SK Telecom Co Ltd (SKM) 2007 Q2 法說會逐字稿

(Interpreted). Good afternoon. And today's conference call will consist of SKT's CFO, Mr. Ha Sung Min's opening remarks on the earnings highlights and issues of your interest regarding the second quarter 2007, followed by a Q&A session.

The conference call will last about one and a half hours with consecutive interpretation. May we also remind that all the forward-looking statements are subject to change depending on the macroeconomic and market situations.

Let me now present to you, Mr. Ha Sung Min.

(Interpreted). Good afternoon. My name is Ha Sung Min, the CFO of SK Telecom. Thank you for taking part in today's earnings conference for the second quarter 2007, despite your busy schedules.

Let me begin with the earnings highlights for the second quarter.

Despite the tariff cut for Wireless Internet which was introduced back in January, the Q2 revenue grew 7.7% year on year and 4.8% quarter on quarter, to record KRW2.842.6 trillion supported by the continuous increase of new subscribers.

The Wireless Internet revenue went up by 4.3% year on year and 4.1% quarter on quarter, to KRW704.5b, helped by active use of phone mail and news services. The Wireless Internet revenue took up 27.5% of the total revenue, excluding Interconnection revenue.

The second quarter was a period of heated competition, marked by MNP market expansion and the competition for the new subscribers. Under such competitive market climate, the marketing expense for Q2 increased 17.3% year on year and 19.9% quarter on quarter to KRW703.1b making its share of the total revenue 24.7%. In the meantime, the strategic market policies during Q2 led to the net addition market share of 51.2%, further solidifying the 50.5% market share target.

The operating income [grew] 6.9% compared to the same period the previous year, despite a higher marketing and the early CapEx expenditure for the Nationwide WCDMA rollout which led to a higher depreciation number, the operating income remained at a similar level as the previous quarter, recording a KRW662.2b.

The net income was KRW403.3b, or 8% and 1.8% on a year-on-year and quarter-on-quarter basis respectively.

The EBITDA grew 10.6% year on year and 4.6% quarter on quarter, to KRW1.103 trillion.

Let me now move onto the 2007 management plan.

First of all, our 2007 revenue target has been raised from the existing KRW11 trillion to KRW11.3 trillion, replacing the quantitative and qualitative improvement of the subscriber base.

The competition for the MNP market share and the WCDMA subscriber gain is expected to continue into the second half. Against such back drop, SKT plans to spend a 24% marketing expense of the total revenue of 2007, in order to maintain the overall market share of 50.5% and to achieve the 1.5 [million] WCDMA subscriber number. However, SKT will do its best to practice efficient expense management, while continuing its efforts to stabilize the market and pursue new subscriber base market strategy through advanced segments' marketing.

Considering the rise in the marketing expense amidst heated market competition and the convergence BM development needs, the EBITDA target is set at around KRW4 trillion. In 2007 SKT will do its utmost to maximize profit, especially through a flexible and organic approach to the changes in the competitive landscape and industry paradigm.

Next, I would like to touch upon other issues of interest in the market.

Also during the second half, SK Telecom will continue to optimize the operation of WCDMA and CDMA networks while considering the competitive landscape and the subscriber response, in order to effectively adjust the migration speed to WCDMA. We will seek to increase the ARPU for WCDMA through differentiated unique services, such as diverse video services and QA high-speed data services. Leveraging the proven voice and data qualities from the 10-year track record of CDMA, we will focus on further enhancement of customer loyalty.

With regards to WCDMA, SKT is planning to continue the unique service offering during the second half based on the fully-established call quality at par with CDMA. We will further strengthen the foundation of the growth of WCDMA through handset competitiveness in terms of handset pricing and line-up. Within this framework, we will seek both stronger marketing and cost efficiency at the same time.

As disclosed earlier, SKT will address the bundling need by forming alliances with three MSOs to initially launch bundled products of Wireless and Broadband Internet products. Going forward, we will diversify the product offering by including services, such as Cable TV, in order to provide additional benefits to our customers. At the same time we will also seek to create new value platforms for the mid to long-term time horizon.

Next, let me comment on the global businesses.

S-Telecom in Vietnam has recorded 2.44 million subscriber number as of the end of June. The market share has increased to 8.2%, which is a healthy growth trend from six months ago when the market share was 7.5% at the year end. Notably, S-Telecom's market share in the net adds market in June was an impressive 20.6% following Viettel, the number one player in the market, carrying on the remarkable growth trend. Accordingly, we are expecting S-Telecom's 2007 subscriber number to exceed the original guidance of 3 million and reach 3.5 million.

