SK Telecom Co Ltd (SKM) 2007 Q3 法說會逐字稿

(interpreted) Thank you very much for standing by, ladies and gentlemen. We very much appreciate you all joining SK Telecom's earnings release conference call for the third quarter of fiscal year 2007. Then, without further ado, I'd like to turn it over to SK Telecom. Thank you.

(interpreted) Good afternoon, and today's conference call will consist of SKT's CFO Mr. Ha Sung Min's presentation on the 2007 third quarter's earnings highlights and other matters of your interest, followed by a Q&A session.

Today's conference call will last about one and a half hours with consecutive interpretation. Let me also remind you that all the forward-looking statements are subject to change depending on the macroeconomic and market situation.

Let me now introduce our CFO, Mr. Ha Sung Min.

(interpreted) Good afternoon and my name is Ha Sung Min, I'm the CFO of SK Telecom. Thank you for taking part in today's earnings conference call for third quarter 2007 despite your busy schedule.

Let me begin with the earnings highlights for Q3. The revenue for the third quarter has increased 3.8% year-on-year to KRW2,815.6 billion, supported by the continuous growth of new subscribers. The less numbers of business days and other seasonal factors led to a 1% reduction on a Q-on-Q basis.

The wireless Internet revenue rose 4.5% compared to the same period previous year to KRW700.4 billion, led by the robust growth from the phone mail service. On a Q-on-Q basis, the wireless Internet revenue edged down 0.6% due to the aforementioned seasonal factors. The share of the wireless Internet in the total revenue excluding interconnection fees was 27.5%.

The marketing expense for Q3 was KRW710.7 billion which was a 1.1% increase quarter-on-quarter and a 38.6% increase year-on-year. The marketing expense to revenue ratio was 25.2%. The third quarter saw a rising demand for handset upgrades compared to the previous quarter, including the WCDMA, which led to a slight edging up of the marketing expense. Compared to the stable market environment in Q3 '06, the expanding new subscriber market as well as the relative increase in initial commission [brought up] the marketing expense.

The operating income came down 19% quarter-on-quarter and 29.2% year-on-year to KRW536.6 billion, mainly caused by the growing depreciation from faster implementation of WCDMA CapEx and the rising marketing expense. The increase in other cash-related operational expense from seasonal factors led to the quarter-to-quarter decrease. On the other hand, the growth of non-operating income such as gains from China Unicom CB conversion boosted the net income by 92.6% Q-on-Q and 70.1% Y-on-Y to KRW777 billion. The EBITDA came down 8.3% quarter-on-quarter and 13.9% year-on-year to KRW1,011.5 billion.

That was the earnings highlights for the quarter. Now let me move on to other issues of your interest. Let me first share with you the future market strategy as well as the WCDMA strategy.

Despite the high market penetration rate and the aggressive WCDMA marketing activities of our competitors, SK Telecom is maintaining the already communicated market share target of 50.5% and the market leadership through a strategic market approach.

We have communicated this point on other occasions as well, but on this, the intensifying competition in the WCDMA market, SKT will control the migration pace, considering the customer response, rather than artificially driving the migration. Ultimately, SKT will seek to strike the right balance between market leadership and profitability.

In order to create the critical mass in the WCDMA market going forward, the following three prerequisites need to be met to secure the competitiveness in the market.

First, is a high call quality at par with CDMA. Second, the convenient and innovative services driven by subscriber demand. Third, more various and affordable handset lineups. We believe adequate time and investment are necessary to meet those requirements.

Especially securing the enhanced service quality through WCDMA network quality improvement is the most essential and critical factor determining the market leadership in the next generation mobile telephony market.

After prudent consideration of all these factors, we have decided to increase the total CapEx guidance for the year, from existing KRW1,550 billion to KRW1,750 billion, to enhance the WCDMA quality and to add more capacity.

Together with the strengthening of the network infrastructure, we will continue to expand the active subscriber base by introducing more customer-oriented fixed price lines, and by linking these services with free content. We will not only further diversify the lifestyle enhancing services such as MMS, UCC, commerce and advertisement, but also expand the differentiated product choices such as wide wireless search and Mobile Cyworld by strengthening the links with wired Internet services.

We expect growth in the wireless Internet as well as an upper hand in the competitiveness in WCDMA through such strategic content development and expanded distribution.

