SK Telecom Co Ltd (SKM) 2008 Q3 法說會逐字稿

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

(Interpreted). Good afternoon. Today's conference call will consist of the earnings presentation by SKT CFO Mr. Kyou-bin Lee on the third quarter 2008 results and other matters of your interest. It will be followed by a Q&A session.

The conference call will last about an hour and a half with consecutive interpretation. Let me also remind you that all the forward-looking statements is subject to change depending on the macroeconomic and market situation.

Let me now present our CFO, Mr. Kyou-bin Lee.

(Interpreted). Good afternoon. My name is Kyou-bin Lee, the CFO of SK Telecom. I would like to thank you for taking part in today's earnings conference for Q3 2008. Let me begin with the earnings highlights for Q3 '08.

The revenues stood at KRW2,899.6b which edged down by 1.1% quarter on quarter due to expanded discount plans such as on-net discount and seasonal factors. However the subscriber growth led to a 3% increase year on year.

The Wireless Internet revenue was KRW619b which went up quarter on quarter due to the increased revenue from expanded fixed price plan of subscriber numbers and data information usage revenue growth. It came down on a year-on-year basis affected by factors such as the SMS tariff reduction. SKT will do its utmost to continue the growth of the Wireless Internet revenue through efforts like expanding data fixed price plans, strengthening the wired wireless convergence services and open network businesses among others.

The marketing expense amounted to KRW727.7b. Our marketing strategy implementation of focusing on retention as well as the easing competition in the market brought down the new subscriber number leading to a 16.9% reduction in marketing expense Q on Q. And on a year-on-year basis the marketing expense edged up by 2.4% due to increasing number of subscribers changing handsets to take advantage of the introduction of mandatory service contracts and handset installment payment program. The marketing expense to revenue ratio was 25.1%.

The operating income was KRW504.1b which came down by 5.4% Q on Q due to more depreciation from increased investment. Compared to Q3 of last year it decreased by 6.1%.

The EBITDA and net income increased Q on Q to KRW1,009.2b and KRW333.6b respectively.

Next I would like to comment on the market outlook.

The third quarter of 2008 was marked by the overall market stabilization in terms of competition. The marketing activities focused more on the high quality subscribers after implementing the mandatory service contracts and handset installment programs. There also was the learning effect from the overheated competition during the first half.

With the competitors' WCDMA migration progressing quite a bit and the continued move towards retention-based marketing through mandatory contracts, we basically expect the current market stabilization to continue into the fourth quarter.

SK Telecom will continue to help stabilize the market while focusing on the fundamental competitiveness of the Company, such as tariff plans, handsets, distribution and brands in order to keep abreast with the changing competitive landscape.

Regarding the WCDMA we have pursued a natural migration, leveraging a strong subscriber pool. As a result the WCDMA subscriber number stands at 7.28m or 32% of the total subscribers as of the end of September. SKT will continue to make efforts to support WCDMA by strengthening the handset line-up through expanded global sourcing and by developing and expanding new services such as USIM based mobile finance service.

SK Telecom and SK Broadband have already launched bundled products and are making new subscriber acquisitions. The market response up to date is quite positive. We expect a stable subscriber growth trend going forward with the enhanced customer awareness.

Considering the saturation of the wired and wireless markets, SKT will stay away from heated competition and mere discount offerings, but will continuously review and develop functionally bundled converged products to strengthen its competitive edge in bundling.

Let me now move on to the global businesses.

The world is currently going through an unprecedented economic crisis. SK Telecom is fully aware of the need to reflect such external changes in pursuing the goal of continuous growth for the Company. As SK Telecom has always exercised prudence in pursuing global businesses in the past, it will continue to be mindful of the changing economic factors in making prudent decisions.

In China, China Unicom started anew after successfully merging with China Netcom. While expanding the existing relationship SKT is looking for opportunities to cooperate in [MVNO] business and convergence related business model development.

