SK Telecom Co Ltd (SKM) 2008 Q1 法說會逐字稿

(Interpreted). Good morning and good evening. Welcome to the conference call for the fiscal year 2008 first quarter earnings produced by SK Telecom. This conference will start with a presentation, followed by a Q&A session. And now we will begin the conference of the fiscal year 2008 first quarter earnings produced by SK Telecom.

(Interpreted). Good afternoon, today's conference call will consist of the opening remarks by the newly appointed CFO of SK Telecom Mr. [Cubin Lee] covering the earnings of Q1 2008 and other matters of your interest, followed by a Q&A session.

The 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 invite our CFO, Mr. Cubin Lee.

(Interpreted). Good afternoon. My name is Cubin Lee, the new CFO of SK Telecom. I would like to thank you for taking part in the earnings conference call for the first quarter 2008 despite your busy schedules. It is indeed my pleasure to greet all the investors and analysts through today's conference call for the first time.

Let me begin with the earnings highlights for Q1, 2008. Our revenues stood at KRW2,837 billion, edging down 2.7% quarter-on-quarter. It was due to the wireless Internet sales decrease affected by the 30% SMS tariff reduction initiated in January of this year, as well as the on-net discount introduced in October last year and other seasonal factors. Despite these factors, the revenue increased 4.6% year-on-year, supported by the continuous expansion of the subscriber base.

The wireless Internet sales reached KRW597 billion. The already mentioned SMS tariff reduction, together with the consumer protection effort such as the tariff cap on underage subscribers and other practical consumer benefits by SK Telecom, resulted in the reduction of the wireless Internet revenue. We believe that wireless Internet sales decrease is a phase we need to go through in order to ensure robust revenue growth going forward. We will try to achieve continuous growth by focusing on the active adoption of the wireless Internet data fixed tariff program, as well as the expansion of the convergence and open network businesses in the future.

The marketing expense amounted to KRW767 billion, or 27% of the revenue. There was a 10.2% increase quarter-on-quarter, supported by less spending on advertising, and efficient use of the marketing expenses. On a year-on-year basis, the heated competition for the new subscriber acquisition in the WCDMA market, and the increase in retentions expenses, led to a 30.7% increase in marketing expense.

The operating income was KRW554 billion, which was a 78.3% increase compared to the previous quarter. The main factors for the increase were the market expense reduction quarter-on-quarter. On a year-on-year basis, the operating income came down 16.3% due to the increase in the marketing expense and depreciation. The net income and EBITDA were KRW383 billion and KRW966 billion respectively.

Let me now move on to the market forecast.

We anticipate some market uncertainties in the early stage of the new regulatory changes, such as the lifting of the handset subsidy ban, the introduction of the lockup contracts, and the elimination of the [USIM locks]. Against such backdrop, we cannot rule out the possibilities of competition intensifying. However, such regulatory changes could also lead to rational judgment among telcos enabling a more stabilized market environment. SKT plans to achieve market stabilization by maintaining leadership with a 50.5% market share, and by enhancing cost efficiencies.

Now I would like to discuss our growth strategy.

The year 2008 is expected to be another year of continued competition in the WCDMA arena following last year. However, SK Telecom will maintain the principle of gradual migration to minimize overheated market competition. We will instead strengthen the fundamental marketing competitiveness by offering differentiated pairs and handsets, [call] quality and [private] CDMA, and convenience and innovated services such as full browser service based on customer demand. Through such efforts, we will focus on increasing the ARPU by satisfying customer needs.

In the meantime, in order to actively respond to the accelerating trend of convergence among different technologies and industries, we will strengthen the convergence in Internet areas. Not only will we expand our music, online game and film investment and distribution businesses, but we will also increase our competitiveness in the e-commerce business including the online shopping mall, the 11th Street.

We will continue to identify and foster new convergence businesses to create new growth engines for SKT in the future. We also plan to focus on the business portfolio management through activities such as monitoring and improving profitability.