Regarding HELIO, both SKT and Earthlink BoDs have completed the approval of additional investment of up to $100m respectively. Following the launch of the well received handset, Ocean, during the first half, two to three additional handsets are scheduled to be launched during the second half to secure the differentiated and dedicated handset line-up for HELIO. We will also focus on growing the subscriber base and realizing the economy of scale through continuous dealership expansion and differentiated service offerings.

In China, SKT is maintaining a friendly relationship with the Chinese Government since the KRW1 trillion investment in China Unicom's CB. SKT is continuing its efforts to prove its competitiveness in the market. Notably, the conversion of China Unicom's CBs has become possible, as of July 5. We are currently reviewing if and when conversion should happen.

Lastly, we are planning to execute the interim dividend at an appropriate level upon securing the BoD approval. The 2007 cash dividend, including the interim dividend, will be KRW8,000 per share. Since the foreign ownership limit has been exhausted, we are watching the market situations closely to determine the right timing for the promised KRW200b Treasury share buyback.

Leveraging the accumulated technological prowess and its leadership in the development of the global mobile telephony industry, SKT will continue to expand both the customer and shareholder values. We will turn market changes into opportunities for new growth and reinforce our position as market leader.

We asked for you unwavering interest and support.

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

(Interpreted). Now the Q&A session will begin (OPERATOR INSTRUCTIONS). The first question will be given Mr. Chong Win Yang from Handel Investment Securities. Please go ahead, sir.

(Interpreted). I have the following two questions. First of all, if you look at the results they are provided on a quarter-on-quarter basis, your revenue has increased by 4.8% but during the same period the data revenue only grew by 4.1% quarter on quarter. And I would like to know exactly why that is so, because people perceive data to be the future growth drivers. Therefore, when do you expect such growth trends to recover in the near term.

And the second question has to do with your EBITDA guidance of KRW4 trillion that you have expressed. According to our calculation during the first half, you have recorded KRW2.16 trillion worth of EBITDA. That means the remaining portion to be expected in the second half will be about KRW1.840 trillion, so that would be about only 85% of the first half level expected during the second half. So do you consider that to be a rather conservative forecast, or did you believe that this is an appropriated calculation? So also relatedly, does that mean that you are expecting even more intensified competition coming from the second half?

(Interpreted). Let me address your first question first. As you are well aware, we have reduced the tariffs for the Wireless Internet service charges in the beginning of the year and we have also suspended provision of the adult content during the beginning of the year. So those two factors have affected the downward trend of the revenue slightly.

However, if you look at the overall picture, I believe that the data-related Internet revenue has actually -- has not come down that significantly and I believe that during the first half of this year there was a heated competition to acquire subscribers, during which case our Voice revenue has grown quite sizably.

So although the data revenue also has grown, proportionally speaking it does not seem as large as before. So, therefore, if we pursue our plan with WCDMA services in the near future, as well as the e-commerce related services, by coming up with various types of convergence business models that we are planning, we expect the revenue to pick up even further in the near future.

Your second question has to do with the reduction of the EBITDA guidance into the second half of this year. And there can be a couple of reasons for such forecast, although we must mention that this is only a forecast. The first reason has to do with the marketing expenses which will be expended in the second half.

We are expecting a more aggressive sales and marketing effort coming from our competitors during the second half. As you know, there is the WCDMA as well as Revision-A initiatives planned. And also there is the MNP markets competition which is also expect to heat up during the second half as well. Therefore, we have allocated appropriate level of marketing expenses for the second half, so that is one reason.

And the second reason is that, as I mentioned in my opening remarks, I believe that e-commerce and other types of convergence businesses will be our future drivers for revenue growth for the Wireless Internet business. So such initiatives require investment.

And also we need to continuously identify different types of business models for new growth, which also requires investment as well. And as you know, we are currently managing dual network and that means added network operation expenses.

So for those reasons that I have listed, we are looking at about KRW300b less of EBITDA coming during the second half.

(Interpreted). The following question will be given by Mr. David [Li] from CLSA. Please go ahead, sir.

(Interpreted). I have the following two questions. During the first half of this year the number of subscribers has increased more than 5%. Could you share with us the reasons why?