In the US the process of selling Helio shares to Virgin Mobile has been completed. Virgin Mobile expects to create additional value by leveraging Helio's advanced data business resources and capabilities and the accumulated experience in the post-paid service model. We believe that such benefits will be translated into value increase for SK Telecom.

In Vietnam, S-Telecom acquired 470,000 subscribers during Q3, making the cumulative subscriber number as of the end of September 5.52m. The growth trend is continuing with enhanced business competitiveness. Going forward we will do our utmost to ensure long-term survival by securing fundamental competitive edge and by making a diverse preparations for 3G license.

Let me now touch upon the Convergence and Internet business. SK Telecom is developing a new business model for the Convergence and Internet area while ensuring business portfolio management based on efficient resource management and [firm and] focused approach.

Our open market business, the 11th Street has achieved a feat of ranking number one in service quality by Korean Standards Association in less than a year since its full launching. It was also ranked 16th in the Internet website unique visitor number in September '08, demonstrating a smooth entry into the market. The 11th Street plans to continue its service in terms of customer value differentiation strategy through initiatives such as Korea's first compensation guarantee for counterfeit purchase, the 24-hour customer center and reward points linkage to OK Cashbag.

In the mid to long-term perspective SKT will focus on creating new market opportunities and sizeable revenue sources to serve as new growth drivers for the Company to proactively deal with globalization, Internet evolution to Web 3.0 and the trend of telecoms convergence with broadcasting.

Lastly I would like to discuss the shareholder return.

With the rapidly changing financial market and economic environment, there was another round of in-depth discussion regarding the shareholder return for 2008. Despite such challenging business climate the conclusion was to fulfill the management's responsibility to protect the shareholder value by executing the promised shareholder return. Accordingly we decided to conduct a share buyback and cancellation of about KRW100b. The cash dividend will be at a similar level as last year, including the interim dividend.

Amidst a volatile domestic and global business environment, SKT is solidifying the foundation for future growth in a prudent manner. We are confident that such growth-oriented activities will ultimately lead to expanded enterprise value and shareholder value.

We ask for your unwavering support and interest in SKT's Management activities. Thank you.

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

(Interpreted). Now Q&A session will begin. (Operator Instructions). The first question will be provided by Mr. [Jong-in Yang] from Hankuk Investments Securities. Please go ahead, sir.

(Interpreted). Thank you very much. I have the following two questions.

If you look at page three of the distributed document, there is a line item called other commission on which we see a 17% increase quarter on quarter. And it does state on the bottom that it had something to do with your activities to stimulate the handset installment program. So could you elaborate on that increase please?

And also relatedly could you discuss the future outlook on that particular other commission line item for Q4 as well as year 2009?

My second question has to do with your plans to invest in Sprint Nextel. Domestically and globally the environment for investment is deteriorating quite a bit. So can we simply assume that your possible investment into Sprint Nextel will be postponed for some time going forward?

(Interpreted). Let me first answer your first question regarding the increase of 17% on other commission line item. On a quarter-on-quarter basis the increase amounted to KRW65.5b. And there are two reasons why such increase took place.

First of all, with more active usage of roaming services the commission related to roaming has increased. And secondly, with the longer duration for the handset installment program being introduced, such related -- debt-related cost has been incurred by about KRW48.7b accounting-wise.

And to elaborate on that, if you look at the corporate accounting standard on long-term liability, such as liability exceeding a one-year period, you're supposed to reflect it through the present value discount account. And that amounted to about KRW48.7b.

However, as you recall, the present value discount account is later on recaptured on the accounting balance under the interest income line item under the big bracket of non-operating income once these installment payments are made and once they reach maturity. So it's a type of expense or cost on the accounting balance sheet only. And so it has simply to do with the mismatch of the duration accounting-wise. This was not an actual cost, per se.

But the only extra cost that could be incurred from this type of activity is the additional cost of capital because we have to source for extra capital in order to enable such installment program.

And to answer the second part of your first question regarding the outlook for Q4 as well as year 2009, for the entire year, this year, we are looking at about KRW80b for present value discount and plus the financing related expenses. And into next year in '09 we expect that figure to just slightly increase.

