SK Telecom Co Ltd (SKM) 2010 Q3 法說會逐字稿

(Interpreted). Good afternoon. Welcome to the conference call for the fiscal year 2010 third-quarter earnings results by SK Telecom. This conference will start with a presentation followed by Q&A session. And now we will begin the conference of the fiscal year 2010 third-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 third-quarter results of 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 third-quarter earnings conference call, despite your busy schedules. Let me start with the major earnings highlights for Q3 2010.

Revenue for the third quarter 2010 recorded KRW3,180.7b, supported by the growing number of high-end price plan subscribers and the expanding wireless Internet revenue on the back of the fast penetration of smartphones. The revenue was up 4.1% year on year and 3% quarter on quarter. Notably, the wireless Internet revenue marked KRW768.1b, expanding by 16% year on year and 7.7% quarter on quarter. The share of the wireless Internet out of the total revenue was 27%.

Based on the marketing expense guideline of KCC, our marketing expense edged down 1.5% year on year and 2.8% quarter on quarter, to KRW750.6b. Although we met the 22% marketing expense guideline for the months of July and August, the fierce competition in September, following the launching of iPhone 4, led to the overall marketing expense ratio to revenue to grow to 23.9% for the quarter.

Operating income came down 16.1% year on year and 10.8% quarter on quarter, to KRW519.3b due to the higher depreciation from increased investment outlay during Q3 and the expansion of other operating expenses, including expenses related to accounts receivables for handset installments.

In an effort to streamline the financial structure, SK Telecom changed the entity acquiring the handset accounts receivables created through the distribution network from SK Telecom to Hana SK Card, effective September 1. Accordingly, around KRW16b of commission expense was incurred during the month of September, temporarily pushing up the expenses. However, we anticipate around KRW5 trillion positive free cash flow effect and a KRW20b administrative expense reduction impact per year from lower funding cost, among others.

Net income stood at KRW363.9b, down 12.5% compared to the previous year. EBITDA was KRW1,064.9b.

Now that I have commented on the earnings highlights, let me move on to the management environment and the strategic direction going forward. Immediately following the announcement by KCC on September 24, regarding the ruling on the handset subsidy matter, the market has stabilized quite quickly during October. We believe this trend will continue until the year end.

The accumulated numbers of smartphone subscribers for SK Telecom as of October marked 2.85m and, at this rate, we expect the accumulated smartphone subscriber number to exceed our annual guidance of 3m and record more than 3.3m. SK Telecom plans to launch around 24 smartphone models within the year, of which 21 will be exclusive for SKT. We will also focus on expanding the smartphone user base by offering specialized handsets and affordable handsets, targeting young users and the female segment.

The Q3 ARPU, excluding sign-up fees and interconnection fees for smartphone subscribers, went up KRW2,001 compared to Q2 to KRW57,000. As for the Galaxy S users, the ARPU reached KRW62,000. The share of the Galaxy S new subscribers opting for price plans higher than All-In-One 55 plan jumped from 43% as of the end of June to 82% in September, boosted by the launching of the unlimited data service during August. Among the entire subscribers who signed up for the All-In-One price plans, the share of All-In-One 55 or higher grew from 40% as of the end of June to 56% at the end of September. Such trend augurs well for the steady ARPU increase for smartphone users going forward.

As of October, the number of All-In-One price plan subscribers reached 2.7m and data fixed-rate price plan subscriber number marked 5.7m.

Since the launching of the unlimited data service, SKT is continuously analyzing the data usage patterns of our customers. Compared to August, the data usage on the 3G network grew by 1.6 times and expanded 1.2 times on the WiFi network during September. In the case of WiFi, 78% of the total traffic was analyzed to be used by notebooks. Through this analysis, we were able to confirm the smartphone customers' preference for 3G service with mobility if given an unlimited data service. We are focusing on expanding the network capacity and enhancing network quality to sufficiently support the rapidly growing data demands, along with the customer needs for 3G services.

According to the smartphone customer-related complaint analysis, there can be possible factors leading to poll drop, which include network issues, OS or application issues and handset-related issues, such as proximity sensor issue. However, we have not identified any network-related issues to date. The fact that the call-quality-related customer complaint number has been quite steady on the feature phones supports this position. Our current effort to improve call quality, together with the handset makers, such as forming a joint taskforce team, will continue in the future, among other efforts.

