SK Telecom Co Ltd (SKM) 2006 Q4 法說會逐字稿

[Interpreted]. Hello everyone. First of all, we greatly appreciate your attendance. Let us start the conference call for SK Telecom's fiscal year 2006, fourth quarter earnings release.

[Interpreted]. Good morning. Due to our CEO's overseas business trip, today's conference call will consist of SKT CFO Mr. Ha Sung-Min's opening remarks on earnings results of 2006 and other issues of your interest followed by a Q&A session.

The conference call will last about 1.5 hours with consecutive interpretation for the conveniences of analysts and investors from both home and abroad. Let me also remind you that all the forward-looking statements are subject to change, depending on the macroeconomic and market situations.

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

[Interpreted]. Good morning and happy New Year. I wish all of you a year full of health and happiness.

Let me begin with the earnings highlights for 2006. The year 2006 was marked by the great strides made by SKT as a world leader, solidifying the foundation for continuous growth through the consolidation of Company-wide capabilities along with the acceleration of the global business initiatives.

Firstly, the revenue grew 4.8% year-on-year to record KRW10.650 trillion based on the expanded subscriber base and the enhanced data product capabilities. Despite the tariff cut for caller ID services starting from the beginning of last year, we were able to exceed our revenue guidance of KRW10.5 trillion for the whole year. The wireless Internet revenue continued its upward trend, increasing about 11% year-on-year to reach KRW2.730 trillion. The wireless Internet took up 28.5% of total revenue, excluding interconnection revenue.

On the marketing expense side, SKT led the market stabilization effort amidst the heated competition in the subsidy regime, while strengthening the customer base for the 3G leadership going forward. As a result, the marketing expense to sales ratio was 20.5%.

The operating income edged down 2.6% year-on-year to KRW2.580 trillion. The net income dropped 22.7% compared to 2005 to KRW1.450 trillion due to the extraordinary income from the sale of SK Teletech in the previous year and the increased one off expenses in 2006 regarding the severance pay system.

The EBITDA value was KRW4.230 trillion exceeding the annual guidance.

Also despite the early investment of HSDPA, the CapEx spending remained at KRW1.520b, which was KRW82b less than the annual guidance.

Let me now move on to the management plan for 2007. On one hand, the year 2007 is expected to bring about an intensified competition in the full fledged 3G market, while issues such as data tariff cut and the bundling services will also emerge. Under such difficult management climate, SKT is faced with challenges to solidify its competitive position in the 3G and the convergence areas, and to deliver visible results from the global businesses.

Our 2007 revenue target is KRW11 trillion. Despite the difficult environment of saturated mobile telephony market and the data tariff cut, we plan to lead the revenue growth through the subscriber base expansion, both qualitatively and quantitatively, while securing a competitive position in the 3G market.

To deal with the data tariff cut, we will make efforts to ensure consistent wireless Internet growth by strengthening the wireless Internet portals, expanding the data flat rate subscriber base and by enhancing customer convenience through new services.

As was mentioned earlier, the 2007 market outlook has an unprecedented level of uncertainty, and various competitive factors and variables exist. Therefore, we have made a strategic decision to defer the announcement of the annual guidance figures such as the marketing expenses and EBITDA.

Our planned CapEx for 2007, however, is KRW1.550 trillion of which KRW610b is allotted for the roll out of the nationwide network coverage for both HSDPA and its quality enhancement.

Next, I would like to share with you our growth strategy. When it comes to HSDPA we plan to maintain an appropriate migration pace, concentrating on sophisticated premium service offerings, such as full browsing service, rather than be obsessed with the overheated marketing competition to secure subscribers early on.

With the roll out of HSDPA SKT will strive to lead the mobile lifestyle change itself by innovating the wireless Internet services, which have already provided the recent growth momentum. For instance, such innovations could include evolution of the wireless NATE service into an embedded media experience into everyday lives of the mobile subscribers. We will do our utmost to improve customer loyalty through efforts, such as expanded web links, UCC activation and more attractive information content among others.

