you get this role model for pursuing such a strategy which requires a very delicate execution.

Alongside that is there any scope that if your competitors do back off from the market, say in two, three, four months' time, and you are able to achieve your market leadership desire that, could you revisit those, I would say, very, very low targets and revisit those if you do achieve market leadership in the market?

[Translated] Let me address the first question regarding the Chinese market first. As you are well aware, China is an enormous market with over one-fifth of the global of subscribers around the world and in terms of the internet subscribers, China ranks No. 2 globally. So it is a big market indeed and, of course, focusing on the turnaround of CDMA business for China Unicom will be critical, however regarding our joint sourcing and value-added services and distribution and platform-related cooperation to be pursued together between SKT and China Unicom will not be only limited to CDMA but to other types of businesses for CU as well.

And regarding the joint sourcing of handsets, China Unicom is interested in the mid- to high-end handsets which would be introduced as a differentiating handset lineup, so in that regard we do have some touch point and overlapping point for such joint sourcing possibilities. And considering how China Unicom currently has about 35 million subscribers only for CDMA, even with that scale alone, I believe that there is always room for synergies.

I would like to express that we fully understand that the surprise that you must have felt hearing the guidance adjustment. As you are well aware when we announced the original annual guidance we did not know exact conditions and how the subsidy direction will change from the government policy perspective, so we were only allowed to make the annual guidance based on the levels of earnings and other types of expenses of the previous year. So that's the guidance we announced and, of course, at that time we did not know how aggressively the competitors will come out to gain new acquisitions.

So I believe that, as always, when new systems and models are introduced the market tends to overreact, however going forward we hope and expect that the third quarter will be an improvement from the second quarter. With that belief we reacted a lot less in the month of July which led to certain reduction of the new acquisition numbers. Of course the market will continue to change and we promise you that we will try to deal with it as flexibly as possible.

You earlier mentioned the case of DoCoMo, but back then the WCDMA coverage was not sufficient, and even with strong marketing effort, if you do not have sufficient infrastructure or substance in place it might have some limitations on its own. However in our case it's quite different so I believe that we currently have confidence about the way we could manage going forward.

The following question will be given by Mr. [Joel Kim] from Macquarie Securities please go ahead sir.

Hi, good evening, thanks for the conference call. Two questions; first of all I understand that you have not factored in in your interconnection revenue or expense the potential adjustment of the rates which is upcoming. Can you verify this fact? And also what kind of adjustment do you expect going forward?

Secondly, regarding the official handset subsidy, how many subscribers until end of second quarter have actually taken the subsidy option among your own subscriber base and also the remaining number of subscribers eligible for some kind of official subsidy? That will be appreciated, thank you.

Our expectation regarding the interconnection fee adjustment was not reflected in the adjusted annual guidance, and as you are well aware MIC will decide on the '06 and '06 interconnection adjustments in the month of coming August. This month that is. And I believe that the government plans to make such adjustments to maximize efficiency in the market and to encourage investment in the necessary fields and while referring to other best cases around the world, and since such policy-making is in progress right now, I do not feel that it is appropriate for us to share with you our expectations or estimates.

And to answer your question about how many subscribers applied for the official subsidy that is available for the second quarter this year, it was in the number of 1.69 million and also those remaining subscribers with our subscriber history of longer than 18 months who are eligible for future subsidy is in the number of 12.55 million.

Kim, could I ask a follow up question regarding the interconnection rate adjustment. Just to verify this one fact. Is the investment HSDPA considered in the recalculation of interconnection rate?

[Translated] I understand that 3G related interconnection fee adjustment is being reviewed as we speak along with the 2G interconnection fee adjustment. Considering how MIC has strong commitment to vitalize the 3G telephony services in Korea we do hope that this will be determined and decided at the next coming meeting.

Thank you.

[Translated] The following question will be given by Mr. Hugh Chung from Goldman Sachs. Please go ahead sir.

[Translated] Yes I have two questions. The first question has to do with the guidance, you talked about the increase of marketing expenses and you also mentioned that it includes some signaling impact or effect in it as well, but if you count that as well even, we feel that the non-marketing expenses are also on the rise, and considering how the EBITDA margin has come down from 42% to 38%, down by about 4 percentage points, marketing expenses are going up by about 300 bps so we believe that there might be some non-marketing expenses strategies that you might want to share with us. And also if you look at it according to the new guidance adjustment it comes out to about 17.5%. So is that something that you plan to maintain in the future as well?

And my second question has to do with your definition of market leadership. I believe that the market share in terms of the revenue is more important compared to the market share in terms of the absolute number of subscribers. I believe that during the past 2.5 years the market share in terms of the voice revenue for SKT has gone down by 800 bps, so what is your definition of market leadership and how high is good enough to say that you do have market leadership?