SK Telecom has completed the mobile telephony frequency 6FA installation in the Seoul area as of October 19, of which 3FA have been dedicated to data services to ensure steady quality for both voice and data. We plan to expand the 6FA installation to the metropolitan area surrounding Seoul by the year end, while introducing 6-sector solution and data femtocells to continue to provide stable data services. As we mentioned before, in order to accommodate the expected expansion of the data subscribers in the future, we are planning an early commercialization of LTE during next year.

Leveraging the excellent 3G network and frequency differentiation, we will continue to maintain the competitive edge in data services by securing three times more data capacity compared to our competitors. Also, to support the customer need for large packet data at stationary positions, we have completed the rollout of 10,000 T-WiFi zones by the end of September, and plan to add 2,000 more zones to the original target of 15,000, to 17,000 T-WiFi zones. As a supplementary network to help meet the data demand for smartphones and tablet PCs, we will continue to expand the WiFi zones going forward.

The earlier-mentioned network capacity expansion and the quality improvement initiatives are already included in the annual CapEx guidance. Therefore we will be able to execute the CapEx within the original annual guidance.

Last Monday, SKT has announced its platform business strategy as one of the new growth strategies of the Company. We have selected seven platforms to foster with priority, including LBS, commerce, messaging, content distribution, SNS, B2B and universal platform. Those selected platforms will be further developed as the Company's core businesses. By opening up our competitive platform, such at T Map and T Store, we will make sure the customers can access diverse services created by external developers. By allocating the existing R&D and CapEx resources, we plan to invest KRW1 trillion during the next three years to foster these platform businesses. We will arrange another meeting with investors and analysts to explain about the platform business in detail.

SK Telecom's IPE business is currently providing mobile office solutions to 580 companies, including POSCO, Kumho Asiana, [Tunguk Steel] and Korea Meteorological Administration, KMA, and whilst striving to expand the number of client companies. Together with Duzon Bizon, our partner, the mobile business solution for SMEs will be commercialized during this November. The education service platform, with [Chong Dang] Learning, as well as the smart brand project for Korean Exchange Bank, will also commercialize during the first half of 2011.

We will soon establish a joint venture with a major general hospital for the medical business. Aside from these domestic initiatives, the digital content exchange hub project in Indonesia will soon commercialize in November this year, with anticipated expansion into the education area. The total 18 projects are in the refining stage, to be launched within this year or within the first half of next year.

The B2B revenue for Q3 marked KRW257b, making the accumulated total revenue KRW613.5b, jumping 75.1% year on year. We will do our very best to reach the B2B annual guidance of KRW1 trillion.

Lastly, I would like to touch upon the shareholder return. On October 20, SK Telecom completed the treasury share buyback of 1.25m shares, worth KRW210.4b. The interim dividend of KRW1,000 was paid out as last year. We plan to maintain the cash dividend for the year end at last year's level.

In 2010, SKT has made its utmost efforts to secure the growth platform while enhancing profitability. Such efforts are beginning to materialize through the expansion of smartphone user base and IPE business progress. We will continue to do our best to translate these positive momentums into bottom-line results.

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 questions.

(Interpreted). (Operator Instructions). The first question will be provided by Mr. Yang Jong-In from Korea Investment Securities. And the next question will be provided by Stanley Yang from Nomura Securities. Mr. Yang, please go ahead with your question.

(Interpreted). I have the following three questions. First of all, on page three, we see some line items for the other commission line items that seems to have increased quite a bit. So could you share with us the one-off items that we should know about so I could gauge at how much we could expect the other commission line item to go down in the upcoming fourth quarter?

And second question has to do with your CapEx. What is the annual CapEx amount for this year? And relatively speaking, how will it be changing next year? In other words, can you give us some color as to whether it will increase or decrease compared to this year?

And especially regarding next year's CapEx, could you provide us with some numbers with regards to how much you plan to spend on the LTE investment?