In addition, we have recently concluded the acquisition of Hanaro Telecom to create a platform for continuous growth through development of new services and business models in the wireless wireline convergence area. Going forward, SKT and Hanaro will do our very best to secure a synergy and growth momentum for both sides. To that end, we will solidify its co-operation in various areas such as development of new services and products to ensure customer convenience and benefits.

Let me know move onto the global businesses.

In China, we are carefully watching numerous potential changes, including restructuring of the telecom industry. While we are continuing the business co-operation with China Unicom, we will also pursue to secure an early mover position in the future convergence business area by developing various business models such as Telemetrics and music business through local companies we recently acquired. In the US, we are making efforts to enhance the competitive edge of [studio] business. Notably, we are building a diverse convergence business portfolio, such as a joint mobile banking service with Citigroup in the US.

In Vietnam, we are maintaining a growth trend exceeding the 3.97 million subscriber mark for S Telecom as of March 2008. We will cement the longer term growth platform by reviewing options to participate in the upcoming 3G licensing process.

To keep abreast with the rapidly changing management environment, SK Telecom is seeking to transform itself as a global convergence leader by strengthening the virtuous cycles between the mobile telephoning convergence and global businesses. We will do our utmost to maximize customer value and shareholder value.

I ask for your continued interest and support, and let me thank all the investors and analysts for your unwavering support.

We will now begin the Q&A session.

(Interpreted). Now the Q&A session will begin. (OPERATOR INSTRUCTIONS). The first question will be provided by (inaudible) Investments. Please go ahead, sir.

(Interpreted). First of all, congratulations on your robust earnings results for this quarter, and I have the following three questions.

First of all, you have mentioned a little bit about the marketing expenses, and this quarter marks the first quarter in which your marketing expenses portion in the overall revenue side has actually reduced. And if you recall the last conference call we had, you have mentioned that at the current rate, if we continue with such a downward trend of such proportion by next year that we will even be able to reach the proportion of our marketing expenses to revenue almost to 20% level, so I'm wondering whether that stance is still valid.

The second question is with regards to what was reported in the press today. There has been some rumor that SK Telecom is signing a joint venture initiative with China Telecom, and also in recent days there has been some concerns raised among investors that SKT would go ahead with large scale investment in the US market. So can you share with us your global investment strategy and direction going forward?

And the last question has to do with the Fair Trade Commission order regarding the 800 megahertz roaming possibility going forward. I understand that SK Telecom has raised an opposition filing with FTC, and what would happen if the FTC does not accept your opposition or request for reconsideration on this issue? And our concern is that SKT still belongs to an industry where it is still quite heavily regulated, so it seems like you're going against the government policy in a way. So what is your strategy or stance going forward?

(Interpreted). Let me first address your first question. First of all, you have congratulated our earnings, but I take it as an encouragement saying that we did better than your expectations in the previous quarter.

Regarding the marketing expenses that was recorded during this quarter, as you are well aware, the first quarter of 2008 was a transition period right before the complete lifting of the subsidy ban on handsets. Therefore, there were some heated competition in the market.

However, against such a backdrop, we have nevertheless attempted to reduce the advertising expenses, and also, we have pursued efficient expense management by effectively dealing with competitors moves. By doing so, we were able to reduce the marketing expense proportion of revenue down to 27%. Going forward after the second quarter of this year, still we have numerous uncertainties existing and looming in the market, as you are well aware.

First of all, we are expecting the lock-up contracts to be allowed, and also there will be unlocking of the USIM locks, and also KTS is aggressively launching and trying to apply fibers in the WCDMA market, and LG Telecom has recently launched their [OZ] 3G services. So against such uncertainties, there still exists quite a bit of concern and possibilities for yet another heated competition, so we have to watch closely how the market evolves.

And also in the -- as we are expecting the lifting of subsidy on handsets, I believe that that will ultimately lead to market stabilization. And also, the lock-up contract system will help us retain more subscribers and to be able to flexibly and strategically deal with the market situation.