To address your second question of -- in the past, of course, it's -- considering the fact that the handset penetration rate in Korea currently stands at about 93% range, we always felt that the domestic market is rather saturated, limiting our future growth in the domestic market only. That is why we have been always interested in the global expansion.

However let me reassure you that we have not been pursuing an acquisition or any type of expansion with a major mobile telephony operator in the US. Therefore we have nothing to postpone. And even into the future we will continue to be prudent in considering all the financial and economic landscape in making any such related decision.

And relatedly, in pursuing the global expansion or global businesses, we are fully aware of all the changes that are going on. And of course it's not that our basic stance for global expansion has changed by seeing this. Actually it has not been changed.

But as I mentioned in the opening statement, when we pursue any growth strategies for the Company, especially regarding global businesses, we will definitely consider the environmental changes in the economic landscape. And we feel the need to do so.

So SKT going forward will continue to consider the ongoing current economic crisis -- financial crisis, as well as consider and apply the relevant investment criteria and standards so that we can make the most prudent sets of decisions so that we could limit any deterioration of the shareholder value.

(Interpreted). The following question will be presented by Mr. [Chae Gyun Song] from Eugene Investment Securities. Please go ahead, sir.

(Interpreted). Yes. I have the following three very brief questions. First of all, you mentioned earlier that roaming related commission has increased as well. Could you cite the reason why? Is it because of the depreciation of the currency? So is it somehow impacted by the FX rate is my question.

And secondly you mentioned that the installment program for handset and that type of related long-term liability line item would be recaptured later on under the interest income. So when can we expect that to be re-recognized on the financial statements? So from which quarter can we anticipate that being recaptured under interest income line item?

And thirdly, you mentioned that you will be more prudent in pursuing overseas expansion. If that is the case what signal can we anticipate so that we could tell that in some time in the future your stance would have changed to a more proactive and more aggressive stance? So any signal that we could wait for? If you could share that with us I would appreciate that.

(Interpreted). To answer your first question the roaming related commission increased because of the increase of the revenue coming from roaming, not particularly because of the FX rate change.

And regarding your second question, it will be recaptured under the interest income line item actually each month going forward because each month they will be repaying 1/24th of the entire handset amount. Therefore whenever that is repaid, that portion will be captured under the interest income line item.

So for the next two years, so let's say for the next 24-month period, if a subscriber makes that installment payment each month by 1/24th of the handset amount, each month that is accumulated and captured under interest income line item. So for year 2009 we anticipate that the total amount for interest income will be at a similar level as present value discount account.

Regarding your third question, I believe that there are many factors to consider when answering such a question. So it would be quite difficult for us to share with you from which point in time we would turn more aggressive in terms of our investment strategies.

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

Yes, thank you for the opportunity to ask questions. I have three questions. First is regarding your top-line growth outlook in the domestic market. If neither SKT nor the competitors are looking to ignite competition for the near term, it's expected your subscriber growth will decrease given the saturation level of the market. Does the management believe your growth will stop? Or does it believe that you can continue to gain top line growth through ARPU increase?

I'm asking this question because I'm wondering what might have changed given Korea's consistent track record of tariff cuts over every 12 to 18 months for the past decade.

Second, it's a fairly simple question. Is it possible to get a breakdown of your equity method losses from your major non-listed affiliates for the third quarter? And if you have any outlook for fourth quarter that will be great.

And finally if you have some guidance on your EBITDA for fourth quarter and if you can give us -- share your outlook for 2009, that will be appreciated. Thank you.

(Interpreted). Let me first address your first question. It is true that SKT's ARPU has been continuously going down in recent periods. And there are a couple of reasons why. First of all, there has been the on-net discount that has been applied, as well as the SMS-related tariff cut. And there have been some customer protection related activities pursued by SKT such as the tariff cap on the teenage subscribers as well as the blocking of the spam mail. So because of those reasons, on a year-on-year basis, there has been a slight decrease on ARPU.