The third question has to do with the handset subsidy cap that was announced by the government in the month of September. And I would like to know how that has impacted the actual subsidy provision. So in order to get some color on that, could you tell us the per-handset subsidy provided for on the average during Q3 versus the actual subsidy payment given in the month of October or at least provide us with some color as far as the direction, at least?

(Interpreted). Let me first answer your question regarding the other category expenses. One of the one-off actions that I must mention is the restructuring that we have gone through in terms of the acquiring process for installment account receivables for handsets. As we have mentioned in the opening, we have changed the entity acquiring such AR or accounts receivables from SK Telecom to Hana SK Card. In the process there was this one-off KRW16b worth of other commission.

And in addition, we have newly established a customer center as well as a network-related subsidiary in the month of July. And in those two subsidiaries, we have incurred a bonus payment for the Chosuk or Korean Thanksgiving holidays in the month of September in the way of a bonus in the amount of about KRW10b. And also there was the penalty placed on the Company by the government in the amount of KRW12.9b. And also, due to seasonalities, the depreciation has increased by KRW42.5b.

And so, to comment on the one-off line items, the first item that I mentioned, remember that was the accounts receivable transfer, acquisition process transfer to Hana SK Card that took place. However, that line item will recur again in the fourth quarter as well. Aside from that, we had the one-off incentive payment to the newly established subsidiaries, as well as the penalty payment as one-off.

If I may elaborate a little bit on the accounts receivable-related commission line item that I had mentioned earlier. That will be recurring. Per quarter about KRW45b worth of operating expense will be incurred. However, because of the less funding that we have to go through, the non-operating expense item will be decreasing, for instance, the interest expense in the amount of KRW51b would be reducing. So, on a quarterly basis, we are looking at a reduction by KRW6b. And, on an annual basis, pre-tax basis, that is, KRW20b reduction will take place.

Regarding your question about the CapEx expenditure, as we mentioned in the opening statement, we believe that we will be able to meet the annual guidance for CapEx for this year in the amount of KRW1.85 trillion; that is our expectation. And regarding next year, considering how we have to conduct early implementation of LTE networks, we believe that a slight edging up in terms of CapEx payment compared to this year is likely.

And regarding your question about how much expenditure we are expecting to spend on the LTE network, it all depends on the vendors we work with as well as the area of coverage that we would like to go for. So we are currently in the process of selecting the vendors. And for the year 2011 we will have to closely monitor the trend of the data traffic going forward in order to come up with the exact coverage area that we will be targeting. And then we will reflect it in the management plans for next year.

And with regards to the government cap on the handset subsidy at the amount KRW270,000, after October I believe that the compliance to this guideline is well followed by the players. And, for instance, if you look at the average per-subscriber acquisition cost during the third quarter, it amounted to about KRW200,000 on average. And if you look at the October figures, due to the reduction of the market size, we anticipate that the average acquisition cost to come down by about 15% to 20%.

(Interpreted). The next question will be presented by Stanley Yang from Nomura Securities. And the following question will be presented by Josh Bae from UBS. Mr. Yang, please go ahead, sir.

(Interpreted). The first has to do with your overall business regarding smartphone users, in that during the second quarter or the third quarter, that is, your smartphone subscriber base has increased quite a bit. And, in the process, you have seen an upward trend in terms of ARPU as well, which is quite positive, to the level of KRW57,000. So my question is what do you anticipate will be the ARPU trend for Q4? Because we believe that some of the early adopter effects might be going away, possibly bringing down the ARPU overall. So how do you foresee the ARPU trend for Q4, is my first question?

And secondly, it has to do with a cost-related question. It is true that the marketing cost was controlled better than anticipated. However, it is the non-marketing expense side that causes us some concerns, because that has actually brought down the operating income. And, going forward, we believe that the revenue coming from the smartphones will increase and we had expected that net income will go up accordingly as well. But, looking at the third-quarter results, your non-marketing expenses can be actually a dampening factor for the overall increase on the net income. So how do you plan to curb the non-marketing expenses going forward so that you could boost the net income going forward? So I would like to ask that question to the CFO.