And the second question has to do with your share holding of SK C&C. When, and it what form, do you plan to dispose of such shares.

(Interpreted). First of all, during the first half we have experienced a growth in the subscriber number and, as you know, during the first half there was a very intensified competition in the market. Therefore, because of such heated competition I believe that the overall size has grown. And also because of the high penetration level of handsets in Korea, we have concentrated on the relatively low penetration level related segment in the market.

So in the case of SK Telecom we have focused on the age bracket between 12 and also middle school and high school students, as well as the [similar] age, which is the older population as well. Due to such reasons we have seen an increase of such subscriber numbers. An additional reason was because of certain work needs and work requirements, certain subscribers seem to have more than a single line which is subscribed to with our Company. So that has also added to the new subscriber number.

Your second question has to do with the share disposition regarding the SK C&C shares that we hold right now. We do understand that there is a high level of interest among investors on this particular issue, and we will be dealing with this issue for sure. But as you are well aware, there exists a certain grace period since the development of the holding company's structure.

So we will abide by such grace period and, when the time is right, we will dispose such shares according to the acceptable and the normal way of disposal in the market which is acceptable by investors, for sure. And the fact that this company is an unlisted company, therefore, there can be many different ways of conducting a valuation of this particular subsidiary.

So, therefore, at this particular juncture, we cannot communicate with you as to what type of gain from the sale of these shares we could realize at that time. Therefore, once we make those decisions then we will closely communicate with you regarding the actual gain that is expected.

(Interpreted). The following question will be given by Mr. John Kim from Merrill Lynch. Please go ahead, sir.

Yes, thank you very much for the opportunity. I have two questions. First, regarding SKT's 50.5% market share policy, could you please share with us if this is going to be a permanent policy? If not, for how long? Can you quantify the additional value to shareholders by maintaining over 50% subscriber market share? For example, what difference does it make if SKT's market share is 48% or 49%, if lower market share is not translating into lower number of subscribers?

Second, regarding SKT's overseas investment strategy, does the management's intentions to provide tangible progress on your existing investments before making any further sizeable investments, still remain intact? If at some point in the future, if you decide to make further investments, what kind of minimum thresholds that you would set for proof of SKT's ability to succeed abroad, that you can share with us?

And related to this, regarding China Unicom Convertible shares, can you tell us if you will use the gains to increase your cash dividend policy? Thank you.

(Interpreted). Well, first of all, regarding your first question about our market share, yes, it is true that some investors have commented on the subscriber number issue as well and the Company's position is the following. Right now we believe that the market is not fully stabilized yet; rather there is a lot of uncertainties existing in the market.

So if you look at it from the mid to long-term perspective, we have to decide whether we will go for the market share or the subscriber number. And so far we believe that, and we judge that choosing the market share will be a better decision in our view in the mid to long-term perspective.

The reasons can be many and I believe that we've mentioned on other occasions as well, and if I may reiterate some of those issues. I believe that market leadership will be quite critical. By maintaining more than 50% market share, we would have various advantages in the market. As you are well aware, the market climate is changing quite quickly and we are seeing the introduction of bundled services in the market as well. So if you are the market leader, you have better position in terms of negotiation capabilities.

And the second factor is that, as I told you before, we are looking at a downward slight adjustment in terms of EBITDA going forward, because we plan to develop various BMs for new business models. And even in doing so, as we try to launch such new business models in the market, if we are the market leader there is more upside potential and more execution success possibility as well. That is why we believe that maintaining above 50% market share would be critical.

You asked about the global businesses on various issues. As you know, with regards to global business related investments, it's not something that we can expect to reap gains overnight and we need to give it some time before we begin to see some visible results. And I believe that it also depends on that particular market situation. SKT, in the meantime, will have no other choice but to focus basically on enhancing their competitiveness in those respective markets that we have already entered into, which are China, Vietnam and the U.S. in the case of HELIO.

And I believe that if you ask about the threshold, or the minimum criteria that we would see as the success point for these respective markets, it would depend on each market as well. In the case of Vietnam, for instance, if we could turn black in the net income numbers, I believe that that would be the period where we feel that we have begun to see the visible results. Whereas HELIO is a market that is a matured market already, so we would deem a positive free cash flow point would be the turning point of our stating that it would be a success.

Now in the case of China, we have not actually begun the actual business in the market. So it would all be up to the market environment as we finally launch our business in China.