And one of the reasons why on the Wireless Internet side we have been seeing certain reduction in ARPU was because we believe that ensuring customer value enhancement should take place first in order to secure a long-term growth platform. That is why we have been pursuing programs such as teenage rate cap, as well as spam mail block services. And so you could consider this as a transitional growing pain in our business growth going forward.

And in order to increase the ARPU going forward we will make a lot of effort. And if you look at the current number of subscribers joining in at the fixed price plan for Wireless Internet services, that portion only takes up 10% of total subscriber number. Therefore we have a great potential for growth going forward from the Wireless Internet area.

And also there will be more active wired/wireless type of convergence services as well as the expansion of the open network business. So with all those activities taking place, we will do our very best to boost the Wireless Internet revenue and growth in the year 2009 so that we could at least maintain or grow the overall ARPU.

It seems you are a little concerned about a possible tariff reduction going forward. So let me comment briefly on that. As you are well aware, last year we have implemented the on-net discount plan as well as the family discount program. As these programs are more actively being adopted by our subscribers, there has been a significant amount of tariff reduction effect taking place already.

And with SK Broadband we are offering various discount packages, combining wired and wireless services together. So once these services are more actively adopted by the subscribers, the discount effect felt by the subscribers will become even larger.

Therefore, going forward, we anticipate still autonomous price reduction related competition in the market to take [forward]. And therefore the likelihood of tariff reduction beyond the appropriate level is quite low, I believe.

Over the entire period Q3, our net equity method related P&L says minus KRW41.8b. On an annual basis it will be at a similar level as 2007. If you recall, last year we had a one-off factor which was an extraordinary gain on equity method regarding SK C&C. So if you exclude that one-off factor, on an annual basis it amounted to about minus KRW200b. So that's about the level that we anticipate for this year.

And going forward, since Helio, which took up a lion's share of the equity method loss in the past, has been sold, we believe a significant improvement on the equity method gain or loss line item in the future.

And lastly, regarding EBITDA guidance, as you recall we did not announce that guidance in the beginning of the year. And despite the increased competition on a year-on-year basis, we would do our best to achieve an EBITDA level similar to that of last year. And we are currently in the process of forming a management plan for next year. So it's quite difficult for us to communicate such guidance for next year as of yet.

But what I could tell you is that we will continue to increase the top line while limiting competition so that we could also maximize our profit going forward.

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

Yes, hi. I just have a very simple question. I was just wondering why your debt level increased in third quarter relative to the second quarter. It looks like it's long-term debt. You have plenty of cash. But if you could just share with us what your thoughts are on that.

(Interpreted). Yes, regarding that increase, as you have pointed out, we have seen some increase on a quarter-on-quarter basis in terms of long-term borrowing. And the reason mainly is the increased liability in order to fund the handset installment program. So naturally in the process there has been an increase of account receivables which has led to such a result.

(Interpreted). The following questions will be presented by Mr. Sam Min from BNP Paribas. Please go ahead, sir.

Yes, hi. I have two questions. I guess I would like to follow up on the handset installment receivable expense item that you're accounting. What would happen -- if you can walk us through if a subscriber cancels earlier than the length of the accounted period or the contract period? That would be my first question.

And then secondly, just following up on the previous questions in regards to your increase in long-term debt, you said that in the third quarter only about KRW48.7b was added to -- was due to the handset installments. So the leverage increase, I believe, was much higher than that. So if you can explain that as well. That's it, thank you.

(Interpreted). Whatever subsidy payment we make, we can actually recover through the form of penalty amount according to the agreement to -- by the subscriber.

So when we make such installment-related sales, of course immediately upon the subscriber's cancellation of the services, we would cancel the contract itself on the installment. And therefore on a monthly basis the payment we make to -- as a form of subsidy to that particular subscriber will be suspended. And all the present value discount that was reflected will be recovered to the original state.

Actually the increase in the liability item has to do with the handset procurement. And also the KRW48.7b that I mentioned has to do with the present value discount alone.