(Interpreted). To answer your question regarding the ARPU trend for smartphone users for Q4, as we mentioned before, we believe that the smartphone subscribers until the year end will reach more than 3.3m; that is about 13% of the entire subscriber base. And also the number of All-In-One price plans is actually increasing in the number of subscribers. And especially All-In-One 55 or higher, that portion is increasing beyond 80% level, starting from September. So, at this rate, we believe that the current trend, upward trend, that is, of the ARPU until the year end is likely.

And let me now answer your question regarding the non-operating expense. As I have mentioned before, the commission payable to Hana SK Card on the operating expense side, it is going to be recurring. However, that will bring down on the other side the funding cost-related interesting income, which will be eventually boosting up the pre-tax income or the bottom line for the Company. And aside from these one-off factors, other operating expense line items, we are confident that we will be able to manage them well going forward.

(Interpreted). I have a follow-up question. You mentioned that in Q3 the number of smartphone subscribers was about 2.85m and also you said that by the end of fourth quarter you anticipate about 3.3m. But looking at the current trend, I believe that the net addition of 1.5m is possible too. And according to my math, by the end of fourth quarter, I believe that even 4m subscribers would be doable. So could you share with us how you came up with 3.3m?

(Interpreted). For your information, the number 2.85m that we have mentioned is as of October, so this is the current number that we have shared with you. And our end-of-the-year target is 3.3m. And during the fourth quarter we believe that the market size itself will be reducing somewhat. So I believe that the 3.3m number is quite doable for our Company.

Since we have the executive in charge of sales right here at the conference call site, I would like to invite him to comment on the Q4-related market-related plans.

(Interpreted). This is Sun Jun Kim, in charge of the sales division. Let me talk about how we plan to go about the sales in the market during the fourth quarter. We believe that we will be able to sufficiently meet the guidelines of the government during the fourth quarter. And, of course, we have the internal target of meeting the smartphone subscriber number at about 3.3m by the year end, but that is the minimum estimate that we have in mind at the moment. Even if the market size narrowed somewhat, we believe that considering how we believe over 50% of the handset upgrade demand will be going into the smartphone handsets during Q4, if I may give you a maximum internal estimation, it could be as high as 3.6m to 3.7m.

(Interpreted). The next question will be presented by Josh Bae from UBS. And the following question will be presented by Kim Hongseek from NH Investment & Securities. Please, Mr. Bae, please go ahead, sir.

Yes. Hi. Thank you for the call. I have two questions. First, you mentioned the KRW5 trillion free cash flow enhancement over the next three years. Could you please share with us your plans with this cash? Can shareholders expect higher shareholder returns? Any indications that you could share with us regarding the shareholder returns for next year onwards, would be very helpful.

Second is regarding the smartphone ARPU numbers that you mentioned. I understand that SKT is offering tariff discount each month when subscribers sign a 24-month contract for the smartphones. Are the ARPU numbers that you mentioned before this tariff discount?

(Interpreted). Let me begin by answering your first question regarding the free cash flow of KRW5 trillion. Regarding the KRW5 trillion worth of free cash flow we anticipate in the future, it is not actually coming from the overall business management and net income generation, but rather we are reworking with the working capital. So we are currently looking at it as a way to improve the financial structure of the Company. So that is our current plan with that free cash flow at the moment.

And to answer your second question, the smartphone-related ARPU figure that we shared with you, that is already reflecting the 24-month special discounts that have been applied. In other words, the special discount has been already discounted from the ARPU amount that we shared with you.

Thank you.

(Interpreted). The next question will be provided by Kim Hongseek from NH Investment & Securities. And the following question will be presented by John Kim from Deutsche Bank. Mr. Kim Hongseek, please go ahead, sir.

(Interpreted). I have the following two questions. First of all, regarding the tablet PC, your competitors have been showing enormous motivation on this particular segment by communicating the subscriber target number, as well as the revenue target number for them regarding tablet PC users. However, SKT has not been mentioning anything in particular. So if you have any internal targets for the tablet PC subscriber numbers and the revenue, we would appreciate that. And relatedly, if that business actually progresses, how much contribution to the overall top line and bottom line do you anticipate?