Regarding your third question about the China Unicom's Convertible bonds, as you are well aware, initially we have invested in China Unicom about a year ago in the form of Convertible bonds because there were other outstanding issues that had to be resolved with regards to 3G license and other types of industry restructuring issues. And as of July this year, now we are eligible for conversion and, compared to the previous year's purchasing price, we have seen quite an upside in terms of the share price increase.

So I believe that that has brought down the downside quite a bit, in our opinion. But we also feel that we need to be more proactive in dealing with China Unicom, so we are positively reviewing the conversion option for the Convertible bonds. And as you are well aware, even if we do so it would not be reflected as immediate profit for the Company. And also it would be a non-cash transaction, therefore, we have no plan for now to turn that into a cash dividend or any type of extraordinary dividend for the investors.

Thank you.

(Interpreted). The following question will be given by Mr. Mitchell Kim from Morgan Stanley. Please go ahead, sir.

Yes, thank you. I have two questions. First question is on your EBITDA guidance. Look, please tell me if I misunderstood. Now you said that your targeting EBITDA at around KRW4 trillion and the reason is that, one, you expect higher marketing costs, second, you said that HSDPA dual network line [costs].

But if I look at second quarter, you were able to achieve EBITDA margin of 39% even with marketing costs at 24.7%. So I would think that if you -- even if you kept your marketing costs at around 25%, or certainly higher, percent of sales you would still be able to reach 39% EBITDA margin. So if you could just -- if I'm wrong in thinking that way, please let me know if I'm wrong in thinking that way.

Second question is on your statement about dual network costs. You said 300b. Do you think this is -- it seems to me this is a large cost, especially given that from KTF -- KTF thinks that their incremental cost of running a dual network is about 70b for the whole year, 35b for the first half. So if you could just come in on why you think that your costs are much higher than KT Freetel, especially when you look at it on an annual basis, if you look at it -- if you used 600b for the annual, that represents [then] almost about 5% of revenue, which seems quite high, even for running dual network.

And related to that, what is -- what are the costs that's related to running a dual network? I would assume that it was leased lines and site rental which you should have been paying for already in the first half of this year, in preparation for HSDPA launch, so what am I missing? If you could clarify that, I would appreciate it. Thank you.

(Interpreted). Well, let me first of all try to answer your two questions together, because I think they are related somewhat. First of all, let me address the marketing cost issue. I have mentioned earlier that we anticipate the marketing expense to increase during the second half, and some of the reasons being that we would be basically launching WCDMA, and I also mentioned the target subscriber number of about 1.5 million, and also that would entail various auxiliary expenses, including the handset-related expenses as well, so that is one factor.

And regarding the network related expense issues, I have earlier mentioned that network -- dual network expenses are part of that reduction announced of 300b that I told you about, so that's one part of it. And also, in addition to that, we have convergence-related, e-commerce-related investment and also new growth business model, development-related investments that are involved as well. So including all those, the figure was about 300b or more.

And as you know, as a Company we need to continuously try different business model development for convergence, and we need to further seek growth and revenue increase in the process as well. So as ask that you look at this particular line item as an investment rather than expense.

And you asked several questions, actually, regarding the dual network related issues and perhaps I have not communicated efficiently during my opening remarks or earlier remarks. I believe that it's not that big of an increase coming from the dual network running costs, and it would only amount to about KRW100b extra. And also on top of that, SKT as you know, has only started the nationwide rollout for WCDMA starting from the second quarter this year, and during the second half of this year we are looking about 1.5 million s, which will also entail additional expenses.

So WCDMA-related expenses will take up quite a bit of share, and also I told you that EBITDA [compared] to the first half. In the second half we will expect about 300b less.

And so, if I may just recap briefly, the first reason would be these increased marketing expenses. It has to do WCDMA and an increased intensified competition in the market. And the second factor would be various types of investment that has to go into e-commerce and other types of convergence-related new growth business model development. And thirdly, as I mentioned earlier, it would include some dual network running cost. So altogether, that would bring down the EBITDA for the second half by about KRW300b compared to the first half.

Okay, thank you. I have more questions but I'm sure everybody else will have some questions as well.

(Interpreted). The following question will be given by Mr. [Han Joon Kim] from Goldman Sachs. Please go ahead, sir.

Great, thank you very much. I was just wondering if you could help us understand the framework of your investment philosophy. Obviously, there's been a lot of talk about different types of potential investment here and there and everywhere. If you could just help us isolate where you really stand in terms of your investment thesis?