(Interpreted). The following questions will be presented by Jay Park from Samsung Securities. Please go ahead, sir.

(Interpreted). Yes. I have the following questions. Yesterday, as you are well aware, your competitor has conducted an earnings conference call as well. And looking at your call charges related results, compared to your competitor, the reduction magnitude is much bigger than your competitor. And you mentioned earlier that partly it's because of the on-net discount program that you have launched. So could you be more specific with the actual amount? How much was affected by the on-net discount?

And the second question has to do with your retention commission as well as the initial commission payment? According to your competitor's announcement yesterday, they were able to reduce the acquisition-related commission quite a bit to about a two-digit number. But according to your figures that have been distributed it's in a single-digit number. So I would like to know the details on that.

And as you know, for the past three-month period, your net addition market share has been less than 50%. So is that the reason why you have not brought down the initial commission as much as competitors?

And the third question has to do with your CapEx trend. Now during Q3, even considering the growing trend of CapEx towards the end of the year, your Q3 number seems to have increased quite a bit. So any particular reasons why you have seen such an increase on the network CapEx spending?

And relatedly can you share with us the 4Q -- the fourth quarter as well 2009 outlook for CapEx as well?

(Interpreted). Let me elaborate on the tariff reduction or the price discount effect. From the on-net discount per subscriber we are providing discount of between KRW6,000 to KRW7,000. And regarding the family discount plan, we are offering KRW4,300 per subscriber discount effect.

Let me answer your question regarding CapEx first. For the entire year 2008 we will maintain the annual guidance previously communicated with you which was KRW1.97 trillion for CapEx. And typically, as you are well aware, compared to Q1 and Q2, always in Q3 and Q4 we tend to expend more of this investment budgets. Therefore there is no anomaly to this year's results compared to the previous years.

And to answer your question regarding the acquisition cost as well as the retention commission, let me give you the details. Regarding the initial commission which is offered at the time of the new acquisition, per subscriber we are looking at about KRW190,000 per subscriber during Q3.

And regarding retention commission, because it has something to do with a -- our competition-related policies and strategies, I ask for your understanding because we cannot communicate that portion to you.

And yes, it is true that our net addition market share is less than 50%. But considering the fact that the recent net addition size has been quite small, I don't think that that figure is that meaningful because our accumulated market share has not been significantly changed because of it.

(Interpreted). Relatedly I also asked for the CapEx guidance for 2009. So could you comment on that as well?

(Interpreted). Again regarding the 2009 CapEx guidance, it is too early for us to communicate that with you today. However, what I could tell you is that we expect a continuously reducing trend for CapEx in the future.

(Interpreted). The following question will be presented by Mr. Hongseek Kim from NH Investment Securities. Please go ahead, sir.

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

First of all, at a recent Korea Communications Commission meeting there has been a discussion about possibly forcing an integration into a same prefix number for all subscribers, which is 010. And seeing how your proportion of 010 subscribers tends to be lower than that of competitors, we anticipate more churning out from the existing SKT high-quality customer base. So that's my personal opinion that there might be a more disadvantageous position for SKT in that regard.

And so relatedly, in order to boost up the number of 3G subscribers for SKT, do you have any plans to majorly change the subscriber strategies going forward?

And relatedly, LGT is still maintaining its OZ price plan which is set at KRW6,000. And relatively speaking, SKT has a limited leeway in order to significantly lower the data rates because you have to maintain certain data ARPU trend.

So in that regard, how do you plan to enhance the competitive edge in terms of data-related tariffs?

And the third question has to do with the frequency reallocation or added frequency acquisition for 3G because there has been a growing number of 3G subscribers. So there has been some discussion about the need to secure more frequency for the operators. So does SKT have such a plan going forward? And if so, what would be the acquisition cost related to that extra frequency?

(Interpreted). Regarding your question about a -- possibly forcing the integration of the prefix numbers into 010, let me share with you that our conversion ratio to 010 prefix currently stands at about 66.5%. And thanks to more activated 3G-related service offerings, that trend is increasing.