In the current saturated markets, we have the policy of maintaining the 50.5% market share as of now, and I believe that our competitors are well aware of our commitment to do so. So I believe that eventually other telcos will come to rational conclusion, and I believe that marketing spends trend will stabilize quite a bit.

And to address your second question, I believe that there is a consensus of concern in the market regarding the expected restructuring to be taking place in the telecommunications market in China, and I believe that there has been some expectations in the market that the CDMA business of China Unicom will be sold to China Telecom. And I do understand that there has been a rumor reported through the press recently regarding our possible joint venture with China Telecom, but let me reassure you that we have never contacted China Telecom on such a matter. And I believe that the Chinese government has not made any public announcement on the future initiatives, so I do not believe that it's the right timing to talk about any possible joint venture initiatives with such players such as China Telecom.

But our policy is the following. Regarding the partnership in China, we will strictly abide by the Chinese government telecom related policies going forward, and we choose the best options available for us in our being able to contribute to the development of China, as well as strategic fit with a potential partner. And also in the meantime, we will try our very best to maximize our profitability in the Chinese markets to maximize our shareholder value for SKT shareholders.

I am told that you third question is regarding our future direction in policies in the global businesses going forward. As you recall, back in 2007, I believe that it was an era of us trying to accelerate the creation of the new growth platforms for the future development, so we have provided the growth momentum in terms of globalization and conversion; therefore, 2007 was a very meaningful year indeed.

And going forward, we will continue to focus on the global businesses, but in the process, we will select on focus what is more critical in order to complete the overall growth platform strategies. We will, therefore, focus on existing major markets such as China and the US, the two largest major markets in the world, and we will invest a lot of our resources and capabilities to develop various types of different business opportunities. And also in Vietnam, through S-Fone business, we will try to create the long term survival platform for that particular company. And also in the US we will try to enhance the competitive edge for Helio business. And, as you are well aware, we are quite interested in expanding the conversions business, especially in the US and China. We will continue to develop various types of conversions business models to create the right fit of the portfolio.

(Interpreted). Let me answer your fourth question regarding our recent filing with FTC regarding the roaming order on the existing 800 megahertz bandwidth. As you are well aware, such roaming arrangements are usually provided to assist new entrants in the market in the very initial stage of the business to provide them a level playground in a very limited timeframe. So I do not believe that there has been any other country around the world in which case a telco which has been doing the business for over a ten year period would be allocated such new roaming privileges.

And we felt that such order coming from Fair Trade Commission regarding the allowance of the roaming services to our competitor was not ultimately going to help the convenience of the customers and subscribers, but rather it could further (inaudible) up the marketing competition among the players we felt. Therefore, we have decided to file the opposition with Fair Trade Commission. And also, we hope the Fair Trade Commission would understand that our roaming arrangement has nothing to do with the Hanaro acquisition which is in point. So I hope that the results could be very positive.

And it is my hope that the newly launched Broadcast & Communications Commission will do its role in enabling a more conversion friendly environment so that we could pursue more business friendly initiatives going forward.

(Interpreted). The following question will be presented by (inaudible). Please go ahead, sir.

(Interpreted). Thank you for the questions. I have the following three questions.

First of all, it has to do with your future strategy and policies. Firs, Hanaro acquisition; what is the timeframe expected for the joint bundling services to be provided? And what type of synergy related strategies do you have in place?

Second question has to do with the newly established SK Marketing Company. What will be the role of SKMC going forward, and what type of impact will this company have on SK Telecom? For instance, would [it be] able to reduce the advertising expenses for the future? Will you share with us the big picture of the role of SKMC?

And the third question has to do with the previously raised question regarding marketing expenses. I also noticed the share of marketing expenses being lower this quarter against the entire revenue. And it was despite the fact that, on a quarter-on-quarter basis, during the first quarter of 2008, the share of the 3G subscriber new acquisition was actually higher compared to the fourth quarter of last year. And theoretically, 3G subscribers tend to have more acquisition costs involved. Nevertheless, it seems that per 3G subscriber acquisition cost has actually come down. And also the advertising expenses came down as well. So can you share with us the reasons why?