[Translated] Against the backdrop of the reducing overall voice revenue for the market, we are continuing to invest in the data-related business and also the network-related business. So from those sides we are seeing a slight increase of operating expenses. However if you look at the second quarter, despite the government penalty that was placed on SKT, we have been quite successful in trying to reduce the operating expenses in general, for instance the bad debt allowance has been managed quite tightly and therefore the growth trend of other operating expenses has been slowing down quite a bit. And also regarding the operating expenses excluding depreciation, even on that side we will continue to do our best to minimize this expenditure on that side as well.

You asked about our definition of market leadership. I believe that [want] to look at market leadership in terms of the absolute number of subscribers or in terms of revenue even, but I believe that it has to be something more comprehensive to include the more fundamental product compatibility and also the quality of the customer group and also the ability to introduce new types of businesses and services, including conversion services and the overall customer satisfaction etc.

So all those things have to be reflected when determining a market leadership. As you are well aware, the national customer satisfaction index-based leadership has been maintained by SKT for the past nine consecutive years. We've been ranked number one in that ranking for the past nine years, so it was, I believe, possible because of our ability to introduce new types of services and networks and leading the market in general.

[Translated] The following question will be given by Mr. Henry Cobbe from Thames River Capital, please go ahead, sir.

Hi there, and thanks very much for the call. Just coming back to the interconnect, could you just explain what the adjustments were in the second quarter?

And lastly, just looking again, coming back to the marketing and the other commissions that you pay, would it be fair to assume that you -- your share of total marketing spend would be in line with your target share of growth additions?

Could you repeat the last portion of the question, excuse me?

Would it be fair to assume that your share of the total marketing spend by the sector will be in line with your share of growth additions?

[Translated] Yes, regarding the interconnection fee reflection during the first half of this year, well, we apply the same rate that we applied for 2005, so once the adjustment is made during the month of August by the government, then we will then retrospectively reflect the adjustment to the first half.

Excuse me, could you elaborate on your second question once again; we could have some misunderstanding as to the question itself, so could you elaborate on your question once again, please? Thank you.

Yes, well I'm just looking at the total marketing expenditure by each of the operators and I'm looking at how much of that marketing budget --what share of that marketing budget you spent, and you spent 600 billion won in the second quarter. KTS spent 320, LGT probably spent around 220, which means that you're spending about 53% of the total marketing budget. And in the second quarter you got 47% of gross adds, so it looks like, on a marketing expense to gross add basis or marketing expense to average sub-basis, you're spending considerably more than both of your competitors, both in absolute and relative terms. And I think that, again, it comes back to the rationale of why there is irrational competition in what is effectively a mature market. Your share of service revenues has come down, but it just seems -- I don't understand the logic, why all three operators are deciding to destroy their own margins rather than engage in more rational competition, given that the market's nearly saturated and there are only three operators.

[Translated] The marketing expenses consist of two factors; the subsidy given to those existing customers upgrading their handsets, and those new acquisition related marketing expenses, and as you are well aware, compared to other operators, SKT has more number of those customers who are applying for the change of handsets, so structurally speaking, we believe that such high proportion will be maintained because of the existing customer needs, and on top of that we do have some additional new acquisition-related expenses.

But, as you know, the number of subscribers who will be eligible for subsidies going forward is on a downward trend because people are gradually taking advantage of the subsidy, as we speak, so as that pool decreases in size that type of marketing expenses will come down and the overall marketing expenses will also, together, come down.

And considering how the ARPU and the customer value of SKT's subscriber base is a lot stronger than that of competitors, I believe that unlike the superficial figures that you are looking at, the actual marketing efficiency is a lot higher.

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

Hello. I have two questions, please. Firstly; you have stressed in this call that a -- that the increase in marketing expenses in the second quarter was taken partly in reaction to aggressive promotional activity by your competitors, however, the communications commission gave you the largest fine, which presumably means that the communications commission believes that you had taken some sort of conscious decision to be aggressive, in other words that you instigated a lot of the overheating in the market within Q2.

Now, looking forward into the second half, it is a little disturbing that you seem to be predicting such a continued level of high marketing expenses. Can you at least give us some reassurance that the marketing activity in which you do engage in the second half is unlikely to incur any additional fines? I'm sorry that's a slightly difficult question, but I felt it was necessary to ask it.

And my I ask one second question, please? You have also stated in the course of this call that you do not intend for the moment to extend your overseas operations beyond those countries where you already have an interest, that is to say, the US, China and Vietnam, but there are persistent rumors that you are interested, maybe, in doing something in Indonesia, or interested, perhaps, in taking another look at India, where, to your credit, you appeared to walk away from a deal with one player, I believe it was Tata earlier this year. Could you, perhaps comment on where you see yourselves in international markets three to four years from now? Would you expect the range of countries to have increased? Thank you.

[Translated] And you talked about the penalty placed on SK Telecom. According to the revised penalty related laws in Korea, the base amount on which they impose penalty is based on the expected amount of revenue to be gained from the long-term subscribers with a history of longer than 18 months. So if you compare the overall such subscriber base and expected future revenue from these people compared to competitors, SKT has a larger base amount to begin with.