And the second question has to do with your network. Recently your unlimited wireless data service offering subscribers have been increasing. And, with the introduction of tablet PCs, such data demand will be only going up. So before you actually transition towards the LTE network, what types of network investment do you have in mind in the meantime? And also relatedly, in the metropolitan area surrounding Seoul, if your capacity is, let's say, 100, how much of that existing capacity are you already using up at SK Telecom at the moment?

(Interpreted). Let me begin by answering your first question about the tablet PC. Next year we believe that the tablet PC market will be growing to the size of maybe 1m subscribers. And we're looking at it about -- at about 200,000 for this year. So I believe that the tablet PC market will be launching in earnest, starting from November, with the launching of Galaxy tablets. So I think that, on that, our executive in charge of sales will be able to elaborate.

(Interpreted). Yes. Again, I'm in charge of the sale division, so let me elaborate on this as well. As was just mentioned by our CFO, this year we are anticipating the size of the market to be about 200,000 domestically for the tablet PC and, by next year, that will likely to increase to 1m. Of course, it could be larger than that, but that is our current estimate.

We look at the tablet PC market to be a new revenue-creating opportunity, and we believe that the cannibalization with the existing mobile telephony operation will be quite minimal. And so, internally, we are looking at maintaining the market share within the tablet PC area at a higher level than the current market share in our existing businesses, both in terms of the subscriber number as well as the revenue number.

And as you know, Galaxy Tab will be launching in the beginning of November and after that, we will be reviewing various smartphone related subsidies and what types of subsidies we could offer to the OPMD type of arrangement for [TLOC] services etc. So we are currently reviewing such subsidy issues at the moment and I believe that by next week, we will have some color as to how we will go about it.

And in terms of the smartphone route, if these subscribers join in through the All-In-One price discount scheme, we will see the net addition in the process but the cost will not be increasing. Therefore, I believe that this can be a new way for us to boost the profitability. So once again, I think that we could communicate more about this issue during the fourth quarter because we are still in the process of planning.

Regarding your second question about whether or not we will be able to meet all the data-traffic requirements coming from the -- or unlimited data services and the launching of the tablet PC, we have with us, executive in charge of Network Strategy who will be able to address that.

(Interpreted). My name is Park, in charge of the network strategy so let me talk about the traffic requirements. As you have mentioned, it is true that the data traffic is on an increasing trend and therefore, we are fully equipped to handle the increased data demand because we have been conducting data capacity enhancement on the 3G networks to date.

And also next year, we anticipate even more traffic increase coming from the tablet PC. But looking at the characteristics inherent on the tablet PCs, they will be usually deriving demand from the WiFi zone perspective so I think that a lot of that will be accommodated by the WiFi network. But of course we anticipate some increase on the load on 3G network as well. So, again, in our overall planning for the 3G network capacity increase plan, we have already reflected such demand increase as well.

And also, relatedly, we have come up with a relevant plan for the LTE establishment as well in deciding the timing and the coverage, looking at all those planning and the demand. So again, in order to support the tablet PC demand, we plan to further roll out the WiFi zone next year as well.

(Interpreted). If I may elaborate on that a little bit, during the next three years, even if the data traffic increases 30 times from the current level, we are fully ready with the design to accommodate all that in terms of the capacity. And for those individual users with large-packet requirements, we are also planning to roll out LTE networks as well as using the data femtocells as the supplementary network for those users as well. So I could reassure you that we are fully prepared to accommodate all the data traffic increase that we could anticipate.

(Interpreted). I have a follow-up question. You mentioned earlier that the tablet PC market size you anticipate is about 1m next year. Are you looking at the new subscribers only in that number or are you mentioning the accumulated number?

And of that market size, how much market share do you believe that SKT will be able to gather?

(Interpreted). Yes, as I mentioned before, we are looking at the market size of 200,000 this year and 1m next year, and that only pertains to the new subscribers. And, of course, the market size estimate differs between different telcos in the market at the moment so it requires further studies of course.

But when it comes to the market share question, our current market share in the existing businesses stands at 50% or higher. So although I cannot share with you the specific numbers, but we believe that it will be higher than the current market share. In other words, between 50% and 60% will be the most desirable market share in the beginning stage of the market.