However, we have a segment of subscribers that are quite resistant to such number change for the future. So, going forward, we anticipate a slower conversion trend for the prefix number. Now -- so in the future, as we expect or pursue such integration policy on the prefix number 010, it is my hope that more focus is placed on the convenience of the subscribers, not only for the sake of perhaps regulating the telcos.

Regarding 3G, we have been maintaining a policy to stay away from the artificial and aggressive migration strategy into the WCDMA network. So we will closely monitor the receptiveness on the part of the subscribers and also consider the handset availability, as well as the market environment, so that we could -- and based on such assessment, we have been maintaining the natural migration path instead. So as long as we maintain an appropriate level of market share, we will stay away from over (inaudible) competition and therefore lead -- play the leadership role in market stabilizations.

And to answer your second question, as you are well aware, in the month of April, we have launched a new type of data fixed-price plan package called [Data Perfect], which has a tariff of KRW10,000 per subscriber. And that subscriber segment number has exceeded 1.72m. So I believe that with that price plan we are effectively dealing with the competitive landscape. And so rather than pursuing an overly aggressive price cut, we will rather focus on enhancing our competitiveness in terms of wireless internet services offering and combine that with rational price systems.

And also, relatedly, we are trying to create the most optimum and valued package combining the right set of handset as well as the right service offerings and a tariff plan. And so we will continuously provide and source handset line-up so that we can be more competitive in the handset item as well. So rather than competing on the price point only, we will be pursuing more full driver-based, browser-based service offerings instead.

Regarding your question about the frequency acquisition -- and we will continuously watch closely the subscriber growth trend. So we are in the process of reviewing the general time period where we might reach the saturation point in terms of the frequency capacity. So if we feel that we do need to secure more extra frequency, we will definitely give it extra time because we have to build the extra network, so we have to give the [prior] period for that.

And also, if needs arise, we will discuss with the government so that we could secure the necessary frequency allocation. I believe that the Korea Communications Commission is currently reviewing various types of frequency bandwidths, including 2.1GHz and 800MHz and 900MHz and 700MHz as well. So they are trying to form the right policies around those related frequency bandwidths. And I believe that they are planning to go through public hearings within this year so that they could finalize the policies.

And relatedly, regarding our frequency-related policy, we are trying to minimize the extra frequency capacity requirement by more effectively and efficiently managing our multi-network policy going forward. So we will -- considering the uncertainties regarding the future frequency-related policies as well as the competitive landscape, I think that it is too premature for us to mention the necessary investment that is involved with the frequency reallocation.

(Interpreted). The following question will be presented by Mr. Hanjo Kim from Goldman Sachs. Please go ahead, sir.

Great. Thank you very much. I just have three questions. Prior -- in one of the prior questions, you mentioned that the reason for the debt financing was for handset purchases. Please correct me if I'm wrong, but SKT doesn't purchase handsets. I thought SK Network did. If it is for handset purchase, can you just help us understand why you need to purchase that? If it's not purchase, is it really rather just the capitalization of subscribers in the lock-in period?

Secondly, relative to your level of interest in investing in the US or China or any other global asset, how high would you rate your priority in increasing your stake in SK Broadband?

And lastly, if you could just give us an update on SK C&C stake disposal, that'd be great. Thank you.

(Interpreted). Regarding your first question, it wasn't for the actual purchase for handset per se, but in order to help purchase such handsets, there are some accounts receivables that are created, because we are enabling installment payment related sales. So it has to do more with the accounts receivable.

And to elaborate on that, what we do is to purchase the accounts receivables incurred by the dealers, and then we are actually purchasing it as no-interest arrangement. So by doing that we are enabling subscribers to experience the installment payment option.

And regarding our possible recapitalization on SK Broadband, I believe that is something to be decided by the BoD and SK Broadband. So it would be inappropriate for me to mention it here. And, of course, it would be all up to the management environment as well as the business results. But up to this point no concrete option has been reviewed yet.

