SK Telecom Co Ltd (SKM) 2010 Q2 法說會逐字稿

(Interpreted) Good afternoon, welcome to the conference call for the fiscal year 2010 second quarter earnings results 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 2010 second quarter earnings results by SK Telecom.

(Interpreted) Good afternoon, today's conference call will consist of the opening remarks by SKT's CFO, Dong-Hyun Jang on the second quarter results for 2010 and other matters of your interest, followed by a Q&A session.

To help deepen your understanding, relevant executives will also take part in the call.

Today's conference call will be conducted with consecutive interpretation. Let me also remind you that all the forward-looking statements are subject to change depending on the macroeconomic and market environment. Let me now invite our CFO, Dong-Hyun Jang.

(Interpreted) Good afternoon, my name is Dong-Hyun Jang, the CFO of SK Telecom. Thank you for taking part in today's earnings conference call for the second quarter 2010.

Let me begin with the earnings highlights for Q2 2010. The second quarter revenue for Q2 2010 recorded KRW3,088.6b. While factors such as sign-up fee reduction per-second billing and introduction of various discount plans put a downward pressure, the overall subscriber number increased including smartphone subscribers, helped boost the revenue by 0.7% year on year and 2.3% quarter on quarter.

Pursuant to the marketing expense guideline of KCC, our Q2 marketing expense marked KRW772.1b, down 12.9% year on year, and 3.8% quarter on quarter. Although the marketing expense to revenue ratio for Q2 remained at 25.3% with the heated competition until May, the market started stabilizing since the announcement of the marketing expense guideline in May, making the June marketing to revenue ratio less than 22%.

Operating income for the quarter was KRW582.1b, expanding by 5.2% year on year and 21.1% quarter on quarter supported mainly by the year on year marketing expense reduction despite the World Cup related one-off advertisement and a higher depreciation.

Net income marked KRW364b, up 16.8% year-on-year and 13.1% quarter on quarter.

EBITDA recorded KRW1,085.2b.

That was the earnings highlights for the quarter. Let me now move on to the outlook for the business environment as well as our strategic direction.

As mentioned earlier, SKT achieved a marketing-to-revenue ratio of 22% during the month of June, pursuant to the marketing expense guideline of KCC. We will continue to abide by the marketing expense guideline to help stabilize the market while maintaining our competitive edge through our fundamental competitiveness in handsets, price plans, networks and content.

SK Telecom has participated in the development of Galaxy S with Samsung Electronics from the very beginning of the development process. Leveraging SKT's marketing competitive edge, Galaxy S was sold to over 500 subscribers within 33 days of its launch on June 24, breaking all the records for the sale of handsets in Korea in the shortest time ever.

During Q2, SK Telecom also launched smartphones other than Galaxy S such as Desire and Xperia X10. All seven handsets launched during the second quarter were under exclusive arrangements for SKT, further enhancing our handset prowess compared to our other competitors. For the third quarter, we are preparing for the launch of 10 additional smartphones.

Based on our competitive strength in handset line-up, the current smartphone subscriber number has reached around 1.7m. Boosted by such upward trends, we expect the accumulated total smartphone subscriber number to reach over 3m within 2010, exceeding the original guidance of 2.5m.

The ARPU of smartphone subscribers, excluding sign-up fee and interconnection fee during Q2, was KRW55,000 which was KRW20,000 higher than the ARPU of non-smartphone subscribers. The high data ARPU of smartphone subscribers contributed greatly to the overall data ARPU increase for Q2 by 5.1% quarter on quarter.

We believe that the increase in data ARPU trend is likely to continue in the future with even wider subscriber base for smartphones.

On July 14, SK Telecom has announced its decision to introduce the unlimited wireless data service. We expect top line growth from upselling to high end price plans and the resulting churn rate reduction from the introduction of the service.

We have also decided to allow mobile VoIP in limited price plans to help promote the appropriate usage. And by launching a new family bundled product combining fixed line and mobile services, SKT plans to further strengthen customer benefits.

SKT has the network operating capability to accommodate 100% of the customer's data demand following the introduction of the unlimited wireless data service. The most critical element in meeting customers' wireless internet usage needs is the guarantee on mobility. In addition, the large packet data usage should be supported sufficiently.

We have secured additional spectrum in the 2.1GHz range last May and we are currently expanding to FA4 data only. We have also planned to commercialize HSPA Plus network and introduce 6-Sector solution and deep packet inspection to ease concerns on network congestion and call quality deterioration.

Through these efforts, we plan to provide data services to our customers anytime, anywhere.

Also, we are working on early commercialization of LTE service with the launch in Seoul by 2011.