At the same time, we will continue to secure growth momentum by continuously creating the convergence business model such as Melon and mobile [inaudible] to keep abreast with the fast changing convergence environment. To that end, we will leverage deep insight on the environmental change of key drivers, like customer needs and technological evolution when focusing on new business areas, so that we can enhance the chances of success for those new business initiatives even further.

Next, let me comment on the ongoing global businesses. Firstly, our Vietnamese operation is showing notable results thanks to the expanded network and to differentiated tariff plans. Surpassing our original expectation, the number of subscribers exceeded the 1.5m mark proving the qualitative service improvement made by S-Fone. Based on such encouraging performance, we will continue to make full efforts to emerge as a major player in the Vietnamese market.

The U.S. MVNO business, which we launched with the brand name Helio, did go through some difficulties last year due to initial handset line up issues and the lack of brand awareness in the market. However, we will continue to do our utmost to secure an upper hand in the wireless Internet market in the U.S. going forward. We will leverage the expanding trend of the nationwide EV-DO networks by major U.S. carriers evidenced since the end of last year. And we will strengthen the handset supplied to diverse handset makers and secure a sound distribution network to that end.

Regarding China, we hope to see some visible business opportunities in 2007, leveraging the existing business base we have built over the years and the structural changes, which is expected to take place in the Chinese telco industry. Notably, we anticipate visible results from the first half of this year from the strategic alliance with China Unicom from the six cooperation initiative areas including the joint handset sourcing.

As we reiterated in the past, SK Telecom will concentrate on realizing business results from the aforementioned three regions for the moment, so that we could provide meaningful references for the globalization efforts of the future.

Next, let me share with you our plans for shareholder return. Firstly, the 2006 payout ratio is 40% of net income, making the payout amount KRW8000 per share, including the interim dividend. Also the share buyback and current calculation of about KRW200b has taken place in the second half of 2006, as promised in the beginning of 2006.

As we have communicated continuously, that in 2007 the shareholder return will be at a similar level as 2006. Upon gaining approval from the BoD we plan to pursue the KRW8000 per share dividend level, whilst repurchasing Treasury shares amounting to KRW200b. We have decided to provide shareholder return in the form of dividend per share, or DPS, instead of using the pay out ratio. Please understand this decision as SKT management's commitment to ensure improved shareholder value with stable shareholder return in the uncertain business environment.

As mentioned earlier, SKT faces numerous management challenges going forwards. However, we will do our utmost to ensure a continuous growth, improved profitability and the maximization of shareholder value.

Lastly, I would like to thank all the investors and analysts for your unwavering support and interest in SK Telecom. Thank you.

[Interpreted]. We will now hold a Q&A session. Please go ahead with questions.

[Interpreted]. [OPERATOR INSTRUCTIONS]. In order to offer you as many opportunities as possible within the limited time, we'd appreciate it greatly if you could limit your questions to just two.

The first question will be provided by Mr. Matt Evans from CLSA. Please go ahead, sir.

Good morning and thank you for the call. The first question is on your affiliate gains and losses. You mentioned that there was some trouble at -- or that it was a challenging year for Helio. Could you provide the actual contribution from that business, and also from TU Media and the other major subsidiaries?

And on the U.S. business, you suggested the lack of handsets and the lack of, well, an established brand were the challenges there. But presumably these were issues you were aware of when you launched that business. So, what was different from what you expected when you first set up that joint venture?

And secondly, what data ARPU growth would you expect in 2007? Thanks.

[Interpreted]. Let me answer your first question regarding equity method gain and losses on our affiliated companies. To cite a few companies that fall under the gain category under an equity method valuation, first of all our CNC -- SK CNC has recorded about [KRW40b] in terms of equity method gain, and also SK Communications recorded KRW15b in gains. And there were some other minor gains from other affiliated companies as well.

Regarding the loss category, TU Media recorded KRW25b in loss from equity method. And also Helio reported about KRW90b in losses. Of course these are all our estimates for now.

