SK Telecom Co Ltd (SKM) 2015 Q3 法說會逐字稿

(Interpreted). Good afternoon. I am Jeong Hwan Choi, the Head of IR. Today's conference call will consist of the presentation on the earnings results for Q3 2015 and the future management plans and strategic direction by our CFO Yong-Hwan Lee, followed by a Q&A session.

To help deepen your understanding, we also have here with us executives from the relevant business units.

Today's call will provide consecutive interpretation.

Let me also remind you that all the forward-looking statements are subject to change depending on the macroeconomic and market situations. Let me now present Mr. Yong-Hwan Lee.

(Interpreted). Good afternoon. This is Yong-Hwan, CFO of SK Telecom.

Today, through the approval of our Board of Directors, the Company has decided to acquire 30% of CJ Hellovision shares at KRW500b out of the 53.9% owned by CJ O Shopping and to merge it with SK Broadband. Also, we have the call option to acquire the remaining 23.9% at KRW500b within the next five years.

Through this acquisition of CJ Hellovision and its merger with SK Broadband, we plan to strengthen the competitiveness of the advanced media platform, one of the three next generation platforms, as well as focus on strengthening the lifestyle enhancement platforms and the home-based IoT platform, utilizing the customer base of the merging entities.

Let me now discuss the consolidated earnings highlights for Q3 2015. Revenue recorded KRW4,261b, a 2.4% decrease year on year due to decreases in interconnection fees, among others. Compared to the previous quarter, it increased by 0.1% backed by revenue increase of subsidiaries.

Operating income recorded KRW490.6b, an 8.6% decrease year on year as a result of decrease in revenue. Quarter on quarter, it increased by 18.8% due to resolution of the one-off labor cost in the second quarter.

EBITDA recorded KRW1,245.2b, down 1.0% year on year and up 8.2% quarter on quarter.

Net income recorded KRW381.8b, a 28.1% decrease year on year due to decrease in income and a 4.0% decrease quarter on quarter, due to smaller equity method income on SK Hynix.

With that, I will now move on to major achievements and strategic direction of the Company.

SK Telecom is currently in the process of establishing the business plan for the next three years until 2018 and believe that we would be able to communicate the detailed strategy and investment plans to achieve the target of KRW55 trillion in enterprise value early next year.

The Company will drive the enterprise value growth through its transformation into a next generation platform player that provides not just connectivity but also additional value. By doing so, we will strengthen customer retention, as well as partially resolve regulatory risks, including those regarding our tariffs, by providing greater value that stretches beyond what customers pay for.

Our lifestyle enhancement platform began with a sincere review and re-interpretation of the essence of the MNO business. As we evolve into a platform player that provides customers with services closely related to their daily lives through mobile, our ultimate goal is to become an intelligent life partner that realizes perfectly personalized services in all areas of life.

Club T Kids, which was launched in July, was our first lifestyle enhancement platform for parents and their children, integrating content, community and commerce.

In October, we launched Pet T, the Company's second lifestyle enhancement platform, created for pet owners. Through cooperation with various partners, we will develop Pet T into an open ecosystem and continue to provide greater high-quality services and customized functions necessary for pet owners.

We have also launched the easy-to-use used goods market service Deal Lite, and the beauty service connection app Beauty Link, in efforts to further expand the lifestyle enhancement platform.

The Company will continue to develop our lifestyle enhancement platform, launching over 50 specialized services and acquiring more than 10m subscribers by 2018.

T Phone recently exceeded 7m subscribers, establishing itself as an innovative voice call platform converging data. The service has been actively reflecting customer needs, including basic needs, such as spam call information, contact search and service connection with external apps. The group call feature, which connects up to 30 people, and the content share feature, through which users can share photos and documents during calls, have become some of the signature functions of T Phone.

In the aspect of the advanced media platform, SK Telecom will concentrate media capabilities under its umbrella during rapid market changes, including the 100% acquisition of SK Broadband, acquisition of CJ Hellovision and its merger with SK Broadband, while aiming to become a leading player within the industry through enhanced fixed mobile media competitiveness.

To seek an overall strategic partnership with the CJ Group, the Company has also decided to invest KRW150b in CJ in the form of capital increase through a third-party allocation aside from the acquisition of CJ Hellovision shares. We look forward to the synergy created between SK Telecom, the number one mobile telecommunication provider, and a strong media platform player, and the CJ Group, the nation's most powerful content provider, leading to the enhancement of our shareholders' value.