(Interpreted). Let me address your first question which had to do with the marketing expenses, and also the Hanaro acquisition, and the post acquisition strategy going forward. As you are well aware, we have decided to acquire Hanaro Telecom because we wanted to provide seamless services for our subscribers in the current environment for wireline and wireless conversions era. And by doing so, we wanted to create more customer value.

In the conversions market, it is quite critical to provide and create new business models and services in order to ensure continuous growth and through various offerings of the bundling services, so we expect numerous synergy effects going forward. [China as an example], for instance, by offering bundled services to our subscribers, we will be able to further increase the retention rate therefore bring down the [churn] out ratio. And secondly, by sharing the distribution channels together and by pursuing core marketing initiatives, we will be able to raise the efficiency of the marketing expenses.

So you asked about the timeline about bundling services offered between the two companies, and we are initially planning one type of GPS service as of June of this year, but following this initial introduction, we plan to launch various other types of bundled products. And also, we have additional synergy impacts in that we will be able to share the network of each company. By doing so, we will be able to bring down the expenses and also stably secure sourcing of networking. And also, we will have more accessibility to the home market that's currently lost to the Hanaro Telecom subscriber pool. And also, with the IP business going forward, we will be able to better leverage the contents developed by SK Telecom.

So we would not only try to create a synergy based on our existing businesses, but we will continue to create new businesses, models and services going forward that links both wired and wireless services. By doing so, we will continue to see continuous growth, but more detailed action plans are currently under discussion by the working level persons.

You asked about the newly created SK marketing company. As we have more diversified consumer needs that we need to meet, and also, there is a higher need for joint marketing and alliance marketing efforts between subsidiaries under the big umbrella of SK, it was quite necessary for us to concentrate the subsidiary related capabilities into a single pool. And as you are well aware, SK Telecom has 22 million customer base, SK Energy has 26 million customer base already and, leveraging such customer related experience and customer insight we have in effect, and by trying to get such insight into a single pool, we hope to reach all of our synergies.

And we will be able to make the loyalty programs for our customer base into a more sophisticated one through the SK marketing company, and we will be able to offer more differentiated, high quality services to our customers. As I've explained, we will be able to log in to a better channel going through this marketing company and also, we would maximize the efficiency of the marketing expenses related activities as well. Based on such rich customer insight that we will be able to leverage, I believe that we will be able to provide more customized advertising and promotion for our customer base going forward. And also, we are planning to launch various other types of commerce and other types of new business items in the future and, by linking those activities to marketing company activities, we would also be able to create some value added results as well.

Let me address your third question regarding the marketing expenses. I do believe that our results have been quite different from the market expectations, and let me remind you that there are four elements that have to do with marketing expenses. First of all, the initial commission and the monthly commission, retention commission and also advertising expenses as well.

And on a month by month basis, the only way we could actually track the subscriber changes or market changes regarding [MNPs] has to do with the initial commission amount changes. But in the other areas, it is quit

If you recall, during Q1, the subscriber activity number has been quite high and also the MNP volume has been quite high quarter-on-quarter, so I believe that the wider consensus was that we would end up seeing more increase in marketing expenses. However, in actuality on a quarter-on quarter-basis, we were able to reduce the share of the marketing expenses to revenues because we were, for one, able to reduce the advertising expenses by reducing promotion activities and reducing (inaudible).

And also, as you recall, during Q4 of last year, there has been some accounting changes that lead to one-off changes in terms of the monthly commission category. That was reflected as a one-off factor in a more inflated way because of the change in timeframes of [differences] in the accounting books. And another factor that led to the reduction was because of the less retention commission (PLs), because of the less amount of subsidy support provided to help that change in subscribers. So overall during the first quarter, our expenses in marketing have come down.