It is true that TU Media and Helio are in the beginning stage of their businesses. And I'm sure you fully understand that it is in a stage that requires further investment in the near future. So, we will have to still wait and see the future growth potential. However, so far according to the financial statement results coming out of 2006 figures, these are our estimates.

Let me elaborate just a little bit about Helio. We are continuing to focus on the high ARPU subscribers by offering new types of content and by offering differentiated services and now easing difficulties regarding the handsets. So, of course, the subscriber base is in a rising trend for Helio for now. And, of course, for 2007 we are preparing various differentiated services for the year.

But regarding the annual guidance for Helio alone, because the management plan for the Company itself has not been finalized yet, we will not be able to communicate the details until they finalize it, in the beginning of February. So, once the finalized plan comes out, we will actively communicate that with you.

To answer your question regarding our prospects for data growth for the year 2007, we are anticipating a slight growth compared to 2006, estimating about 29.5% of revenue coming from wireless data related services of the total revenues.

And, of course, due to the recent tariff cut on the wireless data related service offerings. And also because of the elimination of the adult content provided in the past, there are some pressures coming from other factors, such as those. But we will continue to overcome such constraints by providing extra and expanded data fixed rate price plans, as well as innovating the NATE related services, while activating the UCC services going forward, so that we could continue to grow the data related revenues.

Thank you very much, if I could just follow up. My question on Helio was not really regarding the guidance for '07, but what management felt went wrong last year. They seemed to be a bit too optimistic about the U.S., so where were the specific challenges there?

[Interpreted]. I believe that we have communicated similar issues during the previous conference calls as well. But to cite a few challenges we had to change or face. Number one, we had some handset sourcing issues with A. our handset sourcing company BPA. And as you are well aware, the company went belly up during the year. So, we had some difficulties in providing full supply of handsets.

And secondly, with regards to the brand awareness, we did experience certain issues at the launching period compared to our previous expectations. And because of certain issues outstanding, our actual launching was delayed from our original plan of the beginning of last year to May of last year. So, those I believe were difficult factors that we had to deal with last year.

Okay. Thank you very much.

Thank you.

[Interpreted]. Next question will be provided by Mr. [Jong-in Yang] from Hankuk Investment and Securities. Please go ahead, sir.

[Interpreted]. Thank you very much for giving me the opportunity to ask questions. I have the following two questions.

Number one, I believe that the Government will be finalizing on the bundling service related regulations by the end of March this year. So, could you share with us the recent updates on this matter? And how is SKT preparing for such regulatory change?

Second question has to do with HSDPA. As you are well aware, KTF plans to launch HSDPA service in its full-fledged form from the month of March this year. And they have expressed over and over again in the press that they will be going through aggressive marketing efforts in that regard. And as you know SKT will be launching similar services about three to four months later than KTF. So, how do you plan to deal with such a situation?

And even briefly, or at a ballpark figure even, can you share with us your forecast going forward for 2007 and 2008 regarding HSDPA subscriber base?

[Interpreted]. Let me answer your question regarding the bundling service first. As you are well aware this is a regulatory change, which is expected during the first quarter of this year once the Government decides on the alleviation of the constraints previously imposed on the dominant players in the telecommunications markets regarding bundling service.

And the important issues that could come out of such regulatory change could include possibly the evaluation or review method by the Government in determining the appropriateness of the tariff level of such bundling services offered. And also making sure that these dominant players continue to offer market access and also to exercise their given obligations and responsibilities in the same market.

SKT is continuously reviewing various options to best address benefits that could be provided to the customers and subscribers of SKT. However, we have not finalized on the final details. And because such regulatory decisions have not been fully declared in detailed form, I believe that it would be inappropriate for us to share with you some specific, well, product or strategic directions in that regard. So, once things get -- become more clear then we will communicate the details with you.

Regarding your question about HSDPA, SKT will be approaching this whole topic from a bigger picture, in other words maintaining multiple networks at the same time and preparing for beyond the 3G regime. As you are well aware, we currently already have EV-DO subscribers amounting to 10m subscribers already using, in fact, a type of 3G services already. But if you look at the HSDPA alone, we will be rolling out the nationwide network within the first half of this year. And the fully prepared single band, single mode HDSM handsets will be launched during this period as well. And that's when I believe the full-fledged competition will begin in the market.