I would like to touch upon [test cuts], such as the on-net discount which was recently introduced. As was reported through the media, SK Telecom has launched an on-net discount product, which provides discount on voice and video airtime charges among SKT subscribers. Starting from January 1, 2008, the SMS tariff will also be reduced. We will do our utmost to generate more positive impacts, such as increased usage, higher retention of quality subscribers, and reduced churn by implementing these measures.

We may now move on to the global businesses. In the case of Helio, we have already announced the additional investment in September to expedite the realization of economies of scale through more aggressive marketing activities. We are seeing an accelerated upward trend in subscriber numbers since the introduction of the new handset Ocean.

In addition to the strengthening of the strategic handset lineup, we will also innovate the overall marketing activities through enhanced service competitiveness, distribution, prices, and promotions. Through such efforts, we will steadily improve the performance by highlighting the unique competitive edge of Helio from other MVNO entities.

In China, we have become the second-largest shareholder of China Unicom, through the CB conversion, which helped us secure a more advantageous position for participation in the potentially rich Chinese market. SK Telecom will concentrate on diverse business development and profit creation, leveraging the 150 million subscriber base of China Unicom. Through these efforts, we will solidify our future business fundamentals in China.

Vietnam is rapidly emerging as a market with strong [off-site] potential, supported by the positive economic growth prospects upon joining the WTO. S-Telecom is already building a nationwide network coverage centering around the major metropolitan areas. Also, aggressive marketing activities are being pursued on price plans, distribution and handsets. Thanks to such enhanced competitiveness, S-Telecom's subscriber numbers as of the end of September exceeded 3 million, on the way to 3.5 million subscriber guidance of this year.

Next, I would like to address the shareholder return.

In the beginning of this fiscal year, SKT has announced its plans to issue KRW8,000 per share cash dividends, as well as the treasury share buyback of KRW200 billion. The specific timing and method of treasury share buyback will be determined at the [BoD] in the near future, upon considering various factors such as the stock price trend and the foreign ownership limit. We will do our utmost to complete the overall process within this year.

SK Telecom is doing its best to maintain financial stability while creating virtuous cycle of enterprise value and shareholder value. We ask for your continued interest and support in reaping the fruit of these efforts.

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

(interpreted) Ladies and gentlemen, now we would like to open up the floor for some questions and answers. (OPERATOR INSTRUCTIONS) In order to offer opportunities to as many participants as possible, would appreciate it greatly if you could limit the number of your questions, two per person. Thank you.

The first question will be provided by Mr. [Jeff Kahng] from [CS Securities]. Would you like to go ahead with your question, sir?

(interpreted) I have the following two questions. First (inaudible) a question about the next year's prospects regarding the competitive environment in the market. Recently you have introduced the on-net discount program or the same carrier discount program and I believe that the market is showing quite a bit of interest in that change. So far the competition -- competition within the market has been mainly focusing on the handset side basically surrounding the subsidy issue. However, going forward beyond next year, would there be a new focus on the price competitiveness instead of the subsidy focus? So could you share with us your view on that?

And the second question has to do with the two one-off factors for this quarter. This quarter you have shown certain gains from the conversion of the China Unicom CBs, as well as the SK C&C-related equity gains type-related one-off gain, so that has boosted the net income of this quarter quite a bit. So would these recent one-off factors have a possible impact on the dividend policy and the shareholder return policy going forward?

(interpreted) Your first question has to do with the next year's competitive environment in the market. As you are well aware, until the first half of this year, the market has been going through quite a fierce market competition basing on the acquisition of new subscribers and [MAP] subscribers and I believe that such fierce competition has given weight to certain learnt lessons effect for the -- most of the players in the market. So ultimately we are seeing the introduction of new price-related discount plans such as on-net discount being provided within the market.

As you have mentioned, going beyond next year we anticipate the market to stabilize much more and move away from the exhaustive handset subsidy-related competition of the past. However, we should keep in mind that there are other uncertainties looming in the next year [time] horizon regarding the elimination of the subsidy ban altogether as well as the [USIM lock] issue. Therefore, we have to still wait and see how market develops going forward, but I anticipate that compared to this year the market will stabilize to a model where the focus will be more on the subscriber retention.