To elaborate on the portion of initial commission trend, as you are well aware, our competitors have been quite aggressive in trying to acquire subscribers, and especially in the WCDNA market, the competition has been quite fierce during the past quarter and, during this period, the new subscriber growth amounted to about 311,000 subscribers, or 15% growth. Against such backdrop, we were able to efficiently manage our marketing expenses while trying to seek more strategic handset sourcing, and by providing more affordable handsets to the market. By doing so, we were able to reduce per new subscriber acquisition costs quite a bit so, overall, the overall increases in terms of the initial commission on a quarter-on-quarter basis was only KRW12.3 billion, or 3% growth.

And regarding the advertising expenses, during the first quarter, the expenses amounted to about KRW52 billion, and this was, on a quarter-on-quarter basis a 51% reduction by about KRW54.7 billion Q1. It was due mainly to the reduction in the promotion activities and (inaudible) and, if you recall, during Q4 of last year we had more advertising expenses because of the sponsorship provided to the professional basketball team, and also the SK wide range of related games as well. So that played a factor as well.

(Interpreted). The following question will be presented by Josh Bae from UBS. Please go ahead, sir.

Yes. Thank you very much for the opportunity. My first question is on the subscriber lock-up contracts. What is your view of the impact that these lock-up contracts would have on the industry churn rates going forward? Also, does SK Telecom plan to offer 18 month or 24 month contracts similar to that of competitor KTS?

My second question is on the non-operating side. It seems your dividend income has increased meaningfully. Could you please provide a breakdown of the KRW46 billion you recorded in first quarter?

Finally, the tariff plans you are launching, such as the intra-network discount, the family tariff plans, and the bundle tariffs, they seem like tariffs that would help lower churn rate, but also lower ARPUs, could you please share with us your thoughts on the ARPU and churn rate trends for this year, and also in the coming years?

(Interpreted). Let me first talk about the lock-up contract which has been initiated since April of this year. Among the newly-acquired subscribers, after the introduction of this system, about 80% of the subscribers are opting for such lock-up contracts. Since we are in the very initial stage of this new regulation, there is a possibility that market expenses could temporarily increase. However, in terms of the customer retention effect, I think that this system will be very positive indeed, especially in the mid to long term perspective. I believe that this system will contribute greatly to further stabilization of the market.

And you asked about churn rate prediction going forward, but it's too early for us to tell because we have only launched this product quite recently.

Whether or not we are planning to launch 18 months/24 months lock-up contracts going forward, currently, as you are well aware, in order to make sure that there is activity on the part of the subscribers who are used to the no mandatory contract of any kind in the past, and also to further enhance the successful -- success rate at the distribution channels, we are currently maintaining only 12 month contract programs right now. And whether or not we would expand into other long term contract mandatory periods, we will have to watch closely how the subscribers react to this program, and we will watch closely how the competitors are dealing with this situation.

And you asked about the breakdown of the dividend income for first quarter. The total amount was KRW45.9 billion, of which KRW25.4 billion was from China Unicom, and KRW18.6 billion was from POSCO, and another KRW1.8 billion was from SK CNC.

Regarding your third question about our ARPU trend going forward, as you are well aware, we have launched the on-net discount, and also SMS discount, and also the tap-on, the tariffs for under age subscribers, and prevention of spam mails, etc. Such consumer production measures will lead to a slight edging down of the ARPU during the year of 2008.

However, we are planning to nevertheless increase the ARPU from the wireless Internet site by providing various practical information for every day life information, and also by offering more convergence services, and by expanding our network opening type of services provided to other players. By doing so, in the long run we will maintain at least a current level of ARPU, but also try to increase the ARPU even further.

(Interpreted). The next question will be provided by John Kim from Merrill Lynch. Please go ahead, sir.

