SK Telecom Co Ltd (SKM) 2006 Q3 法說會逐字稿

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 third quarter earning results by SK Telecom.

[interpreted] Good afternoon and today's conference call will consist of an earnings presentation on Q3 2006 by CFO Ha Sung Min, followed by a Q&A session. The conference call will last about one hour with consecutive interpretation. Let me remind you that all the forward-looking figures are subject to change depending on the macro economic and market environment. Let me now present our CFO Mr. Ha Sung Min.

[interpreted] Good afternoon. My name is Ha Sung Min. I'm the CFO of SK Telecom. I would like to thank you for taking part in today's 2006 Q3 earnings conference call despite your busy schedules.

Let me begin with the earnings highlights for Q3 2006. Thanks to the interconnection fee adjustment announced in September, as well as the continuous improvement of the voice business, the Q3 revenue has increased 2.8% quarter-on-quarter and 4.5% year-on-year, to reach KRW2,712.5 billion.

The wireless Internet revenue edged down 0.8% compared to the previous quarter to KRW670.2 billion. But it was a 2.6% increase year-on-year taking up 27.8% of revenue excluding interconnection fees. The marketing expense came down 14.5% quarter-on-quarter, but increased 13.2% on a year-on-year basis to KRW512.7 billion taking up 18.9% of revenue. This was the result of SKT's market stabilization efforts through efficient execution of marketing expenses despite the implementation of handset subsidy redeem in the markets.

The operating income for Q3 was KRW758.1 billion. Due to the revenue increase and the adjusted interconnection rates, the operating income rose 13% compared to the same period last year. If you also reflect the marketing expense reduction in Q3 compared to Q2, the effective increase was 22.4%. The net income improved 22.4% quarter-on-quarter however, due to the one-off extraordinary income from the sale of SK Teletech back in 2005, there has been a 22.3% reduction in net income on a year-on-year basis to KRW456.8 billion. EBITDA reached KRW1,174.9 billion, which was a 17.8% increase quarter-on-quarter and an 8.8% increase year-on-year.

That was the earnings highlights for this quarter. Now let me move on to other areas of interest. Firstly regarding the nationwide roll out of HSDPA networks. Originally SK Telecom was planning to offer HSDPA services with dual band, dual mode handsets. However, encouraged by the progress of the global roll out of WCDMA HSDPA and the ensuing price competitiveness of relevant agreements and handsets, SKT has decided to pursue the SBSM strategy instead which is considered more advantageous to the mid to long term profitability and the corporate value. To that end, SK Telecom plans to complete the nationwide roll out of HSDPA by the first half of next year.

Let me now address the global businesses. Supported by the enhanced marketing and keen competitiveness of S-Telecom in Vietnam, and the expanded network coverage, the year-to-date net addition increased by more than 600,000, making the total subscriber number over 1 million. We believe that the growth momentum for S-Telecom to emerge as a major player in this market has been secured. We plan to achieve over 1.2 million subscriber days by the year end, maintaining this upward trend.

Regarding the strategic alliance with China Unicom, both sides are in the process of identifying win win opportunities in the six co-operation areas which have been agreed upon. We anticipate further communications on the specifics of the implementations within next year. Although there has been an issue of handset sourcing for Helio operation in the US at its early stage, we are making efforts to secure high ARPU subscribers through brand image enhancement and the strengthening of the distribution channels.

Lastly, as promised at the beginning of the year and as was disclosed, the share buyback was conducted in August and September considering the market climate and the foreign ownership limits. We completed the buyback and cancellation of 1,083 million shares, or 1.3% of the total outstanding shares worth KRW209.1 billion.

The management and employees at SKT believe that the continuous growth based on market leadership, coupled with a healthy shareholder return, creates a virtual cycle which is the best we can give back to our shareholders for their interest and unwavering support. We ask for your continuous interest and encouragement going forward as well.

[interpreted] We will now begin the Q&A session.