And your second question had to do with the dividend policy. If I may reinstate my statement from the earlier conference calls as well, this year our planned shareholder return consists of KRW8,000 per share cash dividend as well as the treasury share buyback and cancellation of KRW200 billion. As you have mentioned, we have had certain one-off gains such as CUCB conversion factor as well as the equity gain from SK C&C shares as a category under the non-operating income line item, and I believe that that has boosted the health of financial statements of the company. But as you are well aware, these are non-cash transactions, therefore we do not have any immediate plan to go ahead with any further cash dividend because of these one-off factors.

And also, regarding future shareholder return policy changes, it is not up to the company's management, but rather up to the company's BoD, but I could tell you that for now we have no such new changes.

(interpreted) Next Mr. [Jong-in Yang] from [Hancock] Investment & Securities. Would you like to go ahead with your questions, sir?

(interpreted) I have the following two questions. The first question has to do with CapEx. As you have stated just now in the opening remarks, you have decided to increase the annual guidance for CapEx for this year. Now generally each year we've had between KRW1.5 trillion to KRW1.6 trillion in terms of CapEx, but it has gone up slightly beyond that. So I'm wondering whether this year's increase is actually taking on next year's CapEx a little earlier, or can you give us any idea about the (inaudible) guidance for next year's CapEx?

And my second question has to do with page 3,in which I could identify a slight increase of other expense item on the operating income category and I'm wondering whether this is due to a particular structural issue and whether this increase is something that I -- we should place more meaning onto?

(interpreted) [Let me] first address your first question which has to do with CapEx. As you have stated, we are actually bringing in the CapEx for next year earlier this year because of the various factors. As you know, we are anticipating beyond 1.5 million subscriber number for WCDMA this year and therefore we have decided to expedite the expenditure implementation for CapEx from next year into this year.

And regarding CapEx guidance beyond 2008, as you are well aware, it's quite difficult to communicate the actual numbers quite accurately at this point. It would be very much up to the WCDMA migration speed as well as the market environment, so these factors will have quite a bit of influence on the CapEx trend going forward.

As you have stated, it is true that we have seen a slight rise from the other operating expense category and most of that comes from the R&D expense category. As we have communicated with you in the beginning of the year, we will continue to invest in the innovations and R&D activities and that is a part of our activities. And we've had some seasonal factors as well in terms of the water usage and the lighting and the heating-related expenses has gone up slightly as well, but as you know SKT will do its utmost to maximize cost efficiency going forward as well.

And on the network side, I believe that the nationwide network rollout for WCDMA is having some impact on the expense outlay, but again on the remaining network that we possess, we will go through further efforts to minimize the cost and increase the efficiency.

(interpreted) Mr. Mitchell Kim from Morgan Stanley. Would you like to go ahead with your questions, sir?

Yes, thank you. I have two questions. First question is, I just want to try to get a sense about what you are thinking, CFO. If you look at marketing costs, it's up as a result of a [retentive] cost increasing while ARPU is down, especially data ARPU declining. Are you seeing -- do you see any encouraging signs that your marketing strategy is working? Or what are the positive factors that we should be looking for? Or should we just consider this as just cost of defense, and perhaps this is as good as it gets? And any color or perspective on this would be very helpful.

My second question is that, in your second quarter comments, you did say that you expect the margins in second half of the year to come down or come under pressure because of increasing spending on not just marketing but in other areas including games and e-commerce and portals and --. Can you share with us, what is your Internet strategy at this point and what are the concrete synergy value that we could extract from your implementing these strategies? In other words, what can we expect -- more concrete results that we could expect over the next 12 to 24 months as a result of your more integrated Internet strategy?

(interpreted) Let me address your first question regarding the marketing expense. As you have stated, yes we have seen an increase on the marketing expense side and you have expressed concerns about the fourth quarter as well. Basically speaking, I believe that the largest cause for such increase comes from the fact that the market has grown, therefore leading to an increase of subscriber net addition.

And secondly, regarding ARPU, yes, for the data ARPU side we have seen a MMS call price reduction taking place and that has somewhat taken an effect. However, regardless, we at SKT will continue to do our best to maximize data ARPU going forward.