(Interpreted). Your next question will be presented by John Kim from Deutsche Bank, and the following question will be presented by Sungmin Chang from JP Morgan.

Mr. Kim, please go ahead, sir.

Yes, thank you for the opportunity to ask questions. I have three. First, can you share the senior management self-assessment of the firm's performance year-to-date? In what areas are you satisfied with your performance and where are you not?

Second, on your investment strategies, can you elaborate what are some of the lessons that the management has learned from the past disappointments and how will SKT's approaches to future investments differ?

And third, a quick question on your other commissions as well. In the earnings release material there is comment that the increase was also due in large part to one-off market and industry research. Can you tell us what this research costs and what the nature of the study was about? Thank you.

(Interpreted). Let me start off with the first question regarding the top management's assessment about the Company's performance to date. Basically, ever since the end of last year, we started focusing on the smartphone-related penetration expansion and we wanted to work on creating the market environment that is data-centric. And starting from July 14 of this year, what we have prepared prior to that for about nine months period, it's starting to be implemented in actuality. So we have taken the initiative in the data market more aggressively starting from the month of July.

And also, our second achievement, I believe, is the IPE business that we started working on since last year. And we have made enormous preparations for this business and this year I think that everything pretty much is settling in with the various diverse platforms that we are utilizing. So I think that we successfully identified a new growth pillar in our overall growth strategies through this IPE business.

Let me now answer your second question regarding the other expense category, regarding the research. In order to pursue the IPE business in various industries this year, we have conducted various researches. And also, relatedly, we have conducted overseas market research in countries such as Indonesia and Malaysia where we are actually pursuing actual business projects with partners locally. So, altogether, the research expenses, including the market research and the consulting, amounted to about KRW17b and those were quite inclusive in the IPE solution-development initiatives.

And you also asked about the lessons learned from our past investment experiences. As we have communicated with the investors numerously, we believe that SKT strategy of starting small and scaling fast is quite important. And looking back at the past investment to date, especially with regard to the global investment, one of the things that we have learned is that rather than just making an investment in a single item, I think that it is important to have an overall competitiveness in the surrounding ecosystem as well. So I believe that those things are some things that we have to work on going forward.

And, of course this might just be self-explanatory, but we believe that it is quite critical to fully prepare before making that investment initiatives. And also another lesson learned is that we need to put in a lot of efforts to find the best available partner locally.

(Interpreted). The next question will be presented by Sungmin Chang from JP Morgan. And the following question will be provided by Jeff Kahng from Credit Suisse Securities. Mr. Sungmin Chang, please go ahead sir.

(Interpreted). I have the following three questions. First of all, you mentioned earlier that, on a quarterly basis, you will be incurring KRW45b worth of account-receivable-related commissions to Hana SK Card. But the way I understand it, those account receivables will be acquired by Hana SK Cards directly as types of receivables on their own. So could you explain why SK Telecom would be continuously incurring this much expense?

And the second question has to do with your comment earlier about how you plan to utilize the KRW5 trillion FCF to improve the financial structure of the company. So does it mean that we could safely assume that SKT will be reaching net cash level within the next two years?

And the third question has to do with your level of or the share of smart -- special discounts that is offered to the smartphone users during the third quarter. In other words, if you did not reflect the special discount, what could have been the ARPU without the special discount?

And could you share with us the share of special discount among the total subscribers opting for smartphones?

(Interpreted). Yes, our executive in charge of the Treasury activities will be talking about how that condition line item is occurring with regards to Hana SK Card.

(Inaudible). My name is [Cho-ook Lee] and I'm in charge of the Treasury department. Let me briefly explain to you how the structure of transferring the handset-related account receivables to Hana SK Card works.

But before I do that, I must explain how it used to work in the past. When a dealer sells a handset to a subscriber, they usually already secure or purchase their original handsets by paying a lump-sum payment and then they sell it to their subscribers. And, at that time, SK Telecom acquire these account receivables from the dealers. And, therefore, we had an upfront payment out to the dealers in the very first place and it would be followed with the 24 different installments, for instance, from the subscribers. So it would be spread out in terms of the payment in. So that is how we accumulated account receivables in the past.