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

Good evening. Thank you very much for the call. The first question is on your marketing strategy. Three months ago you communicated quite clearly that your strategy moving forward would be to prevent further market share declines and to maintain your dominance in the market. Whereas in the third quarter what did -- what actually happened was that your marketing expenses fell and you let your market share decline a little bit. So should we interpret from the third quarter results that you have moved away or backed off from that strategy described three months ago? That's the first question.

The second question is a big more big picture. Are there any plans to change the management compensation agreement to bring incentives more into line with shareholders, meaning more stock base compensation or ROAC based compensation? Because from the perspective of an investor there doesn't seem to be much incentive to create value at the company in contrast to companies such as Kumin Bank for example, or perhaps Singtel in Singapore.

[interpreted] Let me address your first question regarding market share first. As you so correctly pointed out, recently there has been a slight edging down of the market share. However, if you look at the cause of such a drop, I believe that it is due to the fact that SKT is less advantageous in the current subsidy based MNP competition environment.

However, if you look at the mid to long term objectives that we've always maintained, we have been saying the importance of achieving certain accumulated number of subscribers and also in maintaining appropriate level of market share in the process. And if you look at the current trend actually, despite the slight edging down of the market share, we safely achieved the annual guidance of 20 million accumulated subscriber base that we announced at the beginning of the year in recent days.

So going forward, looking at the mid to long term perspective, we will continue to manage our accumulated subscriber base, as well as an appropriate level of market share. And as you are well aware we are planning to launch HSDPA and other types of new convergence services starting from next year. And as we also upgrade our brand and also our distribution networks, naturally I believe that we will be able to successfully maintain and defend our market share.

I believe that your second question had to do with the stock option related strategy on the part of SK Telecom. As you know, we have actually implemented a stock option program in the past, but currently we are only offering incentive system based on performance based bonus system. And as you mentioned, it is true that KB in Korea is one of those leading companies that is utilizing stock option incentive programs. But as you are well aware, there are other blue chip companies in Korea such as Samsung Electronics and POSCO which are opting not to utilize the stock option program but rather opt for other types of incentive programs. I believe that as with any other incentive systems, stock options programs has its pros and cons as well. So upon considering all these pros and cons, SKT currently has no immediate plans to adopt such a stock option program.

Okay. Thank you very much.

The following question will be given by Mr. Steve Yoo from Nomura Securities. Please go ahead sir.

Good afternoon. Just two questions. First on HSDPA. Assuming the roll out is completed in the first half of next year, can you remind me what the total investment amount will be cumulative amount? And what would be the amount just for the first half of '07?

Secondly, just looking at your non-core investments. On paper some of these seem quite valuable, namely POSCO, Hanaro, and Powercom. The market value of these companies has come up a bit. I'm just -- yet the market does not seem to be giving SKT any value for these holdings so I'm just curious if the company plans to perhaps unlock some of this value going forward. I know there's some strategic reasons why the company has purchased them, but I'm just wondering if the company plans to try to unlock some of this value? Or maybe the management can comment on some concrete evidence where these holdings are providing the company with some value?

[interpreted] Let me answer your first question regarding HSDPA related investment first. This year our plan is to complete the roll out into 84 cities in total. So up to this year, the accumulated investment total will amount to KRW1,812.9 billion. And in the year of 2006 alone, investment was in the amount of 81.2 billion. And next year, regarding the exact figures, we are planning to invest -- I do not have all the detailed numbers here with us because we are still in the progress of working out the engineering details and design details. But what I can tell you is that compared to the 2006 figures, I believe that investment made in 2007 will be less.

And you asked a question about our non-core investment holdings of other company shares. Let me address POSCO first. We do have a couple of options to do with the remaining shareholding on POSCO, but currently we do not have any plans to sell off such shares. And we will further decide on future plans looking at the stock price trend as well as the market environment. But as you are well aware, in the beginning stage there was a reason why we entered into this cross holding status, therefore we will make the right decision going forward in order to maximize the shareholder value.

And regarding Hanaro and Powercom related shareholdings, SKT has a continuous interest in having new opportunities in the market surrounding conversions and ubiquities, and so I believe that we need to help create the new pie in this market. And we believe that both Hanaro and Powercom could serve as win win partners for SK Telecom, therefore we do not have immediate plans to sell off those shares either.