Regarding your question about our Internet strategy, I believe that my answer also includes the e-commerce-related perspective as well. Our alternate target is to establish the Internet conversions hub and also to finalize and confirm the Internet conversions business, and I believe that, to do that, we have the three service [themes] that we need to address first of all. Number one is SMS, number two search, number three integration between wired and wireless.

So alternately, SKT has to create the growth platform by providing the best possible services for our subscribers, and in doing so, these three types of services are quite critical. And to that end together with SK [Com], which will be soon a part of the integrated company structure in the near future -- together with SK Com we will try to create the synergy effect early on so that we could gain market leadership in this area.

Thank you.

(interpreted) Next, Mr. John Kim from Merrill Lynch. Would you like to ahead with your questions, sir?

Yes, thank you for the opportunity. I have two questions. First pertains to SKT's overseas investment. If we remember correctly, the management has stated on a few occasions throughout the year that SK Telecom will try to prove it's capable of being successful abroad before it makes any further investments. However, your vice chairman keeps getting quoted in the press that SKT is looking at various overseas investment opportunities. So could the management reiterate its view in terms of further overseas investments, especially considering there has been some additional investments announced for US Helio?

My second question pertains to your 50.5% market share policy. I understand that this policy has been in place for about a year, but if we look over the past year, SKT's earnings have decreased partially as a result of this, and meanwhile, the market has not been rewarding SKT with higher valuation for protecting 50% market share. So does the management intend to keep this policy intact for the foreseeable future? Thank you.

(interpreted) Let me answer your first question regarding the global businesses. I've actually seen the media reports myself and I believe that there has been some misunderstanding. As I have communicated with you on numerous occasions, SKT will do its very best to focus on the businesses that we currently have which are Vietnamese and the Chinese and the US operations, and we will do our best to enhance the performance of these existing local businesses. And, of course, not only from Pakistan but from other areas we get various proposals of such a kind but for now we have -- we are not considering any such business options. And if we decide to invest any further in any other global business ventures, obviously we will communicate this fact as soon as possible with the investor community immediately.

Regarding your second question, which has to do with our market share policy, as -- I believe that other parties may look at the same policy in a different light, but as we have communicated with you we plan to maintain the 50.5% self-imposed market share target during the next medium- to long-term time horizon.

Going through the market between year 2004 and 2006, SKT has gained quite a bit of lessons from the market. As you have seen, we had no choice but to be embroiled in this vicious cycle of marketing expense increasing if we are to focus on the market share gain when other latecomers try to expand their marketing activities. So as a market leader, SKT feels quite strongly that we need to send the right message to the market that such a high expense structure of marketing activities will not help in the ultimate maintaining of the subscriber market share goals of any company, so that's why we feel that it is quite necessary to maintain this 50.5% target.

Just to ask a quick follow-up question, if SKT were to consider further overseas investment then could the management please share once again your minimum threshold for success overseas?

(interpreted) I believe that your question is really boiling down to the investment [size]. As the CEO has mentioned on other occasions as well, SKT's ultimate goal and the highest goal in any situation is to maintain the financial stability. So within that range of maintaining that stability we will have to exercise our decisions quite flexibly. So it is quite difficult for me to share with you an exact size at this point, but rather I believe that we should decide on the size as such possible business prospects develop at each stage of the way. But, as I told you before, we will not overburden the company's financial stability by going ahead with too much of an aggressive investment, and we will continue to look at the economic aspects as well as our existing criteria for overseas investment which we have been implementing within SKT, if we decide to invest.

(interpreted) Next, Mr. Hyonjim Kim from Goldman Sachs. Would you like to go ahead with your question, sir?

Yes, thank you. A follow-up question on the previous questions. One, you just mentioned that you would not want to overbear your financials, but it seemed more that your balance sheet is [under levered] at the current juncture with KRW1 trillion in cash, as well. Now, on that note, what do you think is the probability that the company will announce some sort of sizeable investment in the near term? And if it's low, what are you thoughts on again better optimizing your balance sheet and re-deploying that KRW1 trillion in cash that you have?

The second question is a follow-up on your other SG&A costs. I was under the impression that the rise actually came from running your dual networks as costs related to running some of your venture Internet operations. Please correct me if I'm wrong on this, but if I'm not then wouldn't the rise in these other costs be more recurring rather than a one-off that you insinuated in your comments? Thank you.