But, of course, we will flexibly deal with the future marketing effort depending on how the consumers respond to such product in the market and depending on how the market evolves in that period. In other words, we will not focus too much on the early on overheated competition to pre-empt the subscriber base during the early stage of this launching. But instead we will maintain an appropriate migration pace, while ensuring higher level or sophisticated service offerings and by looking and providing the high specification and more -- better handset provision for the customers.

So, we are aware of the fact that our competitor will be launching similar services in the month of March. But regardless, we will prepare steadily our launching for the first half. So, services will be offered within the first half of this year.

And you asked about the ballpark figure -- about our HSDPA target subscriber base. Well, we will not be able to give you detailed numbers at this particular point, of course. But we will continue to monitor the traffic between different networks and per network portfolio structures and the market environment, to come up with appropriate scenarios, so that we could come up with the best marketing effort possible.

Thank you.

[Interpreted]. The following question will be provided by Mr. [Jong] Kim from Merrill Lynch. Please go ahead, sir.

Yes. Thank you for the opportunity. My first question pertains to your China investment and your efforts there. Currently it's my understanding that China Unicom has less than 40m or so on their CDMA network.

Can you share, if you have any expectations for Unicom's CDMA subscriber growth in China over the next two to three years? And at what subscriber level do you think Unicom will reach desired minimum level of -- for economies of scale for CDMA operations?

My second question pertains to HSDPA. I would like to ask a slight -- ask the question in a slightly different way. What -- at what subscriber level for HSDPA service do you expect this business to start to make positive contribution to SK Telecom's margins or bottom line?

And I understand your -- the management's reluctance to give -- provide any margin guidance for the year. But at least can you share what is the expected level of operating expense increase excluding marketing, do you expect to incur during 2007. Thank you.

[Interpreted]. Regarding your question about China Unicom it is true, as you pointed out, their current level of subscriber base for CDMA network stands at about 40m people. And currently, they do have a capacity enough to support up to 90m subscribers on their CDMA networks. So, they do have quite a bit of capacity that is left that is maintaining the 40m level as we speak.

But as we told you before, we are currently pursuing six different areas of strategic alliance cooperative initiatives. So, we are continuing to offer consulting support, as well as all the way up to launching related services on their various services. So, we believe that once all these efforts begin to manifest some results that their subscriber base will begin to increase further. But from our position, it is quite difficult to tell you exactly what level would be the most appropriate level of subscriber base for China Unicom.

And regarding your question about HSDPA and what our breakeven point might be in terms of the subscriber base. Well, as I mentioned before, previously, we have to -- we are currently reviewing various scenarios, keeping in mind various new services we could offer and what additional benefits we could bring about through ARPU contribution. And, of course, we have to look at the migration costs for these subscribers and the added value of new services in terms of ARPU going forward. So, we still are looking at quite a bit of volatility going forward. So, we will not be able to share with you some detailed numbers at this point.

And you also ask about other operating expenses as well. I believe that such items have been looked at from two perspectives, of which network expenses play an important role. And, of course, by running a HSDPA network on top of our existing CDMA network there is a possibility of some overlapping or added expenses there. But through our operational excellence initiatives, we are confident that we will be able to minimize the cost increase there. So, if I may compare our future forecast on network expenses compared to the previous year, we are looking at about similar level as the previous year.

[Interpreted]. The following question will be presented by Miss Chong Kim from ABN AMRO. Please go ahead, madam.

[Interpreted]. Thank you. I have one question. I read in the press yesterday that SKT plans to invest in the EV-DO RA, so could you share with us some more details about that plan?

[Interpreted]. As you know, we have maintained a stance that we have no plan to invest in [our] EV-DO Revision A for commercialization purposes in terms of investment going forward, and that stance has not changed. However, at the same time, we need to prepare from the R&D perspective, for all possible commercializable technologies out there. So, we are preparing from that perspective.