Yes. Thank you for the opportunity to ask questions. First, regarding your business in China and overseas, it's been almost two years since a strategic alliance with Unicom has been reached, but when we actually look at CU's results on surface, there seems to be no growth in CDMA revenues or CDMA subs as percentage of Unicom's total subs. Can you share with us what success you have achieved with Unicom on CDMA alliance? And related to this, if we were to assume for a second that SKT won't have further investment opportunities in China, could you consider shifting direction and approach Sprint Nextel again?

Second, a quick question on Hanaro. Can you --?

Could you repeat the last portion, please?

Excuse me?

Could you repeat the last portion of the second question, please?

Yes. If we were to assume for a second, if SKT's not going to have additional investment opportunity in China, could the management consider shifting direction and approach Sprint Nextel in the US again? Got that?

Yes. Thank you.

Okay. And second question pertains to Hanaro, can you share with us if you have any plans to inject more capital into the company in the near future, and what would be SKT's response given that there is an ongoing legal issue with Hanaro with respect to alleged illegal usage of customer data?

(Interpreted). First, regarding the Chinese business, let me summarize it in the following two manners. There are two types of businesses that we are trying to seek in China. First of all, through the Alliance with China Unicom, we are pursuing a business in [MNO] side. But at the same time, we are also pursuing business opportunities in the conversions area by developing various business models and by seeking more cooperation opportunities. By leveraging the existing 150 million subscriber base of China Unicom, we are also trying to seek opportunities in creating more value-add.

And as you know, year 2008 will be a year of Beijing Olympics, but at the same time, there will be a restructuring going on in the telecom industry, and also issuance of 3G license as well. So there are many different types of changes anticipated in the Chinese market. So we are currently reviewing various options to deal with such changes, so once things become more clarified, we will be able to communicate with you in more detail.

And to leverage a little bit about the CDMA initiatives in China, we did provide support in terms of network and marketing and handset side, so I believe that we did achieve some results through such initiatives. Especially, we were able to provide support in a provincial by provincial type of unit, so I think that has also added some benefit as well.

So as you can see, region by region we have achieved certain performance enhancement. However, I believe that it takes some time for such positive impact to disseminate throughout the entire company, so it does take some time. And relevant to your related comment about possible shifting in our direction to Sprint, I believe that we should not call it shifting, per se, I believe that we are currently reviewing various growth opportunities in both China and the US, continuously.

And also regarding Hanaro, our current equity holding ratio is about 44%. I believe that this is a sufficient amount of equity holding in order to enable us to take part in the management in an active way. Therefore, we are not reviewing any possible additional acquisition of equity in Hanaro Telecom as of yet. And regarding possible recapitalization, Hanaro is currently reviewing and coming up with various business plans as we speak, so whether or not we would require any further recapitalization will be decided after reviewing such plans that are currently under development. So once things become more clear, we will be able to communicate those with you.

And regarding the recent legal issues regarding the customer DB being leaked to outside parties, we believe that this is extremely unfortunate, and we are quite dumbfounded, since SKT and Hanaro place enormous priority in protecting the value of customers. I believe that Hanaro Telecom will take all the necessary steps to address this issue.

(Interpreted). The next question will be provided by Mr. Kim from Morgan Stanley. Please go ahead, sir.

Yes, thank you. I have two questions. The first one is on your wireless Internet ARPU, which seems to be down pretty significantly year-on-year basis, obviously because of your rate cuts. But are you seeing some signs of demand elasticity picking up? And do you anticipate -- what do you think will happen to data ARPU later this year or maybe going into next year? And where do you think such demand elasticity -- pickup will come from? And related to that, are you seeing any increase in HSDPA data ARPU, and whether it makes sense for you to continue to subsidize subscribers to upgrade to HSDPA?

Secondly, I have a question on your --.

Hello? We lost you. Are you still there?

(Interpreted). The connection is (inaudible) right now, so we will go with the next question first.

Excuse me, we will address the first couple of questions, the portion that we did [afford] to receive. I have the following two questions. The first question has to do with wireless Internet ARPU. On a year-on-year basis, it seems that the wireless Internet ARPU has come down quite significantly, and I believe that it was because of the various tariff reductions that have been implemented.