So under the new structure, Hana SK Card will be replacing SKT in this overall picture, therefore, acquiring the account receivables on behalf of SK Telecom. And under this structure, Hana SK Card will not be purchasing these account receivables at a discount at all, but, rather, they would be purchasing it at par value. Therefore, they had no room to generate any profit out of this transaction. So what we decided to do is to provide them with a commission that is tantamount to the discount amount on the account receivables.

And we decide to do this because even if we pay out this commission, it would be cheaper than our original funding cost. And that is why we entered into this agreement. And likewise, on the part of the Hana SK card, compared to their funding cost, this [AR-related] commission income is higher, therefore, I think that we were able to create a win-win situation in this regard.

Let me also try to answer your question regarding whether or not we would be going towards the net cash level with that KRW5 trillion free cash flow. If I may elaborate on the makeup of the KRW5 trillion that I'm talking about, as of the end of September, our outstanding account receivables we had on our books amounted to KRW3.5 trillion and we anticipated about KRW1.5 trillion additional account receivables going forward.

So starting from September, we will not be accumulating any outstanding balance in terms of additional account receivables and eventually that KRW3.5 trillion receivables will be paid back in terms of cash inflow. And out the total borrowing of KRW4.6 trillion, eventually, the KRW3.5 trillion will be paid back. Therefore, the remaining outstanding of balance in that type of receivable balance would be about KRW1.1 trillion.

And let me now answer your question regarding the proportion of special discounts. During the third quarter, the proportion of special discount amounted to 30% to 40%. So you asked about how much higher our ARPU could have been without the effect coming from special discounts, but we will have to do some extra calculation to come up with that number. So why don't we get back to you from the IR department with that number?

(Interpreted). The next question will be presented by Jeff Kahng from Credit Suisse Securities and there is no further follow-on questions. Mr. Kahng, please go ahead, sir.

(Interpreted). I have the following three questions. First of all, out of the total OpEx you had some line items that showed an increasing trend, for instance, other commission line item and other expense items. Earlier, you said that under the other expense item it included the R&D costs and the research expense, but in addition to those items, what additional items did you have under other expense line items?

And relatedly, also on the other commission side, you mentioned a couple of things, but could you tell me how much of those other commission line items would be recurring going forward?

Secondly, regarding the value-added service side, could you talk about the proportion of the lease-line-related item and also SK-Broadband-related resale portion?

And the third question has to do with the revenue of related discounts that are provided. I think that the discounts provided can be seen as another type of marketing expense. If you add those discount-related expenses on the marketing costs, how much did you increase or decrease compared to the second quarter?

(Interpreted). Let me answer your first question regarding the other expense items. Aside from the consulting expense that I had talked about already, it includes lease and rental payments and also the frequency-usage fees as well as the bad debt allowance. So these items are not really linked to the sold volume and, therefore, basically, I think that we, on those line items, we will be able to control them to the past level in the future.

Secondly, let me answer your question regarding the resale portion for SK Broadband. Under the lease-line business, during the third quarter, the amount was about KRW31.2b. And also regarding the SK-Broadband-related resale activities on the wired services during the third quarter, for the broadband subscribers we have brought in about 128,000 subscribers. And also, for your reference, SK Broadband is scheduled to hold their earnings conference call tomorrow so I would like to advise you to please turn to SK Broadband directly for the more detailed questions.

And you also asked how much the actual trend would be compared to the second quarter during the third quarter, if we were to add the discount offered on top of the official marketing expense, how the overall size would have changed quarter to quarter. Again, we have to do additional calculation on that so please contact our IR department and we will provide you with the numbers.

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(Interpreted). The next question will be presented by Sean Oh from Merrill Lynch and the following question will be presented by Byun Seung-jae of Daewoo Securities. Please go ahead, sir.

(Interpreted). I have the following three questions. When you calculate the ARPU figure, is it inclusive of the leased-line-related number as well as IPE-related figures as well?

Secondly, when you offer discounts on the voice and the data, do you apply the discount separately or is all the discount reflected on the voice only? If that is the case, can you see that the data portion is in the growth basis?