For example, one thing you mentioned is that you're looking into just growing in terms of Vietnam, U.S. and China, but even in those markets, if you could just help isolate some of the areas, for example, other operators and other countries, say, that they will only want to go into wireless business, or they only want to go into under-penetrated markets and so forth. So if there's any sort of framework philosophy that we should be keeping in mind in terms of where you want to spend, invest more cash, that would be very helpful.

And the reason I ask this is, in part, because of when you responded to the news flow on Sprint today, you mentioned that you have not reviewed the possibility at all. So, given that Sprint is still in the U.S., I'm just wondering why it was never reviewed?

My second question is ultimately in context of that, where you stand in terms of your holdings in POSCO. Previously, if I'm not mistaken, you mentioned that you're holding it for strategic reasons and now, given how much POSCO share prices rallied over the past year, do you think that that strategic reason still hold? And in terms of looking at it from an investment perspective, is there any inclination to take profit on that investment and return it to shareholders? Thank you.

(Interpreted). Let me first address your question regarding our overseas investment-related philosophy. You are quite correct that we also do have a point of view in this. We mainly look at the strategic integrity, or the strategic fitness with such a business initiative overseas and our Company. And we also look at the potential profit size in that particular market, and also we look at the timeframe at which we could return in that particular market. So if I need to summarize our philosophy, it would be the following three.

First of all, we look at whether culturally and geographically these markets are viable markets, in our view, and secondly, whether we would have an opportunity to transfer our know-how and technological prowess, for instance, in CDMA, and also likewise for GSM or in those receptive markets. And thirdly, we review the potential partners in that market, whether they are trustworthy and whether they are motivated to work hard along with SKT. So these would be some of the philosophies that we abide by when making global investment decisions.

So therefore, that is precisely why we have chosen not to go into the large case and fixed line business in Vietnam, China or the United States but, rather, we chose to stay as an MVNO player. And to answer your question about the Sprint-Nextel [brand] issue, during the course of our work we do receive many different investment proposals and this was one of those. But, as we have already disclosed, we haven't pursued the proposal.

Let me answer your question about the POSCO shares. It is quite true that compared to the acquisition price that we paid initially, the stock price has risen quite a bit. However, from SKT's perspective, we are still abiding by the original principle of the strategic reasons. Therefore, we have not at all considered the possible sale of such shares. Therefore, at this time, we cannot comment on any possibilities of shareholder returns.

Thank you.

(Interpreted). The following question will be given by Mr. [Jeff Khang] from Credit Suisse. Please go ahead, sir.

(Interpreted). Yes, I have the following two questions. First of all, you mentioned earlier about a possible investment during the second half on e-commerce-related initiatives as well as the development of new growth BMs as well. Could you be more specific on those items? Are they simply investment purposes, or how would you be designing the business model? So I would like to know some details about those plans.

And my second question has to do with the 3G handset-related policies. In the beginning of the year you have mentioned that by the year end, probably the prices of the handsets will come down, and that the number of handsets would possibly increase as well. So could you be specific as to how many models for 3G services we could expect until the year end, and possible ASP as well?

(Interpreted). Let me talk about the overall picture about the convergence business that we are developing. I believe that through the media, you have heard our activities in various areas, including games, movies as well as e-commerce and, since e-commerce is taking up the lion's share of the investment related, let me comment on e-commerce at this point.

We are currently building platforms for open market as well as our recent acquisition of Morning 365, which is a specialized book-related Internet portal. And so, by the year end this year, we plan to integrate this open market, together with a specialized book-related shopping portal, in order to provide a specialized portal for wired and wireless shopping experiences. And however, I must point out the fact that this type of investment does not entail large sum CapEx type of investment but, rather, these are running costs, such as BM development cost, as well as the operation cost.

Well, in the WDCMA area, as of the end of July, we have, in total, five models for an SBSM model. By the end of year '07, we are planning to launch over -- about 20 different models, and our basic handset-related policy remains the same, in that we will be mainly focusing on the very sophisticated specification, high functionalities type of high-end handsets. However, we do recognize that there exists low price, very high competition handset market as well, so we are planning a few handset line-ups for the mid to low price range point of view as well.