In addition, we plan to build up to 10,000 stationary Wi-Fi hotspots by September and 5,000 mobile hotspots in addition to that.

We will provide coverage for our customers' data needs while minimizing interference between Wi-Fi networks in building the Wi-Fi zones.

This year's budget fourth quarter CapEx already reflects the FA expansion from extra frequency allocation for WCDMA, network capacity increase, and quality improvement initiatives.

In LTE commercialization, we will minimize additional cost by reusing our existing network equipment.

We also plan to make gradual investments centering on the Seoul area initially. Therefore, we do not anticipate major changes in the future CapEx trend.

With the higher penetration of smartphones, SKT's open marketplace T Store is expected to be utilized more widely. As of the end of July, T Store users reached 1.93m with 44,000 listed contents. Especially after the launch of Galaxy S, the daily registered users reached 19,000 with 247,000 downloads, exponentially growing by 228% and 248% respectively.

SK Telecom is also aware of the fact that being competitive as a service platform provider in areas such as navigation and payment will be even more critical in maintaining the market leadership in the ICT sector in the future. We have established a new organization called product development factory to strengthen core competencies such as service commercialization, service delivery, and utilization of external resources, among many.

The open innovation center, which is jointly invested and operated with Samsung Electronics, is a part of the product development factory which will create a virtual cycle of ecosystem for the overall telecom industry through innovative collaboration.

Next, I would like to comment on the IPE, including B2B business. SKT is currently pursuing various projects with many partners including KDS and [The Zone B Zone] and of the total 31 projects, 10 are overseas projects. The number of new contracts is increasing since the beginning of 2010. Notable overseas projects include the alliance with Telkom from Indonesia, equity participation in Packet One of Malaysia, and Smart City project in China to name a few.

We are unable to disclose all the details about the progress and the names of the partners due to non-disclosure arrangements and consideration for competition. We ask for your kind understanding.

Our B2B revenue during Q2 reached KRW190.7b. If you add the first quarter results, the fits half revenue marked KRW356.5b, jumping 56% on a year on year basis. Considering the IPE-related contracts mentioned earlier, we believe the B2B revenue guidance of KRW1 trillion for this year will be sufficiently met.

Lastly, I would like to touch upon the shareholder return.

Following the in-depth discussion at the recent BoD meeting on the mid- to long-term growth strategy and the shareholder value enhancement, we have decided to purchase 1.25m treasury shares worth KRW200b. The interim dividend was decided at KRW1,000 as last year. The cash dividend for 2010, including interim dividend, will be at the same level as last year.

During the first half of 2010, SK Telecom has made its utmost efforts to secure the growth platform while improving the profitability. We promise to continue such efforts to reap the fruit of all our efforts to date.

Lastly, I would like to extend my deepest appreciation to all the investors and analysts for your unwavering support for SK Telecom. Thank you.

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

(Interpreted) Now Q&A session will begin. (Operator Instructions). The first question will be provided by Yang Jong-in from Hankuk Investment Securities. The next question will be provided by Mr. Josh Bae from UBS.

Mr. Yang Jong-in, please go ahead with your question.

(Interpreted) I have the following three questions. First of all, my first question has to do with your marketing expense plans for the second half. You have mentioned in your opening remarks that you will be abiding by the annual guidance which has been designated by KCC for the rest of the year or for the entire year and as you are well aware, that guideline happens to be 22%. And if you do the simple math for the first half, your marketing-to-revenue ratio stands at approximately 26% to date. That means, in order for you to achieve the annual 22% proportion, you have to achieve less than 20% marketing expense ratio during the second half. So could you give us some color as to how you are going to achieve that?

My second question has to do with your plans regarding the smartphone lineup. As you are well aware, KT has announced that it will be launching iPhone4 in the month of September and also, there has been some news reports that they will be also launching the Galaxy phone around the same time.

Of course, you mentioned that you will be launching about 10 additional smartphone line ups during the third quarter, but could you be more specific as to how you plan to maintain your competitive edge in the handset lineup?

And the third question has to do with your smartphone-subscriber related proportions. First of all, what is the percentage of your corporate subscribers among the smartphone users and what are those corporate subscribers' ARPU? And also, with regards to the Galaxy S handset, what is the number or the percentage of the corporate customers?

(Interpreted) I will be answering your first and the question about the marketing expense related question as well as the issues relating to the corporate subscriber questions. After that, the executive in charge of the sales business unit will be answering your question regarding our plans to maintain the handset competitive edge.