(interpreted) You have stated that SKT is retaining too much cash, and it is actually true that our DE ratio is rather low, and it can be quite interrelated to the dividend issue as well. But on the dividend side, we have already communicated numerous times that we plan to maintain the current level in the foreseeable future, and I believe that the real fundamentals for stock price increase should come from growth, rather than the dividend policy alone.

And it is true that we are holding onto quite a bit of cash for now, and it does not mean that we plan to pursue an immediate sizeable investment in the near time horizon either. But SKT nevertheless will, in any shape or form, leverage or use this current retained cash in the right place and right project, going forward.

Let me now address your question regarding the dual network-related expenses. I believe that the actual network-related expense, in its absolute size, is not going up significantly, the reasons being that, because we are building our own network nationwide, we are actually saving on the lease line-related expenses. And of course, on the WCDMA side, by launching these services we could consider possible increase of the expense for the WCDMA, but because we are sharing quite a bit of base stations with the existing CDMA network, the actual increase of cost is not that significant.

Of course, in the very beginning of such dual network structure, we could be experiencing some cost increase, but it's not at the level that requires any concern from the investor side.

And also, regarding the Internet-related cost, it is quite related to the revenue side increase as well, so it is interlinked, but I don't think that it could be dubbed a recurring increasing trend.

Thank you. One brief follow-up question, on my first question, is ROIC or ROE used in reviewing your management's performance?

(interpreted) Including ROIC and ROE, of course we are comprehensively reviewing such indicators in assessing the performance of the management, because ultimately generating more earnings and EBITDA are critical in terms of assessing the performance of the top management.

Thank you.

(interpreted) The following question will be presented by Mr. [Tsao Yan from Lehman Brothers]. Would you like to go ahead with your questions, sir?

(interpreted) I have the following two questions. First has to do with your EBITDA. In the [beginning of the] fiscal year, you have given the annual guidance of KRW4 trillion, and as of Q3 the accumulated EBITDA stands at KRW3.16 trillion. So that means that, just by sticking with the current guidance, we are looking at about KRW84 billion for Q4, which would be quite a bit of reduction. And we are seeing a margin reduction trend quite a bit, and so should we assume that such a downward trend will continue into the fourth quarter?

And in terms of guidance-related comments you have made in other conference calls, you have stated that marketing cost increase and the dual network expense, as well as e-commerce expenses, will be some of the additional expense items that we could anticipate. Of those, I'm wondering whether during Q4 e-commerce-related expenses will be taking place in a concentrated form. So, in other words, can you revisit the EBITDA margin guidance for the whole year '07?

And also, you talked about 2008 CapEx-related comments, and you said that you cannot talk about the exact number at this point. But you also mentioned that this year you are increasing the CapEx guidance because you are expending the next year's planned CapEx budget early on this year. So that means that some of the portion that you were anticipating for '08 is being put forward into '07, so could that mean that you are looking at a lower CapEx number for '08, compared to your internal target for next year?

And also, you mentioned in other occasions that, compared to '07, we could anticipate a downward trend in CapEx in '08. So can we expect a meaningful downward revision of CapEx for 2008?

(interpreted) As you have mentioned, our annual guidance for CapEx was about -- EBITDA, that is, was for KRW4 trillion. And as you have mentioned, up to Q3 we have seen quite a bit of EBITDA growth already, and against our annual target of -- our annual guidance during Q4, the EBITDA seemingly will be coming down according to our existing guidance, and we are aware of that factor.

However, it's quite difficult for us to predict the Q4 marketing environment. Therefore, for now, we want to maintain our annual guidance of KRW4 trillion.

And you talk about e-commerce, but I believe that in the beginning of the year we said that, including innovation-related, measures we will invest into long-term to mid-term growth-related investment, of which e-commerce would be one category. And so some of the e-commerce-related expenditures will take place during Q4, but it will not be as cumbersome or as burdensome as you might be concerned.

On the CapEx side, yes, it is true that we have mentioned that beyond 2008 at least we will maintain the current level as 2007, or we could even anticipate a downward trend, and that's what I have communicated earlier. However, if we [forget] the overall WCDMA-related CapEx, the absolute total WCDMA CapEx amount will not be changed; it's just a matter of in which year we will expend such CapEx-related expenditures.