And as you are well aware, the current market environment is not that friendly for the disposal of the shares. But nevertheless, we do need to make this action in order to alleviate all the concerns on the circular equity ownership between the related companies within the Company. Therefore, it will have to be proceeded. However, and nothing has been concretely decided yet, but we will still go with the BoD's original resolution that there will be a disposal.

Great. Thank you.

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

Yes, thank you very much. I just have one follow-up question. You mentioned earlier that you expect CapEx to decline gradually. Could you please share with us what kind of CapEx levels or CapEx to sales levels we could expect in the mid to long term? I ask because I do think that there are some pressures to keep CapEx high. The regulator has made some comments on this. Also you mentioned earlier that there might be some need for additional spectrum and also your WiBro license.

(Interpreted). And of course, when deciding the CapEx level, of course we cannot give you a set number right now, because there will be a lot of the competitive landscape that we have to consider and various other factors. However, on a mid-term basis, we believe that CapEx to sales ratio of between 12% to 13% might be a type of reference considering the past history. And also looking at the long-term CapEx trend, we do anticipate a gradual decreasing trend.

However, in the immediate term, we will have to monitor closely the market environment as well as the volatility in the market. And relatedly, I believe that CapEx investment should be made according to the market needs, considering the positive impact that can come from that on the profitability as well as the growth of the Company.

(Interpreted). The following questions will be presented by [Mr. Sung Eun Cho] from Mirae Asset Investment Securities. Please go ahead, sir.

(Interpreted). Yes. I had the following questions. First of all, you have mentioned strongly the need to focus on the wireless internet going forward. And you also mentioned in the opening remarks that there will be some global sourcing relatedly.

So assuming that there will be the lifting of the [WiFi] regulations from next year, how much proportion do you -- are you anticipating in terms of global sourcing? I'm asking this question because I believe that current line-up of Samsung and LG phones might be lagging behind in terms of the usability slightly. That is why I'm asking you for the global sourcing portion.

And secondly, regarding the handset installment program, how much more active adoption of this program do you anticipate for the future, because we have seen quite an uptake during Q3 already? So can you make an estimate for Q4 as well as next year?

And thirdly, because of the difficult financial environment right now, we anticipate a lot of the delinquent subscribers going forward. So in order to prepare for that, how are you anticipating or what type of bad debt write-off ratio are you currently experiencing?

(Interpreted). Regarding the proportion of global sourcing, it will be quite up to the market demand. Therefore it is difficult for us to give you a definite estimate at this point. We will have to watch closely the price arrangement as well as the FX rate movement and the specification and the performance of the handset devices. And we will have to gauge the market response to such handsets in order to adjust the portion of global sourcing accordingly.

To answer your question about how we anticipate the adoption of the handset installment program, for next year, we do anticipate a slightly larger size compared to now. However, on a quarterly basis, we anticipate that it will come down.

For your information, the bad debt related write-off for Q3 amounted to KRW6.5b. And to address this type of issue, we are providing and supporting the entire program with a guaranteed insurance product as well as a very active recovery program for the overview payment on the services as well as other liability that the subscribers have to us. So those are supporting our program.

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(Interpreted). The following questions will be presented by Mr. Young-Whan Chun from Shinyoung Investment Securities. Please go ahead, sir.

(Interpreted). Yes, I have the following three questions. First of all, yes I do see that CapEx has slightly increased on a quarter-on-quarter basis. However, even considering that, your depreciation and amortization account seems to have increased overly high. For example, during Q3 of last year, you had bigger CapEx spending compared to this year, however your D&A line item was smaller. So any special reasons why?

And the second question has to do with the breakdown of the equity method valuation loss because, although this question was raised earlier, I don't think that the breakdown was provided. So especially in Q3, how much of the equity method loss for Helio was reflected, is my question?

And for the -- regarding the third question, it's a specific number-related question. For -- as of the end of Q3, could you give us the total amount for long-term handset-related debt? And also, relatedly, could you share with us the accumulated three quarters membership support related expense?