First of all, regarding your question about our marketing expense for the second half, for your information, we have controlled our marketing-to-revenue ratio during the month of June to about 20.6%. So if you consider that, during the second half, although there will be some volatility month to month regarding the exact percentage of marketing expense which has been executed, we do have strong commitment and will to abide by the KCC marketing expense guideline as much as possible during the second half to achieve the target numbers.

To answer your question regarding the corporate customers, especially regarding the Galaxy S-related subscribers, as you are well aware, over 500,000 subscribers have been initiated with their service initiation under new phones. But most of such sales have taken place through the B2C channel through the general dealership structure and there are still quite a few B2B customers waiting in line with their pre-order arrangement because of the shortage in the supply.

So we will have to wait a little while longer for us to give you more specific numbers as to the exact percentage of the corporate customers.

And to answer your question regarding the average ARPU of our core corporate customers, let me give you some reference figures. Currently, about 55% of the corporate customers using Galaxy S has opted for the price plan called All-In-One 55 or higher. And although it would be difficult for us to give you flat out unilateral ARPU figures on all the corporate customers because they all have different features and different terms related to their subscription, but I could reassure you that their corporate customer average ARPU might be somewhere around that figure. That is 55, which is 55,000 in this case.

My name is Kim, in charge of the sales division and let me answer your question regarding how we plan to maintain our smartphone or handset line up advantage during the third quarter.

And I believe that I could address your question in three ways. First of all, we hope to and we plan to maintain the sale of Galaxy S handset just as we have been showing the trend in the month of July. For your information, we have sold over 400,000 units during the month of July and by maintaining such volume going forward, we believe that we would be sufficiently able to counteract against the launching of iPhone.

And secondly, we are not only selling Galaxy S in this current situation, we are also selling handsets such as Desire and Xperia X10 etc, and per model, we are selling over 5,000 per day, therefore, we will be leveraging such diverse handset lineup in order to counter against our competition.

And also during the third quarter we will have our SKT-exclusive handset types and also, we will be launching some handset types that are unilaterally offered for different operators as well. And altogether, we are planning to launch about 10 different handsets and we also hope to expand the handset line up in the affordable low end type handset category as well.

And lastly, let me just comment that after the announcement of the launching of the wireless data unlimited service packages, the response from the market, as well as the subscribers, has been quite positive. Therefore, if we fully leverage our existing handset line-up advantage, I believe that our smartphone strategy would be very successful going forward.

(Interpreted) Your next question will be presented by Mr. Josh Bae from UBS, and the following question will be presented by Stanley Yang from Nomura Securities.

Mr. Josh Bae, please go ahead with your question.

Yes, thank you for the opportunity. I have three questions. First of all, just to follow up on the first question. Do you plan to match the regulatory guideline for marketing cost to sales for the full year 2010 or just for the second half?

The second is on your guidance? If you could remind us of your revenue and CapEx guidance for 2010 and if you could share with us how comfortable you are with these targets at this stage that would be helpful?

Finally, on your SK C&C stake, if you could share with us what your plans are with this remaining stake?

Thank you.

(Interpreted) Let me answer your question regarding our marketing expense ratio. From the very get-go, KCC has set the criteria or this guideline based on the annual concept. Therefore, SKT is fully committed to meet this ratio during the second half to the best of our ability.

Regarding your questions about our guidance for the year regarding the revenue and CapEx, our revenue guidance for the year was KRW13 trillion while CapEx guidance was about KRW1.75 trillion. While we will be working our best to achieve the KRW13 trillion target for revenue, and when it comes to CapEx guidance, yes, we have the original guidance of KRW1.75 trillion. But we believe that it might be increased by about KRW100b. So altogether, we are looking at KRW1.85 trillion or less, in which, we will be executing our CapEx plan.

Once again, let me reiterate our CapEx guidance for the year was KRW1.75 trillion from which we are looking at about KRW100b increase for the year.

For your information, our SK C&C related equity holding is as follows. We currently hold 9% which amounts to 4.5m shares and we need to sell all those shares by July 2, 2011. And SKT is currently conducting various reviews in order to identify ways to sell those shares without too much impact on the market.

And of course, we will do our very best in order to consider the maximization of shareholder return by looking at the market and economic situations very closely in deciding on the timing.

Yes, thank you. May I just confirm that you mentioned that you will make efforts in the second half to make sure that the full year marketing cost of sales number matches the regulatory guideline?

(Interpreted) Yes, that is correct. We are committed to meeting the annual target figure of 22%.

Thank you.

(Interpreted) The next question will be presented by Mr. Stanley Yang from Nomura Securities. And the following question will be presented by Jae Park from Samsung Securities.

Mr. Stanley Yang, please go ahead with your question.