And as you know, it is completely up to the growth trend of the subscribers for WCDMA. So if the growth rate is higher than anticipated, then some of the later planned CapEx might be expended earlier on, therefore possibly increasing '08 CapEx as well. However, as we have stated earlier, we are looking at the migration strategy to simply follow the market response, therefore we are not anticipating exceeding or [over-burdensome] increase of the CapEx during 2008.

(interpreted) Next question is going to come from Mr. [Chanung Bea] from UBS. Would you like to go ahead with your question, sir?

Thank you very much for the call. Considering the foreign ownership limit is currently full and it seems difficult to cancel shares, are you considering any other options to return the KRW200 billion to shareholders?

Second question, I guess someone should ask, I remember in the last few conference call you stated that you have no interest in Hanaro Telecom stake. Could you please update us on what your thinking is right now?

(interpreted) On the foreign ownership limit, yes, we have already reached the 49% level so we are aware of the fact that we will not be able to cancel such shares as -- just like last year. However, we will complete the buyback of the treasury shares within this year as planned. And now, regarding what to do with the repurchased treasury shares and the timing of such action, the BoD will continuously consult on this issue and get back to you.

And Hanaro Telecom, let me just flat out say that we're not interested.

Thank you.

(interpreted) Next we would like to hear from Mr. Sam Min from BNP Paribas. Would you like to go ahead with your questions, sir?

Yes, hi, thank you. Just quickly, one of the three focus areas you mentioned for you Internet strategy was mobile search, and I was wondering if management can give us more color on that as to what you see in terms of how big this market could be in the future, and if any type of monetization can arise from this, when that would be, particularly with the advertisements and what have you? That's it, thank you.

(interpreted) It is difficult for me to give you a color on the overall market size in this particular area for now. But when you talk about monetization I believe that you are mainly referring to the mobile advertisement market and for now, at this particular juncture, the market size is deemed at about KRW20 billion to KRW30 billion.

However, if you look at other global markets' cases and other best practices, there is very high potential in this particular mobile search market. They are looking at about KRW100 billion to KRW200 billion possibly in terms of the advertisement size, or it could even reach the KRW1 trillion range, so this market has quite a bit of potential. That is why SK Telecom plans to introduce the search-related services furthermore so that we could provide the future growth platform.

Perhaps if I can follow up with one more question there? I know that there are --.

(Inaudible).

I'm sorry. I was wondering if I could follow up to this question? And I know that there are two sides of arguments where one side would argue that a company like NHN, which is dominating the search market right now, would actually be advantageous in the mobile environment. And then on the other side is the -- actually the mobile companies that own the platform and their subscribers. So if you can give us some color there I would appreciate it, thank you.

(interpreted) I believe that two [parties] could coexist in the market and NHN, as you have pointed out, is a leading player in the search market when it comes to the fixed line portal services. However, in terms of the mobile search business, I believe that it is quite different from the fixed line-related portal services in many different ways. And SKT, as you are well aware, is a leading mobile telephony leader with a platform and we also have the affiliated company SK Com which has the capabilities from the MPASS and [Conan] technologies, which provide the search-related services. Therefore, together we anticipate a great growth potential and I believe that the company could grow in a large scale in this particular market.

(interpreted) The next question is going to come from Mr. [Cheng-yung Song] from [Sol] Securities. Would you like to go ahead with your question, sir?

(interpreted) Yes, I have the following two sets of questions. My first set of questions include the following.

Up to Q3 this year, the number of net -- newly added subscribers has grown quite significantly, so can we anticipate the same trend going forward into Q4 and into next year as well? And also a follow-up question to that question is that during Q3 the per subscriber acquisition cost has gone up quite a bit; would that be maintained in the future as well? And recently, during Q3, the retention side of the expense has gone up quite a bit as well, so is that going to be something recurring?

The second set of the question has to do with the USIM lock-related regulation change going forward as well as the mandatory contract period system which could be possibly introduced. So can you share with us the progress with which the regulation is being finalized on these issues? And, regarding the USIM lock, soon we are expecting the subsidy band elimination altogether, so with the USIM lock regulation looming in the future, regardless of the mandatory contract system being introduced or not, how would that impact the company?