(Interpreted). This year in the wireless Internet area we saw the tariff reduction in terms of the SMS tariff and there have been various protection measures taken to enhance the customer value. Therefore, on a year-on-year basis for this coming year, it would be unavoidable to see some downward trend in terms of ARPU for wireless Internet.

In the long run, we believe that protecting the subscriber rights, and also creating more customer value, would ultimately help our company as well, and also with that in mind, we have been introducing various customer protection related measures such as not placing any charges for long term non users of data services beyond certain months, and also placing caps on tariffs for underage subscribers. So these measures have been basically provided to enhance customer value.

And I believe that we are in a very transitional period, therefore, the current situation is a necessary growth pain, we believe, in order to ensure long term growth, going forward. And as you are well aware, among the subscribers only 10% is a fixed rate wireless Internet subscribers. Therefore, in terms of the wireless Internet potential going forward, the potential to grow even further is quite high.

We will continue to provide more practical and helpful information to assist everyday daily activities, and we will provide full browser services, and also expand the network -- open network related services. So beyond '09, we believe that wireless Internet growth will continue and we will do our utmost to make sure that it does.

And my second question, if you could hear me better?

Actually, we haven't finished the -- finished to answer your first question.

Okay, sorry. Go ahead.

(Interpreted). To elaborate on your earlier question, if you look at the figures for Q1 '08, the accumulated average WCDMA ARPU was about 10% higher than the overall subscriber base ARPU. Therefore, since we are in the initial stage of gradual migration to WCDMA, and since we are seeing such a higher ARPU for those WCDMA subscribers, we have high hopes for the future as well. And under the WCDMA programs, we hope and expect to evolve this network even further, and we will be developing new applications as well. So in the mid to long term as well, the ARPU price fix is quite bright as well.

Okay, may I ask the second question now?

Yes.

Okay, good. The second question is on your open market strategy. You have decided to invest in open market when others such as CJ Home Shopping are -- have decided to reduce or fold, and I was just wondering what is that SK Telecom thinks it could do differently to find success in open market, and what are the maximum losses that you're willing to incur associated with it?

(Interpreted). Regarding e-market or e-commerce initiatives, I believe that going forward, open market forum which combines both wireline and wireless platforms, as well as hybrid more type of initiatives, will be the mainstream drivers for the e-commerce arena going forward.

And as you are well aware, we have launched the 11th Street, which is an open market initiative, as of February of 2008. And this is a website which combines both fun and technology, which enables social shopping, which is a differentiating point for us. And we will further enhance these services by linking this particular website to mobile interface going forward, enabling more easier browsing capabilities and [tracking] capabilities as well. By doing so, we will maximize customer satisfaction.

Open market is an initiative which is quite aligned with our existing strategy, to pursue Internet service that combines both wireline and wireless platforms at the same time. Therefore, I believe that in the long term, this is a business model that could create quite a bit of synergy. So with regards to how much we are willing to invest in this business, we will have to watch the market quite closely to come to detailed decisions on that.

And we will watch closely how the business performs, and we will decide how much we invest and how the management expenses or operating expenses unfold. Therefore, let me reassure you that the size of the investment expected and the operating expenses involved with this business will not be that significant to deserve such a concern from the market.

(Interpreted). The next question will be provided by [Jeff Kong] from Credit Suisse Securities. Please go ahead, sir.

Yes, thank you for the opportunity. I have two questions. First, in terms of the marketing cost, I'm looking at the retention costs for 1Q. That has been going down a little [since] the fourth quarter, but at same time, your [churn] has gone up, in the 1Q. Is there any direct relationship between you cutting down your retention costs and churn rate going up? If this is the case, in order to driving down your churn rate, do you need to increase your retention costs?

And just to get a better feel for marketing costs going forward, can you give us some, even if it's just direction, how the marketing costs will look like, relative to one Q in next few quarters? That would be very appreciated.