(Interpreted) Yes, I have the following three questions. First of all, regarding the government guideline on the marketing expense, are there any follow up measures planned by the government regarding those operators not meeting the government guideline?

In other words, currently, it seems that SKT seems to be most committed to meeting this annual reduction target given by the government. But if you look at the overall telecom industry, it seems quite difficult for the operators to abide by the annual target.

So I'm wondering, are there plans by the government of introducing let's say, subsidy cap on those operators not meeting the regulatory guideline figures for instance? If you know such information, please share them with us.

And secondly, I have a question about the smartphone ARPU. You mentioned that currently the ARPU for smartphone subscribers currently stands at KRW55,000. But as the penetration of smartphones goes up and as the margin of subscribers begin to come on board as well, I would assume that the ARPU on average will only go down. So do you have some color as to the following two/three years with regards to the smartphone subscribers' average ARPU? How far do you think that it will go down? That is my question.

And the third question has to do with CapEx. You mentioned that for year 2010, there will be additional KRW100b addition, but that seems quite minimal. So basically, you seem quite committed to meeting the 2010 original guidance on CapEx. So my question has to do with the following two years, in other words, 2011 and '12, and what your plans are regarding the CapEx because we have to make the necessary estimates?

Going forward, I do believe that you will have to support more data usage and also, you will be increasing your capacity with the additional frequency allocation. So under those circumstances, do you think that it will be feasible for you to still maintain your CapEx level at between KRW1.85 trillion to KRW2 trillion into 2011 and '12 as well?

(Interpreted) Regarding the marketing expense related guidelines and the regulatory actions prepared, our executive in charge of CR will be answering that question.

(Interpreted) Regarding the regulatory plans by KCC, I believe that they are making preparations in order to make sure that operators comply with the marketing expense guidelines going forward.

To that end, I believe that KCC will be conducting monitoring per month, every month, on each operator as to how much they are complying with the guidelines. And on a quarterly basis, they will be disclosing the compliance by each operator on this guideline as well. And also, in order to make sure that effective marketing expense cap is placed, I believe that they will be utilizing various policy measures available in order to encourage the reduction of the marketing expenses by all the players.

And it is also assumed that the subsidy cap related discussions are being delayed. It is not decided yet. However, we believe that it will be decided within the month of August this year, and once that portion is decided, I think that they will be conducting market analysis. And after finding out about the subsidy application in the market, on those operators that are providing higher subsidy than the cap that is decided, I believe there will be actions such as penalty that is imposed on such operators as well.

Let me now answer your question regarding the smartphone related ARPU. If you look at Galaxy S as an example, for instance, and if you compare on the subscription price plan by each category, if you do the comparison, it is quite obvious that 10% ARPU increase takes place before and after the adoption of Galaxy S.

And if I may attempt to make an estimation about the penetration of smartphones, looking at the current trends, I could assume that by the end of next year, between 8m and 10m subscribers will be using smartphones. And also, if you -- therefore I believe that it is still too early to discuss the marginal subscribers in this entire equation yet. Considering where we see response from the market regarding the data, unlimited data price plans and also if you consider the B2B growth that is still anticipated, I think that the ARPU will be maintaining the current level. Or even actually increase going forward.

And regarding the CapEx increase requirement that comes as the increased demand coming from the data usage of our various plans, already we have conducted various assimilations about the capacity increase. Therefore we are already working on the 2FA expansions and that portion has been already included and reflected in our CapEx guidance, or plans for this year already.

Therefore, for next year, we anticipate just ordinary CapEx increase as in the past, as well as quality enhancement measures. And also there will be some implementation of the LTE commercialization actions as well. Therefore we do not anticipate any major changes on the CapEx trend going forward as well.

(Interpreted) I have a follow up question regarding that answer. Regarding the smartphone ARPU, you mentioned that it stands at KRW55,000 and I'm wondering whether that is based on the billing base amount. In other words, is that excluding interconnection fee etc? Excluding interconnection fee, I believe that your average ARPU for the entire company currently stands at KRW36,000 and you're saying that it's about KRW20,000 higher.

So if that is the assumption by next year, or that is by Q4 of next year, if you are indeed saying that there will be 10m smartphone users by that time, so I'm wondering, do you mean that the ARPU will be converging to somewhere around KRW40,000 around that time? If that is the case, I believe that that would be a very good boost for the revenue in a very significant way. But even after considering various special discounts that you have in plan, do you still believe that such ARPU is achievable? Let me just double check that.