Let me comment on the price range of these handsets as well. As you are well aware, currently the prices of the handsets for WCDMA are higher than that of CDMA handset cell phones, but as the WCDMA market size increases, there will be economy of scale that take place, and there will be heated competition from the handset makers as well, which will naturally bring down the price point. So we believe that the prices will start to significantly come down, starting from the first half of 2008. And if you ask about our ASP for the low price range, we're looking at about KRW300,000, and also for high end, we're looking about KRW600,000.

(Interpreted). The following question will be given by Mr. [Stanley Yang] from Lehman Brothers. Please go ahead, sir.

(Interpreted). Yes, I have a couple of questions, and my first question has to do with your EBITDA. You have provided us a guidance of KRW4 trillion for '07 EBITDA, and I would like to ask how conservative this figure is. Because if you are accounting at KRW1.84 trillion for the second half, this seems to be far off from the market forecast that is given by analysts.

And of course, you have mentioned three reasons why, and if I may touch upon the marketing cost issue? Now during the first half, you have only spent about 24% of revenue in marketing expenses, and you were still able to raise your market share by 3 bps, therefore, keeping your 50.5% target. And during the second half, you are saying that you would increase such marketing expense up to 25% and I'm not sure whether it is intended to maintain or increase the market share in the process.

The reason why I'm saying this is because recently, during a conference call, [KTF] has expressed that they expect the market to stabilize, starting from the second half, and also regarding LGT, their Revision-A services will only begin, starting from next year. So I don't quite understand why you are saying that 25% marketing expense is necessary. Does that mean that you plan to increase the share even more, or to simply defend the current share?

And my second question has to do with your dual network operation-related expenses. You said KRW100b earlier, but does that mean that compared to first half, you are going to spend extra KRW100b during the second half? And if yes, where would you be spending it, and in which line item in the accounting books would you show that? Is it under depreciation? I don't think so, so would that be under [leased] lines? So could you share with us which line item?

And thirdly, regarding the BM development, you said that you expect additional development/operation expenses for the new growth business model development, and you said that that would take place by the end of this year. Now, which line item in accounting books would that be shown as well? Is it through raised labor costs, or is it under R&D expenses? Could you share with the details?

(Interpreted). Let me talk about the marketing expenses a little bit more. I don't think that I should elaborate too much for you to assume how heated the competition will be in the market regarding the second half. I believe that in the second half we are anticipating added competition coming from the WCDMA. And also there is a high likelihood that the MNP market competition will heat up as well. Therefore, we are planning to defend our 50.5% market share guidance and, therefore, we do believe that additional marketing expenses would be necessary.

And as you know, our current subscriber number as of the end of June for WCDMA services, stands at around 380,000 or so. It's less than 400,000, and we are targeting the subscriber number for WCDMA by the year end to reach about 1.5 million. And as I mentioned earlier, the WCDMA handsets tend to cost more than the CDMA handsets. Therefore, it equates to added acquisition costs per subscriber as well. So those are reasons why we are looking at higher marketing expenses.

Let me elaborate on the network-related costs. As I mentioned earlier, we are planning to invest more in the WCDMA, especially the number of base stations for WCDMA will increase. And during the second half, because of the seasonal factors, various types of rental expenses will increase as well as these items as well. And it's not that one particular line item will surge in terms of the increase but overall, for instance, leased line expenses as well as maintenance and even electricity, or other types of rental expenses, will increase because of [the seasonal] factors. And overall, we're looking at the total of about KRW70b for the added network cost.

And regarding the growth related e-commerce and convergence-related expenses, unfortunately, we cannot share with you all the fine details about expense items. But let me reassure you that these would be mainly spent for market researches, for consulting expenses and development of pilot products as well, so these should be seen more as an investment in new businesses and, nevertheless, we will do our utmost to minimize such expenses.

(Interpreted). The following question will be given by Mr. [John Bae] from UBS. Please go ahead, sir.

Yes, thank you very much for the chance. My first question is on your CapEx and depreciation. Your competitor, KTF, raised its CapEx budget yesterday. They cited HSDPA capacity increase as the reason. Could you please confirm with us your CapEx guidance for this year, and also if you could give us some sense on your CapEx budget for 2008 and 2009? Also, your second quarter depreciation, it seems, came in above market expectations. How much depreciation expense do you expect for the full year 2007?

My second question is, again, regarding your EBITDA guidance. I understand, regarding the marketing expense. However, if my calculations are correct, it seems you're expecting the non-marketing expenses to increase by over KRW350b in the second half. How conservative do you think this is? I ask this because last year, at exactly the same time, you provided EBITDA guidance of KRW4 trillion, but actually your results came in higher.