So, I believe that there must have been some misunderstanding as opposed to our commercialization related investment versus the R&D perspective related investment in the press yesterday.

[Interpreted]. The following question will be provided by Mr. Sam Min from BNP Paribas. Please go ahead, sir.

Yes, hello. My first question is on marketing expenses. Just looking at your fourth quarter and second quarter, fourth quarter [is] posted very high marketing expenses. But if you look closely the acquisition cost increased in the fourth quarter relative to the second quarter. And I noticed in the fourth quarter as well, your net additions market share has gone up relative to the third quarter. So, I just wanted to know your strategy to improve your market share for next year, whether your stance is now very much fixated on the 50% market share?

My second question is on iPhone. I'd just like to get your take on what impact iPhone will have on the Korean wireless sector. Thank you.

[Interpreted]. Since I will have to take a little longer time to answer your first question regarding the marketing expenses, let me first address your second question regarding iPhone and its impact.

As you are well aware, iPhones are expected to be launched in the Asian market starting from 2008. And at the same time, we do see some hurdles for iPhone fully taking root in the Korean market going forwards in the following reasons.

First of all, iPhones do not have the 3G capabilities included, such as GSM and EDGE related capabilities as of now.

And secondly, it's the price factor. As you are well aware although there are some gigabyte to gigabyte differentials between different models within iPhones, we do see the price range to begin at $500 to $600 per phone. And on top of that, you will have to add some higher sophisticated functionalities that are specific to the Korean market, which will also add costs to the initial price. So -- and if you compare the $500 price range of iPhones compared to the existing SmartPhones, there exists about $200 price differential there. So price is the second factor.

And thirdly, they are announcing the launching in the U.S. market currently and they are in discussions with the European telcos as we speak. And we are looking at the launching in Asia starting from about 2008. So it's a gradual approach. So, I believe that there be will some time lag. Therefore, we will have to see the developments going forward. And so at this particular point, I believe it is too premature for us to talk about introduction or sourcing of iPhones in relation to SK Telecom.

You asked about the marketing expenses and you talked about how the fourth quarter expenses increased as opposed to the first, second and the third quarter. It is true that our marketing expenses for the last quarter of the last year has increased indeed. And it was done so in order to maintain our market leadership and at the same time during the fourth quarter, the MNP market size has increased as well. So, in order to secure new acquisition of new subscribers we increased the incentives. So what it means is that such increased incentives leading to higher number of new acquisitions could add long -- to our long-term corporate value going forward.

And regarding 2007, up to January this year so far -- as of today that is, we do already see some signs of the market speeding up in terms of marketing. But so far, SKT is not aggressively dealing with such changes. And of course there exists high likelihood of the market becoming quite intensified in terms of competition. But again, we will focus on market stabilization as much as possible.

And you also mentioned about our market share target going forward. Of course, we hope to maintain market leadership while -- and steadily increasing the accumulated subscriber base, and also the market share while ensuring market stabilization. So, we will continue to monitor the appropriate level of the market increase in the upcoming year. But in any case, we will be maintaining higher than 50% market share.

[Interpreted]. The next question will be provided by Mr. Jong-su Kim from NH Investment and Securities. Please go ahead, sir.

[Interpreted]. I have two questions. First question pertains to the 800-megahertz frequency range. Now that WCDMA services will be launched in Korea, I'm wondering whether your existing -- the so-called obsession on the 800-megahertz frequency range will change into the future.

And secondly, officially the WCDMA related official subsidy range is about KRW300,000 per handset. But I'm wondering whether you have plans to even change the policy yourself, so that you could increase the amount of subsidy.

[Interpreted]. Let me answer your first question regarding the 800-megahertz related position. In the short term, we do not anticipate any idle facilities or idle frequency range available from the existing network.

However, of course, in the long run as WCDMA truly takes off, of course, CDMA subscriber base might decrease. In that case, we might have some extra idle facilities or frequencies capacity left. In which case, we will continue to provide new services and new business models for the existing CDMA networks as well, which in turn could always increase the data traffic. So we will flexibly deal with the 800-megahertz range. And I hope you understand that this is not at all from a perspective -- an obsession of a kind, but rather trying to be economical.