(Interpreted) Yes, to answer your question, the smartphone ARPU figure that I have cited before is excluding sign up fees, as well as interconnection fees. And of those -- I answered previously giving it also on the assumption that the special discounts are all included in this equation. So our ARPU forecast, that it will either remain at this current level, or either go up, that is assuming that we apply all the discount plans as well. And if you look at the monthly trend already, we believe that we are already engaged in the upward trajectory already, according to our recent trend.

And, also regarding the smartphones subscriber numbers, we had originally anticipated about 2.5m by the end of this year. But we are revising it up to 3m for this year and likewise, for next year our initial target is about 8m, but then again it will be quite doable to do more than that.

(Interpreted) The next question will be presented by Mr. Kim Hong Chi from NIG Investment Securities and the following question will be presented by David Chung from JP Morgan. Mr. Kim Hong Chi, please go ahead with your questions.

(Interpreted) I have just one question. For the second quarter, what is the number of subscribers that opted for the special discount price plan? And also, with such subscriber increase coming from such special discounts price plan program, how much marketing expense were you able to save?

(Interpreted) To answer your question, we have launched our special discount price plan at the end of May. And so after that period, about 20% to 30% of the new subscribers have opted for this particular price plan. And also, we are currently targeting high ARPU subscribers in running this special discount program and we hope to maintain a very flexible program, looking at the market situations going forward.

And regarding the marketing expense reduction impact coming from this program after the end of May, we are still seeing numbers coming in right now. I think that we need to conduct more reviews in the future to get back to you with a more accurate information about this.

(Interpreted) I have a follow up question. Could you clarify as to what you mean by that 20% of new subscribers? Is it among the smartphone subscribers only, or is it out of the entire new subscribers for SKT?

(Interpreted) To answer that question, I mean 20% to 30% out of the entire new subscriber base. And, for your information, about 95% of these subscribers opting for the special discount program are also using the price plans All-In-One 45 or higher.

(Interpreted) The next question will be presented by Mr. David Chung from JP Morgan and the following question will be presented by Mr. (Inaudible) from [Merit] Securities. Mr. David Chung, please go ahead with your question.

(Interpreted) Yes, I have the following questions. This is a follow up question on previously asked Stanley's question actually. If you look at the ARPU figure for Q2, you said that there has been some positive impact coming from the increasing number of smartphone subscribers. But actually, if you look into the trend, usually, typically, between Q1 and Q2 there always has been certain positive seasonality that is involved.

But during this transition period from this first quarter and the second quarter, it seems that on a quarter on quarter basis, the monthly fee portion has come down by actually 3%. So, there seems to be some discrepancy as to what you have said and the actual numbers. So could you clarify on that?

And the second question has to do with the average ASP between the feature phones and also the smartphones from SKT's perspective.

And thirdly, you mentioned that for the rest of 2010 you are anticipating about additional KRW100b increase, compared to the original annual guidance on CapEx. But if you look at the actually executed amount during this first half, it is quite minimal. So, are there any particular reasons for such low execution of the CapEx plan?

(Interpreted) To answer your question about the execution of CapEx plan, actually, there has been a delay regarding the frequency allocation decision. And we had originally anticipated that allocation to take place during the month of February this year, but it has been delayed. So that was one factor.

And secondly, it had to do with the over Wi-Fi investment increase re-engineering and also we have been executing a little later than anticipated on Wi-Fi expansion. But, if you look at it from the PO perspective, I think that we are on track with regards to the Wi-Fi related CapEx investment.

Secondly, let me answer your question regarding the ASP differential between the smartphones and the feature phones. Regarding the feature phone and also the smartphone related differential with regards to ASP, it's difficult for us to give you a unilateral, very generalized description about the cost involved because it all depends on the market environment, as well as the competitive dynamics.

However, they may seem about the same between the feature phones and also the smartphones. But because our subscribers tend to prefer the smartphones and because we have certain smartphone handset competitiveness for an SKT perspective, currently we are spending a little less on smartphones at the moment.

And regarding the reduction on a quarter on quarter basis, it was mainly because of various discount plans that we have launched, such as all family discount and other double discount type of programs.

So, if I may give you some color on the structure of the [TES] system, we applying a lot more discount programs on the voice side, so we are losing some ARPU from there. However, from the smartphone side, there is increasing data traffic so that much increased data portion is offsetting the reduction coming from the voice revenue.

(Interpreted) So, let me clarify your answer one more time. So, as you mentioned earlier, because of the positive impact coming from the higher penetration of smartphones, during the second half you're saying that ARPU trend will likely improve going forward, right?

(Interpreted) Yes, that is correct. According to our estimation, the data portion will be more than able to offset that. Therefore, for the entire ARPU trend, we are expecting a positive trend going forward.