(interpreted) Regarding your question about the marketing expense, actually the recent acquisition cost and the newly subscriber-related cost has gone up recently, and it has had a lot to do with the number of subscriber increase for the WCDMA services. And I believe that, depending on the trend going forward for the WCDMA subscriber number, increase or decrease, I believe that that will impact the expense prospects going forward.

And you asked about the 4Q -- fourth quarter prospects, and I believe that in terms of WCDMA subscriber increase trend or the necessary acquisition cost, I don't think that it will go down too significantly. It's a little too soon to talk about the first half of next year, however, because it really depends on the competitive landscape and what other telcos would pursue and also how well the subscribers in the market receive the WCDMA's effective value. Obviously, if the new subscriber number increases on the WCDMA side, naturally that will bring up the cost as well. So it's too early to tell about the next first half but, again, for the fourth quarter this year, we don't see -- expect a too much of a reduction.

Regarding your question about USIM lock elimination, regarding the same carrier USIM lock deregulation, regarding the timing of the introduction of such change, there are ongoing discussions with the telcos, as well as the government, so it is exactly as was reported through the media. So, nothing definite has been determined yet.

Now, when it comes to inter-carrier, in other words between different carriers' USIM lock deregulation, there are a lot of existing technological issues, such as interoperability or inter-compatibility or services capabilities as well. So, we are at a very infant stage of such discussions right now, and if you read some of the papers that have been issued out of Japan, there have been a lot of issues and challenges and problems associated with inter-carrier USIM lock-related deregulation going forward because --. And so, looking at that, I believe that those issues have to be ironed out fully in order to ensure that the consumers will be protected. So nothing has been determined yet and we believe that we still need to expect a long time before a decision can take place.

(interpreted) I have a follow-up question regarding the first set of the question. You have stated that the marketing expense-related trend going forward will be dependent quite a bit on the subscriber growth number trend and -- however, at the same time, you have been talking about how you would control the migration speed to WCDMA. So, looking at all these different factors, I could assume that, compared to the existing CDMA network, the WCDMA per subscriber acquisition cost is high; therefore, their ARPU seemingly would be lower than 2G ARPU. So, could you share with us, regarding the details about ARPU on the newly acquired WCDMA subscribers, is it as good as you have anticipated in terms of ARPU or is it much lower than the 2G subscribers?

(interpreted) When it comes to new acquisitions as well as the handset upgrade subscribers for WCDMA, the ratio is much more leaning towards the new acquisition side. And compared to 2G subscribers, although we do not have a sufficient number of population in terms of the subscriber number to give you a meaningful statistical result, but for now, looking at the current data only, the ARPU for the 3G or WCDMA subscribers is actually 15% or so higher than that of existing CDMA subscribers.

So in terms of the amount, it's as much as KRW4,000 to KRW5,000 higher, so it all depends on how well the WCDMA subscribers [offsets] and uses the services offered by our company. That is precisely why we plan to strengthen the Internet and also the conversions link services going forward, so that we could maximize the ARPU. And we will continue to make these efforts going forward.

(Spoken in Korean).

(interpreted) Next, we'd like to hear from Mr. [Yung-sup Chez] from [Miras SX Securities]. Would you like to go ahead with your question, sir?

(interpreted) I have a question regarding [DTV 365] service which was recently launched, so I would like to know more specific business plans regarding the service offered, for instance the prospects for the subscriber numbers and your plans for the network and marketing, and on also content sourcing.

When it comes to fixed line policies and strategies, I believe that the market environment in general has changed quite a bit recently. For instance, SK Group is now completely a holding company structure and also, I believe that the market is viewing your fixed line strategy quite positively for now, and now that DTV 365 service has been launched recently, there can be some concerns that since you do not own a network per se, you might encounter some issues. So there might be a need to supplement it with a network of your own. So what kind of changes would be required in the market for you to take on a more aggressive fixed line policy going forward?

(interpreted) The exact name of this service is called TV Portal 365 degrees Celsius is the [exact] name, and we are -- we have decided to take part in this particular project in order to deal with the upcoming conversions, and also the broadcast telecommunications conversions environments that we are seeing.

So, as you know, many different players are a part of this consortium where we are operating an open digital portal services. And for now we are offering pilot services for newly built apartment complexes, and starting from November of this year, we plan to commercialize this service as well.