The third question has to do with your announcement that you will be investing in the platform business in the amount of KRW1 trillion going forward. Now, may I ask why the management feels that you will be quite competitive in this very -- already competitive market?

(Interpreted). First of all, our ARPU figure already reflects the lease line business as well as IPE business. Regarding the discount application on the voice and the data, we are applying the discount rate pro rata so it is actually being reflected on both sides.

Let me now answer your third question regarding why we are planning to invest KRW1 trillion during the next three years in the platform business, and why enter into this competitive landscape and why do we feel confident that we will do well. Basically, we believe that the major competitive factors in the platform business will be very much overlapping with the core competencies necessary in the existing MNO business. During the past 10 years or longer SK Telecom has been accumulating and developing diverse technologies and experiences precisely in the relevant platform areas. So we believe that, more than any other player, we have the right DNA fit for this type of industry.

And as you are well aware, by nature, platform business is not inherently a short-term profit-driven business model. However, if we utilize our accumulated know-how and the business models in the best possible way and also if we could apply such know-how and experience globally, I believe that the possibilities of great success is quite likely. And, in this regard, we are quite confident about the success. And as we communicated with you earlier, we hope to have another session with all the investors and analysts specifically to discuss our plans and the possibilities and potentials regarding the platform business in the near future.

(Interpreted). The last question will be provided by Byun Seung-jae from Daewoo Securities. Please go ahead, sir.

(Interpreted). Recently, you have obtained the approval by the government on a bundled-product package combining the fixed line and the mobile services. And looking at the contents of the service offering, it sound quite attractive. I believe that it will be able to help boost the market share for SK Telecom. So do you have any targets as to how much subscriber gains you are anticipating?

And also, what types of hindrance or hurdles do you anticipate in selling these products as well?

(Interpreted). Let me first give you the status on the recently launched and new bundled products. In this particular category, within the first month after launching, looking at the mobile telephony subscriber number only, we have added about 50,000 lines. And also in terms of the broadband, we have added about 19,000 lines, and fixed home lines, we added about 11,000 lines.

And if I may compare that with our existing family bundled offerings of the past, in the case of the broadband product, we are seeing a four times higher growth rate in terms of the accelerated addition. And when it comes to the fixed-line offering, we are looking at more than two times more addition as well.

And our executive in charge of Sales will be elaborating on the customer feedback to date and also the market response.

(Interpreted). As you are well aware, we have launched the new family discount between the T product and the B product. And in the month of October, we have conducted a lot of promotions and the response from the subscribers has been quite positive. So I think that we have placed this new product on the orbit within this year already. So looking at the broadband service only, within this year we are looking at about 30,000 to 40,000 and next year I think that we will be able to maintain numbers higher than that. And also we will be continuing to sell broadband products on their own as a separate product aside from the bundled offering as well.

And next year, we are currently setting up the management plan for next year as we speak so I cannot share with you all the detailed numbers at this point. So we ask for your understanding.

And you also asked about the hindrances or challenges in adding new subscribers in this program. And even if we have the best of the offering in the product side, we are bound to face certain pain points. For instance, existing broadband subscribers has to complete their existing lock-up contract period. So we have to wait until that period ends. So that's one hindrance that we have to work with, but we are currently looking at ways to possibly resolve these issues through other processes available.

And also, another pain point is to be able to offer and suggest to the subscribers which of the bundled products would be better and beneficial to those particular subscribers between the existing family discount offering versus this new offering. So we are currently providing the sales forces with the right set of sales script so that we can support them with the best possible solution. So we believe that the outcome or the outlook is quite positive.

(Interpreted). This concludes the earnings conference Q&A session so let me invite the closing remarks from our CFO.

(Interpreted). Thank you for staying with the conference call until the very end. During the third quarter, SK Telecom has focused on strengthening the fundamental competitiveness by securing smartphone line-up advantage and by introducing unlimited data service, among many. Rather than turning to a war of attrition, SKT will secure a competitive edge based on the fundamental competitiveness while pioneering new markets to strive to grow continuously. We will also do our best to achieve the business targets set out for this year through the business and financial restructuring pursued during Q3. Thank you and we ask for your continuous support and cooperation for SK Telecom. 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.