And I believe that I did not address a part of your question earlier. Regarding the KRW100b extra CapEx that is planned for the year, I think that your comment referred to how that seems to be a little too small in terms of execution? But to answer that question, regarding the 2FA expansions, that portion has been already reflected in the main CapEx business plan. However, when it comes to the Wi-Fi related execution plan for CapEx, we have been in the process of finalizing it. And Wi-Fi investment in total is not that significant. That is why we are only going to be adding another KRW100b.

(Interpreted) The next question will be presented by Mr. (Inaudible) from Merit Securities and the following question will be presented by Mr. (inaudible) from Honda Securities. Mr. (Inaudible), please go ahead with your question.

(Interpreted) I have the following couple of questions regarding the market cap related issue, marketing expense cap that is. You have mentioned in your opening remarks that, during the first half you were not able to meet the marketing expense guideline of 22% higher for the first half. And again you mentioned that you will be able to meet the annual target of 22%, nevertheless which means during the second half, you will have to bring it down below, to about 17% to 18% to revenue in order to achieve the annual target. So, relatively, I have the following questions.

First of all, you said that during the month of July you have sold about 400,000 units of Galaxy S. So in order to sell those units, how much marketing expense were you spending? And also, relatively, what was the percentage of the marketing expense to revenue during the month of July?

And my second question has to do with the following. You said that up to the end of July the accumulated subscriber numbers stood at 1.7m and your annual target is about 3m which means during the remaining five months, after the month of August, you will have to add another 1.3m subscribers. And that means, on a monthly basis, you have to add another 260,000 subscribers per month.

So, I'm wondering, is it possible for you to achieve both targets? That is, number one, meeting the marketing expense guideline target and also at the same time, meeting your smartphone subscriber increase target? So, if that is possible, could you explain how that is possible?

(Interpreted) First of all, regarding our actual marketing expense for the month of July, we are still closing the books right now. We are collecting figures so we are unable to give you the final number as of yet.

And your second question was regarding our ability to meet both targets at the same time. In other words, by the year end, meeting the 3m smartphone subscriber number, at the same time, meeting the current marketing expense guidelines target. And I believe that as long as there is a strong commitment, or the will on the part of the government and as long as all three operators are committed to meeting this guidelines, I think that it is doable. And in the case of SK Telecom, we are quite committed.

Nevertheless, I think that in the market there is a high level of concern as to whether meeting the marketing expense guideline would be possible. However, I think that the most critical thing in the current situation is for the three operators to continue to have the full commitment to abide by this guideline.

(Interpreted) I have the follow up question to that. I think that your answer is based on the assumption that the three operators should be all committed to the same goal. However, that is precisely the portion that we are concerned about because in the case of KT, as you have been selling quite a significant number of Galaxy S in the market, their iPhone 4G launching has been delayed quite a bit. And as the result, their iPhone 3G monthly sales has been slowing down.

Therefore, for KT to meet the net addition target which has been communicated to the market, after the launching of iPhone 4G, in either August or September, it is inevitable for them to turn very aggressive in terms of marketing. So, already the first half, you've already exceeded the annual guidance, or annual guideline by the government. So how much commitment do you think that it is possible between all three operators in the market?

(Interpreted) With that question, I would like to invite our executive in charge of the sales division to respond.

(Interpreted) Thank you very much for your very pertinent question, but, however, I believe that it would be inappropriate for me to comment too much at length regarding other competitors' strategies, especially regarding KT's strategies around iPhone. And also, according to our estimation, I think that all three players must have spent more than actually originally planned, regarding marketing expenses during the first half by far in some cases I believe.

I believe that the competition going forward will be entering around smartphone related strategies. But currently, the share of smartphone sales out of the total number of handsets sold is within about 30%. Therefore, there will be limited impact when it comes to the marketing expense related competition in that regard.

And also, we will be effectively selling Galaxy S products as we have been doing so far and I believe that the momentum is gained quite a bit. And also SKT is quite competitive in terms of its handset line up. Therefore, leveraging such a competitive edge, I believe that we will be able to manage our marketing expenses in the smartphone arena in an efficient manner, while meeting the KCC guidelines on marketing expenses.

(Interpreted) The next question will be provided by (inaudible) from [Honda] Securities and the next question will be provided by Jay Park from Samsung Securities. Miss. (inaudible), please go ahead with your question.

(Interpreted) Yes, I have the following questions. After the third quarter, that is during the second half, you mentioned that you are planning to launch 10 additional new handset models. So, can you cite one or two new models that you have the highest expectations on?