And of the legalized subsidy portion, if we look at the longer than 18 month history of subscribers who are applying for the change of handsets, that portion, the change of handset portion of the penalty amounts to about 22 billion out of the 42.6 billion in total penalty placed on SK Telecom. So only the remaining would have to do with the new acquisition related penalty. But if you look at the recent decision by the government, unlike in the past, now the late entrants, in other words our competitors, have also been imposed quite high penalty just as with SKT. So that shows you that asymmetrical regulation is coming down in Korea so we expect that in the future competitors will not be misusing such asymmetrical penalty systems that were in place in the past. And in the future, in the long run that is, I believe that the government is looking at further revising the Telecommunications Business Act, in which we expect the investigation on change of handset type of subsidy issues to be eased going forward.

Of course in the future, counties like India and Indonesia could prove to be important markets for us and so we believe that it is possible for us to continue to monitor such markets, but as I mentioned earlier, our current position is that we will in the meantime, for now, we will basically focus all our attention and resources on existing global business in the US, China and Vietnam.

Thank you.

[Translated] The following question will be given by Mr. Jong-su Kim from NH Investment & Securities, please go ahead sir.

[Translated] I have two brief questions. Number one, I believe that the penalty imposed on SKT must be reflected in your Q2 information so which line item under the IR distributed information should I look at?

And the second question has to do with HSDPA. I believe that the T logo based products that you are launching for HSDPA has relatively higher service charges compared to EBDO so are you confident with such higher tariffs to vitalize the services for HSDPA, and do you have any future plans to readjust the price plan?

And I believe that KTS has recently announced their aggressive plan for HSDPA related investment, so what is SKT's plan for the remaining part of the year; is it going to grow compared to Q2 in terms of HSDPA investment?

[Translated] You will find the penalty reflected in the other operating expense item in the IR distributed documents.

And regarding HSDPA price plan, it is not relatively higher as opposed to the existing EBDO, because the type of bundled services that would be introduced for HSDPA is fundamentally different from the EBDO services so it can not call for apple to apple comparison between the two types of services. As a matter of fact HSDPA services would be higher speed data services, therefore if we normalize the speed factor, HSDPA would be cheaper in the amount, so it can't be compared apple to apple.

[Translated] The last question will be given by Mr. [Geoff Kong] from Credit Suisse, please go ahead sir.

[Translated] Thank you for giving me the opportunity to ask the last question. I have two questions. Number one is, I need some clarification on the marketing expenses side. And as the CEO was answering about the subsidy issues, you said that compared to other telephony operators in Korea, SKT has relatively larger base for the change of handset type of subsidy issuance. If that is the case, and assuming that the current subsidy policy is maintained into the future, then would that mean that SKT will continue to incur such high marketing costs, even after the market is stabilized? Could you clarify that for us?

And number two question has to do with HSDPA. Some people in the market is saying that since HSDPA is based on the global standard, it will definitely have the economy of scale possibly bringing down the cost compared to the existing EBDO, not only in terms of the handset, but also the network-based cost would have competitiveness some people say. So if so, then how much cost competitiveness compared to CDMA do you expect from SKT's perspective? Can you share that with us in terms of the short-term and long-term perspectives?

[Translated] Regarding the marketing expense side, as I shared with you earlier, the pool of subscribers eligible for a subsidy for a change of handsets is on a shrinking trend. Therefore, of course, in the change handset market, of course, the market situations will change as the market competition moves. So as with the MNP market, even in the change of handset market, we will have to watch how the market develops. And so, once again, depending on the market movement, the retention commission and the initial commission side of the expenses will fluctuate as well. So if the market stabilizes in general, we believe that overall marketing expenses could also stabilize.

And regarding the HSDPA and the cost competitiveness, I believe that it is true that, compared to CDMA, we do have some leeway in terms of the cost advantage. However, you have to look at the big picture including the absolute total investment and the depreciation and the transmission speed and the capacity and also the diverse types of services offered on this system.

So, once again, it is difficult to offer such a simple comparison between CDMA and HSDPA.

[Translated] This concludes the Q&A session. Now let me invite President Kim Shin-Bae for his closing remarks.

[Translated] Thank you for staying 'til the end of the conference call. Once again the management at SKT sincerely ask for your understanding about the change in some of the annual guidance figures which was necessary due to the rapidly changing market environment.

Once again I would like to reconfirm that the top priority of the management at SKT is to maximize the company value and therefore maximize the shareholder return and shareholder value in general. SKT will do its utmost to maximize company value through continuous efforts to maintain long-term market leadership by flexibly dealing with market competition even in the fast changing environment.

Today then, the trust and unwavering support of the investors and analysts will greatly help SK Telecom. Thank you very much.

[translated] This ends the conference call for Q2 of 2006 for SK Telecom. Thank you.