To answer your question about the WCDMA related subsidy, yes, it is currently set at KRW300,000 per handset. But we will continue to monitor the market climate and the launching prices of these initial handsets and the responses from the subscribers. And, of course, the subsidy may go up or down depending on the situation.

[Interpreted]. Next question is going to come from Mr. Sung Min Chang from Samsung Securities. Please go ahead, sir.

[Interpreted]. I have two questions.

First of all, I recall the CEO of SK Telecom commenting during last -- in September last year, in which he commented that looking back at 2006, one thing that he regrets the most was the marketing war which was taken place -- which has taken place during the month of June last year. The reason for his regret was the fact that the results were not visible.

And if you look at the fourth quarter marketing expenses, it was even higher than that of the second quarter. So, I'm wondering whether you are satisfied the results coming from the fourth quarter. If so, does that mean that there will be a directional change or the perspective change coming from the management?

And also, can we look at the trends of the second quarter and fourth quarter last year to be some guidance for the upcoming 2007 as well?

And also, the equity method loss -- valuation loss during the past three year period has been on an upward trend. The loss portion, that is. So, can you share with us for this year and also the next year, the possible trend that you are forecasting regarding the equity method gain or losses?

[Interpreted]. Let me comment on your question about the marketing expenses. It is true that we did spend quite a bit of marketing expenses during the second quarter of last year, as well as the fourth quarter last year. However, I believe that there is a qualitative difference between the Q2 and Q4 acquisition cost involved in that during the fourth quarter, we were able to successfully acquire more sophisticated high end, high quality subscribers. In other words, we focused more on those subscribers who could add value mid to long term through sales efforts on HSDPA products and the like. Therefore, please understand that the fourth quarter marketing expenses were the type of a pre-emptive early investment to secure leadership in the 3G era.

And you asked whether we could interpret last year's figures to be the guidance for year 2007. That is mentioned earlier. Our position is that although there is a high possibility that the market will be involved in an intensified competition this year, we will again refrain from becoming too embroiled in this overheated competition. So, that will be our basic position and according to that position, we will be extending our marketing expenses.

And to address your third question regarding the equity method loss, of course, although we do not provide a specific financial statement related forecast or guidance for the affiliated companies at all. But you simply asked about the overall trend, we are looking at a smaller loss coming from equity method valuation compared to the past year in the upcoming year. And, of course, we will not be able to share with you company to company specific figures, but the overall volume of the loss will definitely be on a downward trend we anticipate.

[Interpreted]. Next question can come from Mr. [Han Chan Kim] from Goldman Sachs. Please go ahead Sir.

Thank you very much. My first question is actually on your handset deployment schedule. Now, I realize this will be spread out through the year, but I would like to understand what your term is in terms of ruling out or releasing HSDPA enabled handsets.

And in conjunction with that there's also been a discussion that SKT could potentially release handsets that have both terrestrial and satellite DMB phones. So, if you could just elaborate on if you have any schedules on that that would be great as well?

My second question is on Hanaro Telecom. Now, I realize that the Company has repeatedly denied any M&A intentions, but given that the stock has rerated over the past several months I wanted to see if the Company had a refreshed view on that, and to see what the threshold would be for SKT in considering buying Hanaro Telecom? Thank you.

[Interpreted]. You asked about the handset launching or the handset introduction in the market regarding HSDPA, well of course, we currently already has three different models for DBDM handsets and within 2007 we plan to add two more models as well.

Regarding SBSM related models of course we are preparing the various models for the first half launching. But because of marketing strategic reasons, we will not be able to share with you the details.

[Interpreted]. And you said a few things about Hanaro Telecom, but ultimately I'm sure you are curious as to whether we can acquire the company or not. As we have mentioned over and over again, the stand of SK Telecom regarding Hanaro has not changed. In other words we have no plan to acquire the company as of now.