Okay. Sorry, just one quick follow up on the POSCO holdings. Among the -- I guess some of the plans that you're considering with regards to POSCO, could a share swap with POSCO be one of the options?

[interpreted] You talked about a share swap and we do not have any immediate plans for swapping using our treasury shares, no.

Okay. Thank you very much.

The following question will be given by Mr. [Ken Mitchell] from Morgan Stanley. Please go ahead sir.

Thank you. I have two questions. I think the first question you knew somebody was going to ask this, so I will do that. Given that in cumulative first three quarters of this year your EBITDA margin came in at something close to 40.6%, and given your annual guidance right now is 38%, is there any reason for you to believe that 38% is more of an accurate number for what you expect for this year? Basically you have to assume fourth quarter EBITDA margin of something close to 32%. So if so, what are some of the scenarios that you could foresee happening that would make you hesitant about changing your guidance?

And my second question is on HSDPA marketing. If you are going to be more aggressively launching the single mode strategy next year, what are some of the strategies that you -- SK Telecom will consider to promote HSDPA? Would it be much more on the subsidy side potentially targeting high end users of other service providers -- subscribers as well as your own? Or would it be much more promoting on the benefits of HSDPA; the technology itself? Any color would be very much appreciated.

[interpreted] Yes, let me answer your first question regarding the marketing expense related guidance. To give you the conclusion first, the shorter answer is yes, we will maintain our annual guidance as is. Of course it would be only obvious for us to say that we will continue to look closely at the market change going forward.

And regarding our prospects on fourth quarter, it is true that compared to Q2 of this year, even during Q3 and also going into Q4, I believe that the overheated marketing related competition is cooling down somewhat, and that's why we were able to limit our marketing expense expenditure during the third quarter of this year. However, since we still have continuing uncertainties in the MNP related competitive landscape with other telcos, I believe that we have to be ready for any market changes. So that's one reason. And also we need to continue to make marketing investment looking at the mid to long term perspectives as well. So that is why we plan to maintain the annual guidance as is.

And I believe your question was whether our HSDPA marketing strategy going forward would be more reliant on subsidies or whether we would bet on our technological prowess instead. Naturally, well we have no intention to simply rely on those subsidy programs to come out a winner in this competitive landscape.

As you are well aware, SKT has excellent service as we speak already, and once HSDPA services are launched with its high speed and large capacity types of services available, naturally our services will be more sophisticated going forward leading to higher revenue for the company I'm sure. So we will focus on developing and offering high and better specification related handsets and services to our customers so that we could offer better services.

Just an add on to that last question. Do you have any ability to target -- do you have enough database and enough knowledge to target high end users of other service providers? Or are you just limited to targeting your own?

[interpreted] Of course, even legally speaking, we are not allowed to have access to the customer related database of other telcos, so we do not have that access. But we do offer a strong enough of services to high ARPU customers of our own. And also the fact that SKT has excellent services available is already well known to other telco subscribers as well. So I believe that once we begin to launch those new services, we hope that those subscribers of other telcos would naturally switch to SK Telecom.

Thank you.

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

[interpreted] Yes, I have two questions. First of all regarding the CapEx expenditures. Although I do realize that in the telco industry there seems to be a seasonal factor involved, but if you could give the accumulated related expenditure on CapEx up to the first three quarters of 2006, the amount was in about KRW72 billion. And I'm wondering whether you still will be able to meet the KRW1.6 trillion annual guidance that was offered in the beginning of the year?

And my second question has to do with the wireless Internet revenue decrease quarter-on-quarter during third quarter. Can you share with us the outlook for Q4 and also into 2007 regarding wireless Internet revenue prospects?

And related to that I'm wondering whether your recent suspension of offering adult content has had any major impact on the reduction of wireless Internet revenue?