So the different roles and responsibilities will be as follows. For instance, the consumer electronics companies would be responsible for creating and distributing the handsets, etc.; and the contents would be up to the portal companies; and the billing and the certification and also the service developments are being taken care of by SK Telecom.

And the business model is one that there is no basic charge or acquisition or -- the first initial joining charges for these services, but basically the paid content usage fees would be used for the future infusion of the funds. And in the future, we plan to actively leverage the advertisement-related activities as well, so we are at a very infant stage for now.

(interpreted) Let me share with you our fixed line-related policies. I believe that we've touched upon these matters on other occasions as well, but for now we do not have a high level of confidence that we definitely need this side of the business to fulfill our strategy going forward. And, as a matter of fact, the probability of us requiring that fixed line strategy is actually coming down quite rapidly, because if you look at the current environment, [SIM] to [cell] and SMC, all these different types of technologies currently being used are breaking down the barriers between different types of technologies, so you could assume that we are actually more convinced to believe otherwise.

So also, regarding the digital home services, we do not require a fixed IP network to enjoy these services, either. And so I believe that in terms of the bundle services that are offered by our company, our existing alliances for now will suffice, including the alliance with MS.

(interpreted) Can I summarize it this way? This DTV 365 degrees -- now this service is not being pursued as a test bed for a fixed line strategy going forward, but rather, are you approaching this service to prove that you do not require a fixed line network?

(interpreted) I don't think that you should extrapolate it to that extent for now. For now, because of the emerging technologies regarding portals and home networks, you could perceive this particular service as one of those diverse options available.

(Spoken in Korean).

(interpreted) Our final questioner is going to be Mr. John Soo Kim, from NH Investment and Securities. Would you like to go ahead with your question, sir?

(interpreted): I believe that you've addressed these questions earlier but I would like to ask for a more detailed response. For now, you said that you have no immediate plans to expand the market share target. And looking at the competitive landscape and considering how the market share is bound to change in the near future because of the on-net discounts that are provided by different players, I'm wondering, since you cannot exactly increase the market share, then how would you offset the earnings [upside]? In other words, are you going to be bringing up the ARPU or reducing the marketing spend? Which side would you be choosing?

And the second question has to do with the USIM lock-related issue. How would that impact the marketing activities going forward? Would that increase the marketing expenses or bring it down? Because with the introduction of the mandatory contract system in the market, it is bound to have an impact on the cost. So could you share with us your perspective?

(interpreted) To answer your question about the market share issue and the ARPU, I believe that the on-net discount program being offered will have a positive impact on the retention of our subscribers. That means retention generating possible ARPU increase going forward as well. And, as you know, SKT currently has more number of high quality and highly profitable subscribers compared to other telcos in the industry, so we plan to increase the MOU, thereby increasing the ARPU.

(Spoken in Korean).

(interpreted) I believe that the translation did not go out because of the microphone so let me repeat the answer.

First of all, regarding market share and the ARPU, on the on-net discount will definitely be focused on the retention of the subscribers and the retention will ultimately lead to ARPU increase as well. As you know, SKT currently holds more number of high quality subscribers compared to other telcos, therefore we plan to increase the MOU and therefore leading to higher ARPU in the long run. But in the short term, we believe that this will bring down the retention cost.

To answer your question about USIM lock, it's a little too early to tell the final results and if you look at the mandatory contract system alone, I believe that although it will bring up the cost in the short term, ultimately in the long run you will stabilize the price trend or the -- that is, the cost trends on a downward trend. And, as you have seen in the [MNP] case, going through such changes the market naturally converges back to the market-driven structure ultimately.

And regarding USIM lock issue, of course we are internally looking at various scenario plans and reviewing those, but it is a little too early for us to comment on this.

(interpreted) I'm sure you have more number of questions but, because of time constraints, we will conclude the [training] session. And lastly, I would like to invite the closing remarks from our CFO, Mr. Ha Sung Min.

(interpreted) I would like to extend my appreciation to all of you for taking part in today's conference call. All of your meaningful questions and interest will contribute greatly to the management's activities going forward. Once again, I ask for your support and co-operation going forward. Thank you very much.

(interpreted) Thank you. This concludes the third quarter 2007 CFO conference call. 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.