(Interpreted). Let me address your question about CapEx. For this year, we have provided a guidance of KRW1.550 trillion, and we plan to keep with that original guidance. And as I told you before, during the second half we're looking at about 1.5 million subscribers and, of course, that will entail certain additional service development and capacity increase, but it will not be that significant. Therefore, we still plan to abide by the original guidance.

And regarding '08 and '09 CapEx guidance, for now, we do not have plans to expand such budget but, as you are well aware, we are maintaining the dual network strategy in order to retain subscribers, and also to maximize the CDMA effect. And as you know, we are currently pursuing Wibro technology as well. But, nevertheless, we plan to keep to the similar level as this year.

Let me answer your question about depreciation. On a quarter-on-quarter basis, the second quarter depreciation number has increased, but it was mainly because of the early expenditure of the WCDMA-related CapEx amount. And regarding the overall size for the entire year, it's quite difficult to give you an accurate figure now because it all depends on the timing of the expenditure taking place, because we follow the straight line method. And so, generally speaking, we do not communicate in terms of the yearly based depreciation cost. But generally speaking, usually compared to the first half, the second half figures tend to be higher.

And regarding the EBITDA guidance of KRW4 trillion, I believe that there might be some concerns that we might be spending more during the second half compared to the first half. And I have shared with you possible reasons why we do require certain additional funds, because of the marketing as well as the development of the new growth business model. But it does not mean that we will be spending money in an unbridled fashion during the second half either.

We would be managing the marketing expenses according to the market climate changes. And also, with regards to the convergence-related business model, it is critical and it is required for future growth driver identification. And so, nevertheless, we will be quite wise in the expenditure management but, for now, let us keep with the EBITDA guidance of KRW4 trillion.

(Interpreted). The following question will be given by Mr. [Dong-Sub Yi] from [Daishin] Securities. Please go ahead, sir.

(Interpreted). I have the following two questions. Recently the government has been announcing various policies, for instance, possibly allowing MVNO players in the market, and how it intends to allow new entrants into the industry as well. So what is your view on this government policy? It might be a difficult question and a sensitive question at that, but I would appreciate it if you could share with us?

And second question is regarding your assumption about subscribers until the year end. What is the total subscriber number that you are looking at?

(Interpreted). I believe that you were talking about the recent roadmap announcement made by MIC, and it has something to do with the allowance of more re-sales -- re-selling of the telephony services and allowance of MVNO players as well. And that means that the basic ultimate objective of the government is to provide lowest possible tariffs for the customers. However, nothing has been finalized yet, so it is difficult for us to share with you any specific stats on our part.

However, the Company's perspective is as follows. Already in the mobile telephony market, re-selling has been made mandatory to a sufficient degree already and, of course, it is critical and necessary to have competition in the market, and also to provide as much convenience to the subscribers as possible, and also to attract investment in the industry. But again, as I told you before, the re-selling has been already made mandatory to sufficient degree so, therefore, we need to have a certain level of safeguard in order to ensure investment going forward.

And regarding the subscriber number question, again, we are targeting 50.5% market share target until the end of the year and so, from SKT's perspective, our subscriber number is estimated at about 22 million.

(Interpreted). The following question will be given by Mr. [Chando] from GIC. Please go ahead sir.

Hello, thank you, good afternoon. Thanks for the opportunity to ask a couple of questions. The first question is just on your stance towards HSDPA. Previously I thought the stance was a relatively evolutionary, piecemeal approach to HSDPA but from your margin guidance one could draw the implication that you're going to be more aggressive, or revolutionary in your HSDPA promotion, so is that correct?

The second question, again, is on your EBITDA margin guidance. I guess you must be tired of answering these questions. But in the second half your guidance implies about a 32% EBITDA margin, which I can't actually remember when you last earned a 32% EBITDA margin. I guess there was a dip back in '04, but it wasn't into the low 30s, so this is a pretty new piece of news.

At what level of EBITDA margin would you be willing to suffer in the short-term for long-term growth opportunities, long-term growth in profits? Are you willing to actually go below that 32% margin, even into the high 20s, or is 32% really the base case and, hopefully, you will actually do better than that? Thank you.

(Interpreted). I believe that earlier we have mentioned that we would -- the balance between CDMA and WCDMA going forward has been to introduce HSDPA. I don't think that the exact word was that we would go to an evolutionary or gradual approach, per se, but basically it was pretty much up to the customer needs regarding the handsets, as well as the customer response to the 3G types services in the market, and whether we could expect higher ARPU compared to existing CDMA services.