[interpreted] Yes, okay. Let me address your first question regarding CapEx. So far up to the first three quarters of this year the accumulated expenditure that has been implemented was in the amount of KRW719.5 billion exactly and that is against the annual guidance of KRW1.6 trillion. So against the annual guidance, the execution has been made in about 45 percentage range.

However, if you refer back to last year, the accumulated total CapEx expenditure up to Q3 was actually about 30%, so we still anticipate that we will be able to use up the 1.6 trillion by the year end. Although we do have some areas where we could expect some savings. For now we hope to just maintain the current annual guidance.

Let me answer your question about the wireless Internet related revenue. In order to improve the wireless Internet revenue we are doing our utmost as we speak, but at the same time we believe that customer value and increasing that value is more critical. That is precisely why SKT has announced the suspension of offering adult content in order to make the content quality even better for the users. And at the same time we reduced some of our promotion related expenses for these particular categories as well.

So if you look at the third quarter results, we experienced a temporary slowing down of the wireless Internet, that is true, but since we are doing quite well in terms of increasing data fixed price plans for many subscribers and we are planning to launch HSDPA services. And already the key log in, the conversion service is being welcomed quite a bit by our subscribers already.

So using these factors we are confident that we will be able to get back on the same growth track as before. So for that reason we feel confident about reaching the annual guidance on wireless Internet revenue as we expressed to you earlier.

And related to the content -- adult content how it impacts our revenue. For the part year the impact is in the amount of about KRW70 billion and SKT feels that we could easily overcome such a dip in the near future and we will do our best to continuously improve the wireless Internet revenues.

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

Yes, thank you for the opportunity. I have two questions. First is on your equity method loss. Do you expect your equity method loss to widen during the fourth quarter? Is it possible in any way for the management to provide some guidance on this?

In particular, regarding your satellite DMB joint venture, TU Media had only about KRW62 billion left of shareholders' equity at the end of first half. At this rate, it looks as if the business is only a few quarters away from burning through the entire shareholders' equity balance. So are you intending to put more money into the joint venture? If so, is there a sound rationale for keeping this business alive? Does it benefit your retention efforts or do you expect to record sizable revenues from this? I would appreciate your insight.

The second question is related to the handset subsidy policy. Assuming the subsidy ban is completely lifted in 2008, how do you foresee the subsidy policies changing beyond the expiration period? Or will the current rules for like one subsidy for every two years still hold? For example, if you were to give -- provide a handset subsidy to a user during 2007 will he or she be entitled to receive another subsidy after March 2008? Thank you.

[interpreted] Yes your question about the valuation loss on equity method. I believe that, as you know, most of the companies that fall under that equity method calculation are in their initial business stage and they need to further expand going forward. Therefore it is inevitable for these companies to continue to have some volatility. Therefore I don't think that it would be that meaningful at this stage for us to state whether such equity method loss would increase or decrease going forward. And especially related to the global businesses we have to consider the local partners and also the competition, therefore it would be difficult to share with you more accurate guidance. So in other words the fourth quarter loss from equity method going up or down is not that meaningful for us, we believe, at this point.

And you also commented on TU Media. Beyond 2006 we do not expect any further, major CapEx investment requirements however they need to still work at expanding the number of subscribers. So we are in the process of considering additional financing because we are aware of the fact that they are running out of cash. But when it comes to the actual method or the size of additional financing it's hard for us to share with you now but all I could tell you is that we are considering that option.

And you asked about the handset related policy change around 2008 and although there exists many different scenarios I don't think that it is appropriate for us to comment on government policies, especially when discussing such a long distance future.

Okay, just a follow-up to that actually. Can you elaborate, if you decide to go ahead and inject further capital into TU Media what will be the value of TU Media for SKT and SKT's shareholders? Previously I asked about, do you expect this to help your retention or do you foresee a potential additional revenue opportunities through commission. Can you elaborate on that please?

[interpreted] Although I was not able to share with you the more specific financing methods that we would be employing, we do value TU Media looking at the long term. We believe that TU Media will reach the break even point around 2008 and the company is continuously working at differentiating its contents and increasing the efficiency of the channel operation, increasing the usage and also as announced recently a possible tariff reduction as well.