The second question is regarding your breakdown of equity method gains. You have mentioned that some of your affiliates have improved your earning, so it would be good if you could give us some breakdown in terms of how equity method contribution were from your key affiliates.

Thank you.

(Interpreted). Let me first talk about your first question. In terms of our retention commission paid out during Q1 '08, the amount was KRW131.9 billion. On a quarter-on-quarter basis it was a reduction by 17%, or KRW26.6 billion. It was because, relatively speaking, because of the robust growth from the new subscriber growth portion, relatively speaking the handset changing demand has come down slightly, therefore, our subsidy support for the handset changing subscribers was reduced during this period. And also, compared to the end of last year, we had less promotional events as well, which led to less expenditure of expenses as well.

And you asked whether there is a direct correlation between the retention expenses versus turnout ratio, and let me tell you that there is no such direct correlation. In other words, the churn rate was high because of the heated competition among the three players, so the proportion of the MNP activities was quite high. And such figures are quite volatile month to month so, therefore, I could tell you that there is no direct correlation.

Let me answer your question regarding the breakdown of the equity method loss. During the first quarter of 2008, the total equity method loss was about KRW49 billion, of which KRW5 billion was because of new media and also another KRW3.8 billion from SKTB non-operation, and also from Helio 27.3 billion. So in total, it amounted to about KRW49 billion and, compared to Q4, that was quite a bit of an improvement. Specifically during the last quarter of 2007, the equity method related loss amounted to KRW75.4 billion, so we have seen an improvement by KRW26 billion.

The last question was provided by (inaudible) from Lehman Brothers, please go ahead, sir.

(Interpreted). I have the following two questions.

First of all, with regards to the lock-up contract which will be introduced in the future, or which has been introduced already, I am wondering whether the subsidy provision, 100% of that subsidy, whether it will be treated as expense item or would you be turning it into an asset class and advertising, or depreciating that portion going forward.

And second question, has to do with ARPU. Data ARPU has come down by KRW 2000, and overall the reduction amount was equal in 2001, which means the voice side did not see any downward trend in terms of ARPU. And I believe that there is some discount impact coming from on-net discount and we have not seen that during the first quarter in the voice side at least, so I am wondering should we expect such impact to begin to surface in the voice area starting from Q2? And belatedly for the entire year 2008, on the average, how much ARPU reduction should we expect year-on-year?

(Interpreted). Let me answer your first question first. Our lock-up contract related expenses on an accounting basis is supposed to be treated as 100% expense item during that quarter.

Let me talk about the second question raised regarding the ARPU reduction. On a year-on-year basis, we are seeing some reduction from ARPU side and there are various reasons such as on-net discount and SMS discount, and also the cap on the under-age subscriber tariffs and also the prevention of spam mail, etc. And these are various customer protection activities which is leading to a slight edging down of the ARPU year-on-year. To give you some more color, overall, last year's ARPU was about KRW44,416, and we expect this ARPU amount to reduce down to about KRW43,000, which amounts to about 3.2% reduction year-on-year.

And to address your question regarding the possible impact from the on-net discount. Yes, we have seen some tariff reduction because of such on-net discount. However, on a year-on-year basis during the first quarter of this year, we have seen an increasing call volume, and we expect this trend to continue into the future.

And regarding the more specific impact coming from the on-net discount, we will have to watch closely during a little more period for us to give you more concrete picture.

(Interpreted). This concludes the Q&A session. Let me now invite the closing remarks by our CFO, Mr. Cubin Lee.

(Interpreted). Let me extend my appreciation to all of you for participating in today's conference call. All your questions and interest will contribute greatly to the management of the company. As mentioned earlier, SKT will do its utmost to pursue continuous growth and profitability enhancement, leveraging our market leadership so that we can ultimately maximize the enterprise value and the shareholder value.

This concludes the earnings conference call for the first quarter 2008.

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.