Of course, because of the bundling services coming out as a new issue in the market, I do realize that there are some concerns about our capabilities in that regard. However, we are confident that we will be able to form strategic relationships with any player in the market to form a win win situation in that area as well. So, once again we do not have any plans as of now for acquiring Hanaro Telecom.

Thank you, just two more to confirm that on the issue of a handset that has both satellite and terrestrial DMB, is that handset going -- is part of the two models that you plan to launch the DBDM?

[Interpreted]. I'm sorry to omit or neglect that one part of the question in answering. Actually that's not the case. It's not one of the two DBDM models that I was referring to. But during the first half we plan to introduce at least one model that would support both terrestrial as well as the satellite DMB functionality.

Great, thank you very much.

[Interpreted]. The following question will be presented by Mr. Jeff [Kim] from Credit Suisse. Please go ahead Sir.

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[Interpreted]. To first address your question regarding the full variety in functionalities, we are referring to being able to provide handsets that provide same type of Internet services as fixed Internet services. So with the launching of the SBSM handsets for WCDMA we will be offering such functionality. So, I wasn't referring to the same [piece reporting] the Notebook capabilities.

Now regarding when we could offer such services, because of strategic reasons we will not be able to disclose that exact timing at this point.

And you asked about the marketing expenses and even excluding marketing expenses our overall guidance for the remaining year of year 2007. Now, of course, I did tell you early on that the marketing expenses, excluding the marketing -- the operating expenses, excluding the marketing expenses, will be about the same level as the previous year. But I will not be able to share with you more details on that, because if I start giving you more details I'm sure you are able to do some re-engineering and recalculations in the reverse order and come up with some type of figure. So, once again, I ask for your indulgence and your understanding in that for strategic reasons we have decided to defer such guidance communication.

[Interpreted]. Next question's going to come from Mr. Jong Kim from Merrill Lynch. Please go ahead Sir.

Yes hello, I just have one follow up question pertaining to your fourth quarter marketing costs. As discussed earlier, your initial commission expense during fourth quarter rose 74%, while your gross activation volume during the same period rose only 20%. Looking at it another way, in terms of your net subscriber add during the fourth quarter, increased by about 190,000 subscribers relative to third quarter.

So, I think the message that we get from here was that your marketing costs increase relative to third quarter and what SKT has achieved during this period seems to be out of proportion. Can management actually help us understand in terms of how that such a large increase actually can be justified? Thank you.

[Interpreted]. Although I mentioned it earlier, let me reiterate the point. Yes, we have incurred added initial commission or -- for the fourth quarter of last year. And also as I mentioned before however, the quality of the subscribers has changed to a more higher ARPU HSDPA related new subscribers. So, yes, you may compare apple to apple, the proportion between the initial commission versus the number of new subscribers added on to our network.

However, please consider such investment to be an -- a pre-empted investment, an early on investment for the 3G operations going forward, because we believe that the fourth quarter net adds will ultimately lead to higher revenue for the year 2007.

In other words, with the fourth quarter net adds and the new subscriber base we gained on HSDPA, we anticipate added revenue for the year in the amount of about KRW130b to KRW140b for '07. Therefore, we do not consider the extra investment taking place in the fourth quarter of last year to be all that bad.

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[Interpreted]. The following question will be presented by Mr. Mitchell Kim, Morgan Stanley. Please go ahead Sir.

Yes, thank you for this opportunity. I don't want to beat a dead horse, but I just want to go back to this marketing question again.

Well, specifically you said that you -- basically you [spend] about KRW130 in incremental marketing costs and about some 230,000 to 240,000 gross [subscribers], which amounts to almost KRW400,000 per gross [inaudible].

But you said that you -- basically you acquire high-end services. If you -- [inaudible], if you could just add a little bit more color on what you define as high end [subscriber]? Is it just purely higher ARPU? And then how -- is it just a case -- obviously looking at your retention costs which declined pretty significantly quarter on quarter it does look like what you mean by high end subscribers is really coming from new subscribers?

And [inaudible], do you see more [inaudible]?

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[Interpreted]. Next question will be presented by Mr. John [Baillie] from UBS. Please go ahead Sir.