So I believe that all these ongoing efforts will lead to the increase of subscriber base and I believe that with a bigger subscriber base the company has full growth upside potential. And if TU Media begins to generate profit I believe that it will be reflected as equity method gain on the part of SKT as well, and at the same time we will be able to increase the retention rate as well. So in the long run I believe that TU Media related investments will continue to add value to our shareholders as well.

Thank you.

The following question will be given by Mr. [George Bear] from UBS. Please go ahead sir.

Hi, thank you very much for the call. My first question is on HSDPA. How much additional operating expenses do you expect from running two networks, for example like leased line expenses and rental expenses?

Also in terms of timing can we assume that by middle of next year you would have a satisfactory voice quality on HSDPA so you could start marketing with the single band, single mode handsets?

Finally regarding your network, do you have plans to further upgrade to HSUPA or EV-DO revision A? And if so could you please share with us the timing? Thank you.

[interpreted] To address your first question regarding operating expenses, as you pointed out we do expect some increase coming from the added leased line as well as the rental and lease related expenses. However, considering how customer value comes first I believe that it is a necessary pre-investment in the network so that we could ensure network competitiveness going forward as well. And we will continue to control our operating related expenses to our best ability. And of course all these factors will be included in our management plan and discussions next year.

And as you know SKT is well known for its efficient network management as well as excellence in services. So in this area as well we will do our best to control the cost.

And your second question had to do with the quality of the nationwide rollout HSDP network, as you are well aware since '96 for about a decade we have made significant investment and optimization efforts in the CDMA network. So in comparison relatively speaking right now, HSDPA might come out a little less in terms of quality, however, we do not anticipate any problems in conducting mass marketing for HSDPA. And also we plan to put in most of our investment effort during the first half of 2007 in improving the quality of HSDPA network so that we could bring up the quality of HSDPA, up to par with a CDMA network within the first half of next year.

And regarding HSUPA as well as the Revision A related investment, we planned to begin the technical review on HSUPA during the second half of next year. So when it comes to commercialization of such technology, I believe that we would have to wait and see the market environment. So it seems like a far distance future. And of course we have to deal with securing the technological solution as well.

And regarding Revision A related technology, SKT's current focus is planning to only focus on HSUPA for now so we have no immediate plans to investigate on Revision A.

The following question will be given by Mr. [Tong Soc Lee] from [inaudible] Securities. Please go ahead sir.

[interpreted] Yes I have two questions. First of all there exists a rumor in the market about SK Telecom and a possible MOU between Hanaro and SK Telecom. So any plans to acquire shares of Hanaro is my first question?

And second question has to do with your HSDPA strategy. From your presentation today, I get the impression that your strategy in that area has turned rather aggressive. So is that a correct understanding? Or is it still valid that you will closely monitor the market situation including your competitor KTS and their next move before making further decisions? Could you clarify on that please?

[interpreted] Let me answer your Hanaro Telecom related question first. As you so correctly put it, it is a rumor, indeed, and nothing but a rumor and as we've disclosed many times, we have no plans to enter into any such arrangement.

And regarding our HSDPA plans, actually there hasn't been any major change compared to what we announced originally regarding the nationwide roll out back a long time ago. The only thing is that as we prepare for the nationwide roll out, there needs to be service quality improvement so in line with that improvement we are planning to do necessary marketing activities, that is all.

[interpreted] And I would like to ask a follow up question. As you mentioned earlier, going forward, we are expecting a ubiquitous world indeed in which we would be required to provide wired/wireless type of convergence services. So what options or measures do you have in mind?

[interpreted] And as we have expressed on several occasions, our standard has not changed at all in that SKT is willing to enter into any alliance or co-operative arrangement with any domestic players when these arise in order to meet customer demands to provide such convergence services. And we will continue to watch closely the market changes regarding wired and wireless convergence as well as the broadcast/telecom convergence activities as well, so that we could very proactively deal with the changes in the market.