And secondly, you mentioned that the number of smartphone subscribers you anticipate for next year would be as high as 8m. So, do you mean only for SK Telecom 8m will be achieved, or for the entire market? If you mean that it only applies to SK Telecom alone, then how much entire market size do you anticipate?

And thirdly, my question has to do with SK Broadband reselling. You have begun the reselling process already, so what has been the marketing expense related to those particular type of distribution? And also, what is the wholesale expense you have to pay out to SK Broadband?

(Interpreted) Your question regarding the new models that we are planning to launch for the rest of the year, our sales division executive will be responding shortly. In the meantime, when I say 8m subscribers for next year, I'm talking about SK Telecom only for smartphone subscribers.

And during the second quarter, regarding the reselling activities for SK Broadband, in terms of the number of subscribers, it had to do with about 110,000 subscribers. In amount, it translated to KRW30b.

(Interpreted) Yes. I'm the executive in charge of the sales BU. Among the 10 different types of smartphones that we are planning to launch for the rest of the year, it would include all players such as Samsung, Pantech and Motorola and other foreign handsets as well. So for me to just pick out and single out two models out of those 10 would mean discrimination on the part of all the manufacturers and they might not welcome such selection. So, unfortunately, I will not be able to single out a couple of products for you.

And what I could tell you is that we will be introducing various types of OS, such as Pada and Wave of Samsung and other types of OS and various types of handsets that are available. So, that is what I could share with you.

And also, when it comes to handset strategy, where we are focusing on would include the following. We want to focus on the young target groups, offering more segment handsets targeting certain groups and also we are focusing on the outdoor activity tailored handsets to enable music and entertainment-elated enriched experience. So, we will be focusing such types of specialized handsets among the 10 handset line up that we are currently planning.

(Interpreted) Yes, again, I would like to follow up on my previous question. You said that 8m smartphone subscribers pertains to SKT alone. Then how big of a market size do you anticipate?

(Interpreted) Actually, it will always be up to how much smartphone penetration is achieved by our competitors and that is something that we cannot gauge quite accurately. But on a traditional or typical basis, according to our experience, SKT has been selling more number of smartphones. So, if we are, let's say, roughly 60% perhaps our competitors would be remaining 40%.

(Interpreted) The next question will be presented by Mr. Jay Park from Samsung Securities and the following question will be presented by Mr. (inaudible) from [SK Securities]. Mr. Jay Park, please go ahead with your questions.

(Interpreted) Yes, I have the following two questions. In order to cap your marketing expenses to meet the guidelines you will have to reduce the spending on marketing. And I believe that, out of your marketing expenses, special discount price plan is taking up a lion's share. And you have mentioned earlier that you will be utilizing this discount plan in a very flexible manner, looking at the market dynamics. So, once the iPhone 4 is launched in the market, I think that you might have to increase the discount level for special discount plans.

You also mentioned that a lot of -- or most of the new subscribers, have been opting for this plan as well. So, I'm wondering, are you indeed going to be able to maintain the current level of ARPU or increase it even higher? Have you reflected such spending coming from the special discount price plan in coming out with such estimates on the ARPU trend going forward? And if so, how many subscribers were you assuming in joining this price plan, to come to that ARPU assumption?

And also, relatedly, my second question has to do with your wireless data ARPU portion. It has not grown that much and most of the growth has come from the additional services. Therefore during Q1 and Q2 concurrently, on a year on year basis, your ARPU has come down on the data side. And if you look at your competitors' numbers, their wireless Internet data ARPU has been increasing.

So, despite the fact that SKT has more number of subscribers, why is it that your wireless Internet data ARPU has not been increasing? And if you can, could you break it down between data versus SMS proportions as well?

(Interpreted). Let me answer your question regarding the special discount program. As I mentioned before, we will be utilizing this program quite flexibly within about 20% to 30% range. Depending on each month, situations that are on a month to month basis, we will be running it flexibly. And, as mentioned earlier, the special discount subscribers are mostly high ARPU subscribers, opting for price plans higher than All-In-One 45 or higher.

And on July 14 we have announced the introduction of the wireless -- unlimited wireless data price plan. And most such price plans, or unlimited data service can be only applied to those subscribers opting for a price plan higher than All-In-One 55. Therefore, even if we applied a special discount program that we have mentioned, we believe that negative impact on ARPU will be minimal. That is the result of our assimilations. And, therefore, we will have to prove such trend into Q3 and Q4 as we actually see the business unfold. And we are quite confident that we will be able to prove this point.

Let me address your question regarding data ARPU trends. In terms of comparison against competitors, what we could tell you is that our base is so much larger that it is not easy for us to show a very short-term temporary spike or increase like some other competitors. And for example, Q2 of last year was a particular timeframe when we showed an exceptionally high data ARPU.