Yes, thank you very much for the call. I think my question may be similar to what Mitchell was asking. But I was just wondering regarding your previous comments about acquiring high end subscribers and HSDPA subscribers, is it fair to assume that your marketing expense increase in the fourth quarter was related to acquiring HSDPA subscribers on the dual band dual mode handset and also T Login?

[Interpreted]. Yes that is true. We have invested most of our marketing expenses on the HSDPA subscribers, as well as T Login services. As you are well aware the T Login was newly launched, and we are also currently planning other new services as well. So, yes, on those two categories was the concentrated investment from marketing.

Yes.

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[Interpreted]. Last question is going to come from Mr. Mitchell Kim from Morgan Stanley. Please go ahead Sir.

Okay thank you. Since our previous question was already answered, I'll just [shift] through my second question which is on CapEx trend. Now, given that --

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[Interpreted]. Since we are experiencing some communication difficulties with Mr. Mitchell Kim, we would like to instead answer his question regarding CapEx, assuming that the remainder of the question was regarding CapEx.

[Interpreted]. To answer your question about CapEx trend, we have been maintaining between KRW1.5 to KRW1 point trillion worth of CapEx expenditure year-to-year.

Yes, it is clear that we are maintaining a downward trend in terms of network investment. Although we are maintaining or running multiple networks, such as WiBro and HSDPA, which requires added investment sometimes, we are trying to maximize efficiency of investment on our existing networks to offset that increase from other networks. So, I could tell you that the trend going forward will be downward.

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[Interpreted]. The following question will be presented by Mr. [Dung Yo] from IMM Investments. Please go ahead Sir.

[Interpreted]. Well, mine is not a question per se, but rather posing a fundamental issue. I believe that under the situation where your particular telco industry gets to determine the profitability of a company depending on the cost restructure, it was quite important for us to listen to the marketing and EBITDA related guidance at the beginning of each year. And I believe that you expressing such annual guidances each year express the reliability and trust with investors. But, however, this year you have opted not to provide such annual guidance at the beginning of the year, which could possibly damage the trust built between the Company and the investors. So I'm wondering is the marketing outlook for the coming year that desperate in your opinion -- so -- enough to possibly damage such trust with investors.

[Interpreted]. Well, even internally within SK Telecom we did have numerous discussions about whether to announce the guidance or not. And for purely strategic reasons, we have decided not to announce as such an annual guidance at this particular point.

As mentioned earlier, the year 2007 will be marked by a lot of uncertainties, including the bundle service issues and other types of HSDPA related competition. And, of course, by disclosing such marketing expenses plans going forward in 2007, we felt that we could be easily exposing our strategy to our competitors or to the rest of the market as well. So, for strategic reasons we opted not to communicate such information at this point.

However, as mentioned over and over again, we will refrain from being embroiled in the overheated competition in the market, but lead the market stabilizations efforts on the other hand.

And I would like to once again ask your indulgence and understanding to the shareholders and analysts that that's precisely the reason why we decided to change the shareholder return policy to DPS structure, and at the similar level as last year the share buy back in cancellation of about KRW200b and the exact dividend amount, which is equivalent to 2006 level for '07 as well, precisely to save the investors and analysts from being swayed by uncertainties in the market, and to provide certain shareholder return to all of you. So please, once again, we ask for your deep understanding.

[Interpreted]. This concludes the Q&A session so now I would like to invite the closing remarks from my CFO.

[Interpreted]. Thank you very much for taking part in this conference call. Your valuable questions, interests and concerns will help us greatly in achieving better management of the Company.

And as mentioned earlier, due to numerous uncertain factors, such as HSDPA launching and also the bundling service issues, we were not able to provide you some detailed annual guidances. And once again, we ask for your understanding. SK Telecom will nevertheless make an effort to ensure continuous growth, improved profitability and maximization of shareholder value.

Once again, I ask for your unwavering support and interest going forward. Thank you very much.

[Interpreted]. This concludes the CFO conference call for the fourth quarter of 2006. Thank you.

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.