As you know, SKT already has over 20 million subscriber base, so I believe that we will be in a good position to proactively deal with such changes for the benefits of not only our customers but also for our shareholders.

The following question will be given by Mr. Jong-su Kim from NH Investment Securities. Please go ahead sir.

[interpreted] Two questions. First of all, the tariff on wireless Internet packet is expected to be reduced next year, but in order to absorb such shock, I'm wondering whether SKT has any internal measures in mind?

And the second question is that seasonally speaking, it seems that every third quarter the voice ARPU typically has gone down, however this year it seems quite robust. So any special reasons why?

[interpreted]: Regarding wireless Internet related tariffs, actually nothing has been decided in concrete manner yet, so it is difficult for us to express how much impact on our revenue it will have. However if the tariff cut is proceeded as you mentioned, then of course it could have some negative impact on the revenue. However, we could turn it around and look at the other side of the coin in saying that it could possibly contribute to more popularization of the wireless Internet services. We are in the process of improving the negative image on data Internet services right now, and we are developing new contents to meet customer needs. And we are trying to increase the number of subscribers subscribing to wireless Internet. I believe that this could, all in all, help our company.

And regarding voice ARPU, our average subscribers has increased in number and also their call volume has increased accordingly. And we also enjoyed quite a bit of improvement from the roaming side as well, so I think those have contributed.

The following question will be given by Mr. [Choura Jon] from [inaudible] Securities. Please go ahead sir.

[interpreted] First of all, relating to China there exists numerous scenarios surrounding the 3G licenses to be given within China but leaving aside other scenarios, if China Netcom ends up taking away the CDMA license currently held by China Unicom, how will SKT's strategy change because of such change?

And my second question has to do with a Pantec related difficulty. We hear that Pantec subsidiaries are doing not so well nowadays and SKT currently has a shareholding of Pantec. So if Pantec decides to ask SKT to repurchase some of their shares, would you be willing to buy those shares, or would SK Group be interested as well?

[interpreted] Regarding China related scenarios I believe that there are new scenarios popping up every month, it seems; so there are many changes and you are concerned about China Unicom losing its CDMA license. However, SKT has sufficient room for further co-operation with China Unicom in the WCDMA area as well because SKT is continuously accumulating know-how in WCDMA as we speak, and we will be able to share the results from their business at the end of the day.

So I believe that there still exists sufficient room for further alliance even if they do not hold a CDMA license. But, nevertheless, we will continue to have consultations with China Unicom so that we can protect the value of our investors to the best we can. And, as you know, we've invested in the form of [CDs], therefore I believe that we already have enough risk hedging mechanism if necessary.

And regarding Pantec, we did also hear some rumors from the banking sector. Our relationship with Pantec is simply dependent upon the customer requirements to purchase certain handsets. So if you are asking whether we plan to extend further support or possible share purchase, we do not have such plans.

The last question will be given by Mr. Henry Cobbe from Thames River Capital. Please go ahead, sir.

Hi there. Thanks very much for the call. Two questions; first, just a CapEx guidance update for this year and next year.

And second, given the improved profitability from the interconnect changes, will you be raising the pay-out ratio from 40%? Thank you.

[interpreted] To answer your CapEx related guidance, as I mentioned earlier our annual guidance for '06 that was announced in the amount of 1.6 trillion has not been changed. And for '07 what I could share with you is that it will not be more than this year's figure.

Regarding the interconnection rate readjustment, I don't think that the recent decision is particularly in advantage of SKT, but rather they decided to go for a more rational calculation which is more appropriate. And because of that we do not have immediate plans to change our dividend pay-out ratio, so we will, for now stick with our original guidance.

[interpreted] This concludes the Q&A session, and lastly I would like to invite our CFOs closing comments.

[interpreted] Thank you for taking part in today's conference call. You have posed meaningful questions and interest which will serve to contribute to better management of the company going forward. As mentioned earlier, we will do our utmost to continuously grow based on market leadership, ultimately leading to corporate value and shareholder value maximization.

This concludes the earnings conference call for Q3 2006. Thank you very much.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.