Therefore, SK Telecom has targeted about 1.5 million subscribers by the year-end of 2007. So I won't comment progressive, or aggressive, or revolutionary for that matter, in our approach currently, because we have been watching closely for WCDMA trend in the market. And as a result of such observation, we came to the conclusion that the year-end target of 1.5 million for the year 2007 would be appropriate.

Regarding EBITDA margin, last year we had told you that because of the saturation in the telecommunications industry, we need to look at the overall revenue and also the subscriber growth. Therefore, we decided to communicate the EBITDA-related numbers in terms of the absolute value instead of the margin figure. And as you know, as we begin to pursue more convergence business models in the future, the margin is bound to come down slightly. And as the Company gets larger, the margin might edge down slightly as well.

Therefore, we will continue to communicate with you in terms of the EBITDA value, instead of the EBITDA margin value. Of course, we could always go back to the margin comparison between different periods. However, looking at the mid to long-term perspective, I believe that maximization of the corporate value would be the most critical objective. Therefore, we would continue to focus on increasing the absolute value of EBITDA.

Just a follow up. Is KRW4 trillion really then the EBITDA base case? You made the same guidance last year. If we're talking just in terms of absolute values, KRW4 trillion is the base case below which you wouldn't want to pursue more aggressively marketing activities or investments in convergence products?

(Interpreted). Yes, that KRW4 trillion is the management target.

Okay, thank you.

(Interpreted). The last question will be given by Mr. Sam Min from BNP Paribas. Please go ahead, sir.

Thank you. I was hoping to shift gears here quickly and ask you about MVNO a bit. Running HELIO in The States, I was wondering if you can share with us some of the challenges or difficulties of running an MVNO in the U.S. market and if there are any similarities or the same difficulties if you think that would present in the Korean market. If you could add color, I would appreciate it. Thank you.

(Interpreted). Regarding MVNO, as you are well aware, literally it means borrowing somebody else's network to provide telecommunication services and, therefore, we have actually expected and also experienced certain challenges in dealing with, I guess, the service launching the way we want to. First of all, from the technical perspective, if we want to launch certain network capabilities, it's not entirely up to us to manage the network so there is certain constraints.

And secondly, regarding MVNO, it's usually not a large-sized business but, rather, a smaller-scale business. Therefore, there can be some challenges in securing sufficient dealership network. Therefore, there might be an issue with economy of scale. Now therefore, SKT in launching HELIO in the United States has therefore focused on a niche market, targeting high ARPU, high-end customers.

And if I may compare things with the United States, of course, Korea is different because the Korean Government has only recently -- quite recently announced a larger framework or guidance for MVNO business and, therefore, no details have been announced yet. Therefore, the two markets they are quite different, so apple-to-apple comparison would be quite challenging. However, according to our own experience of doing MVNO business in the United States, I could tell you that it could be a daunting task.

If I can follow up, thank you for that insight. Conversely, if an MVNO in Korea tries to attack the low-end subscribers using disruptive pricing technology, do you think there is perhaps [hostility] there?

(Interpreted). Well, it's difficult to assess the situation for us, but according to various analyst reports that I have read, many analysts have stated that therefore low ARPU players, both in the wired and wireless areas will be suffering the most.

(Interpreted). I'm sure that there are many more questions but, because of time constraints, we will conclude the Q&A session, and now I would like to invite our CFO, Mr. Ha Sung Min for his closing remarks.

(Interpreted). First of all, I apologize for the shortage of time today, and if you have further questions please contact me through email or please contact our IR Department, and we will do our best to respond to your question.

As I mentioned earlier, we anticipate the second half of this year to be a very challenging period and we anticipate various changes in the market as well so, against that backdrop, SK Telecom will do its best to keep abreast of the changes and develop various business models as well, although we do, as you have pointed out, have to deal with the EBITDA issue.

So we will continue to do our best to remain as a market leader, and by leading various changes in the trendsetting manner. And as you can tell, your opinions are quite valuable to all of us and, therefore, this is especially the important time, critical time for us to listen to your various opinions and receive your interest. So we will do our best to maximize our corporate value and the shareholder value going forward.

(Interpreted). Thank you very much. This concludes the [SK Telecom] conference call for the second quarter 2007.

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.