(Interpreted). Of course, regarding CapEx expense, whenever there is more spending on CapEx, of course the depreciation and amortization increases accordingly as well. But it's not always closely correlated. There are a couple of reasons why. Let me cite certain examples.

For instance, when new base stations are built or new [racks] are installed, actually -- new networks are installed, we do require some type of test running or pilot running. And we could only begin the depreciation only after such pilot testing is concluded. So because of that, there can be certain difference or mismatch in terms of the timing.

And the second reason possibly is the capital outlay which we've made on existing equipment and assets. In other words, if we have existing assets and if we are only adding a couple of new components to that, we have to make sure that all the depreciation on even the added parts have to be completed before the full depreciation on the main equipment is concluded. So because of that, sometimes, on the later investment on existing assets, the amortization and depreciation ratio might be faster. So because of those factors, it's not always entirely correlated.

Now, regarding the equity method loss on Helio for Q3, the loss amount amounted to KRW17.6b.

And to answer your last question regarding the long-term handset-related receivables, as of the end of Q3, it amounted to KRW1,360b. And regarding the total expense for the membership support program, please contact our IR department separately, because we don't have that figure right now with us.

(Interpreted). The final questions will be presented by Mr. Sang Hyun Park from SK Securities. Please go ahead, sir.

(Interpreted). Thank you very much. I have the following two questions. First of all, regarding the wireless internet revenue, after the tariff reduction in the past, I believe that the revenue has not picked up yet. And seeing how you have the network now secured, such as 3G and WCDMA, which could actually lead to bigger revenue, we have not actually seen that take place yet. But if you look at the US market, basically a lot of the revenue increase depends on the handset competitiveness and related service usage increase. So I guess most notably iPhone could be one of the handsets which could impact it.

And in that process, in the US at least, there has been some discussion that over-reliance on the handset competitiveness in order to increase revenue has, I guess, reversed the dynamics between the telcos and the handset makers. So within SK Telecom, do you have any strategies in place in order to secure and maintain such telco advantage against the handset makers by doing actions such as in-house sourcing or manufacturing your own handsets and embedding the necessary services, etc.?

And my second question has to do with the current distribution channel, because your current distribution structure is quite simple, in that you wait for customers to come to your shops and dealers and you simply sell the product. And under the past business model, where we relied on the voice services as well as SMS only, maybe that would have sufficed. However, nowadays you have to teach new services to those subscribers who have never used it before. So I think that you need to have a different type of distribution system where people could experience the services rather than simply buying products. So within SK Telecom, do you have any plans to realign your distribution channel accordingly?

(Interpreted). To answer your first question, we have already decided in the past that in-house sourcing does not ensure competitive edge. That is why we have sold SK Teletech. And therefore we have no immediate plan to return back to the scheme of producing handsets internally.

And to address your second question, in the overseas market, I believe that they are actually following the track that SKT has trodden in the initial stage of the data service market. So in such a period, I do believe that, yes, handset functionalities could have a significant impact.

And also regarding the distribution channel, we are reviewing various options and we are trying to focus more on the retail channels so that we could create a sound balance between the wholesale channels as well as retail channels. And to do that, on each channel, we are trying to create the most optimum portfolio. And against our competitors we are trying to get an upper hand by securing more number of dealers or shops. At the same time, we were trying to enhance the quality of our services by enhancing the sales per dealer and -- as well as improving the customer service level as well.

(Interpreted). This concludes the Q&A session. Our CFO, Mr. Kyou-bin Lee, will now give a closing remark.

(Interpreted). Thank you for taking part in today's conference call until the end. All your valuable questions and comments will help create the foundation for management activities for SK Telecom. Against the backdrop of rapidly-changing business climate, SK Telecom is doing its best to further enhance shareholder value through profitability improvement based on stable management activities as well as continuous efforts to create growth platform. We ask for your continuous interest and support in that regard.

(Interpreted). This concludes the earnings conference call for the third 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