And as you know, during the second quarter, SKT has launched handsets such as Desire and Galaxy S and we have gone through the reshuffling of the price plan structures as well. So, I believe that you should understand the current period as a beginning stage of a turnaround in terms of data ARPU.

(Interpreted) I have the follow up question. Let's say an average subscriber wants to buy a Galaxy S. The current handset price is about KRW840,000, of which SK Telecom provides subsidy of KRW160,000 and it seems that the special discount offered is about KRW383,000. Now, isn't that counted as ARPU reduction item?

(Interpreted) Yes, I am the executive in charge of sales and let me answer that question. Your observation is correct in that our subsidy provided on such handset is about KRW160,000 and our special discount is about KRW340,000 and it has about KRW15,000 tariff discount impact on a monthly basis. But as you are well aware, our Galaxy S subscribers are mostly opting for a price plan higher than All-In-One 55, for instance. Therefore, they are on average showing an ARPU that is quite positive.

And to answer your question regarding the share of SMS out of the total data usage, SMS currently accounts for 35% to 40%.

(Interpreted) The following question will be presented by Mr. (Inaudible) from SK Securities. Please go ahead sir.

(Interpreted) Yes, I have the following question. My question really has to do with convergence and first of all, regarding the media related convergence, you have been selling iHQ for instance and TO Media has been merged. So, has there been any change of your strategies regarding your media business?

And secondly, regarding the finance related convergence you have mentioned earlier that, starting from May, Hana SK card initiative will take place in a full fledged manner. So, can you cite some of the specifics about the recent progress and what is the outlook going forward?

Thirdly, regarding your fixed mobile convergence, the CEO recently has mentioned that SKT does not have any plans for a merger with SK Broadband. But from the market, people assume that there is high merits regarding such a possible merger. So, are there any particular reasons why you are not considering such a merger?

(Interpreted) Let me first answer your question regarding SK Telecom's media strategy. Basically, our media strategy which used to be focused more on the existing contents creation side is undergoing changes or modifications. However, basically, as we mentioned during the opening remarks, we hope to strengthen our basic service platform capabilities on a global scale. And also we hope to enter into more strategic alliances with various content providers.

Regarding the media related strategy for SK Telecom, if I may cite everything then it might take too long. So, what I could tell you is that SK Telecom will be focusing on the platform based on the networks. And based on that platform, we hope to enter into more strategic alliance arrangements with various global content providers.

Let me also answer your question regarding our progress regarding Hana SK Card. During the first half, we have been focusing on the internal infrastructure side. For instance, in order to enable issuance of SK Hana -- Hana SK card through existing SKT distribution network, we have been working on the establishment of the application and issuance process. As well as training and education on the dealers, or the distribution channels.

For instance, the touch one card, which has already been launched in the market, has been well received by the market. Starting from August, mobile cards will be issued in earnest going forward more actively. So, according to our estimates, with all the preparations that we have made to date, meeting the annual business target for the year would be quite feasible.

And regarding your questions about the decision not to merge with SK Broadband, as mentioned by our CEO at the press interview on July 14, SK has certain management philosophies. In that, as you pursue an M&A you must not only look at the financial aspect of it but also look at the overall synergy effect between the two companies.

In that regard, we believe that SK Broadband has to further enhance its competitiveness and so in this context, we are currently not considering any merger options with SK Broadband. So, that is the current position of SK Telecom. And, as you are well aware, SK Broadband is rapidly enhancing its competitive edge and they are making diverse efforts to that end.

Therefore, SK Telecom and SK Broadband will be continuing to strengthen their respective competitiveness to further create synergy between the two companies, so that we could ultimately create a combined competitiveness, bringing together both fixed line services and wireless services.

(Interpreted) This concludes the Q&A session. So, after hearing the closing remarks by our CFO, we will be ending today's conference call.

(Interpreted) Thank you for taking part until the very end of the conference call. If I may summarize most of the concerns and questions raised during the conference call today, I believe that a lot of the focus has been placed on whether or not we will be able to control the marketing expense during the second half.

Let me reiterate that, when it comes to the marketing expense related guideline, as the dominant player in the market, SKT is fully committed to abide and comply with the government policies. And also, we will do our utmost in the market in order to achieve as high performance as possible based on our fundamental competitiveness.

And if there any further questions that you still might have, we will make sure that we arrange meetings with you separately, so that we can fully address your questions respectively. We ask for your continuous support and cooperation going forward. Thank you very much.

(Interpreted). This concludes the conference call for the second quarter 2010. 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.