The recent announcement of our partnership with CJ E&M on joint investment and production of video content and in the field of commerce was our step forward to creating synergy in order to attain leadership in the mobile video content platform arena on which both companies are putting more weight. By continuously expanding investment in the production of innovative content based on the interactivity and timeliness of mobile media platforms, we will lead the trend of the vitalization of mobile media, as well as guide the way to developing new and innovative business models based on the advanced media platform.

As for the IoT platform, our goal is to become an unrivaled leader in the domestic home IoT market by the end of 2016. We commercialized the open platform-based Smart Home service this past May and plan to launch 25 new connected products within this year and 45 more during the first half of 2016.

We now have 33 partners in the Smart Home area, including Samsung Electronics and LG Electronics, a notable growth from the initial nine partners and expect rapid subscriber growth, along with a wider range of connected devices offered.

We are also continuing our efforts to identify new promising business areas that can utilize the network to provide various ICT services, such as that of the auto industry.

In other new business areas, including life-wear and healthcare, a KRW4b contract to provide 50,000 UO Air Cubes to China was signed, while the UO Smart Beam sold over 30,000 units within three months of its launch. In healthcare, we are seeing continued growth in the global market in areas such as in vitro diagnostics.

The mobile telecom market is continuing to show a stabilizing trend as the focus of the market paradigm shifts from M&P to handset upgrades and from subsidies to product and services. As a result, the churn rate for the third quarter remained a low 1.4%. Going forward, we plan to strengthen benefits for existing customers, as well as lead healthy marketing activities centered on handset upgrades.

With the band data plans that were launched in May breaking records with 4.79m subscribers as of the end of Q3 and continued data usage growth of LTE subscribers, we believe that our environment is becoming more mutually beneficial as customers can enjoy greater data benefits at lower prices, and carriers can secure the engine for future growth, along with the changing data usage pattern.

Our products based on customer segmentation and second devices, including T Kids Phone, T Outdoor and T Pet have been very well received by customers, allowing the Company to gain the upper hand in the second device market. We plan to continue the launching of various second device products that answer to customer trends, which will contribute to new revenue in the future, not only in terms of connectivity but also by evolving into a lifestyle enhancement platform.

The Luna phone that we launched exclusively in September immediately received spotlight with its performance rivaling premium smartphones at half the price and opened new doors for mid to lower-end handsets. The success of our exclusive device once again attested to SK Telecom's superior marketing capabilities as the market leader, leading the trends according to the changes in the market environment.

Another unique strength of SKT is our membership service. Following the April launch of the DIY membership program Membership as You Wish, we launched T Mania in August, which offers up to four times the previous benefits at partner locations of their choice and added new benefits related to overseas travel to the T Membership Global program launched last year, all of which were met with great enthusiasm of our customers.

Table 2015, an event prepared for our customers in line with the recently growing interest in cooking and restaurants, is another example of our efforts to develop more unique membership benefits for our valued customers. SK Telecom will continue to widen the gap between us and our competitors in all areas of products and services.

Lastly, I'd like to discuss shareholder returns. On September 24, the Company decided on buying back 2.02m shares to increase shareholder value through a more stable share price. This includes the volume of treasury shares utilized in the acquisition of SK Broadband and additional shares as a result of the Company's judgment that current prices are undervalued. It is currently in process and will be concluded by December 24.

The annual dividend for 2015 will be reviewed in a flexible manner to enhance shareholder value while considering investments for the Company's growth and the cash flow. SK Telecom will continue to do its best to achieve the KRW55 trillion enterprise value target through enhanced profitability, as well as growth. We ask for the continued interest and support of our investors and analysts in the future.

Thank you.

(Operator Instructions). Josh Bae, UBS.

Yes, hi. Thank you for the opportunity. I have two questions. The first is regarding your core business. Your mobile service revenue declined again on a year over year basis. I understand that part of this is related to the sign-up fee and the interconnection rate, but also concern that this has become a trend, that there is no longer growth in your core business. Could you please let us know if there is reason for us to believe that there is growth left here? If not, should you be focusing more on cost cutting rather than seeking growth that's not there?

Second question is regarding the shareholder return policy. During this call, at the beginning of the year, you had mentioned that you would flexibly consider shareholder returns, but compared to other major Korean corporates that have been moving forward in terms of their shareholder return policy, there hasn't been much change from SKT so far.

The interim dividend, which you mentioned at the beginning of the year that you could increase was actually flat. The share buyback I guess was largely just a refill of the treasury shares used for the SK Broadband integration. There was no cancelation, and given the announcement to invest in CJ Group, I think there are concerns that the year-end dividend again could disappoint. So if you could please elaborate on what you mean by flexibly considering the year-end dividend, I think that would be helpful.

Also, do you have any long-term plan for shareholder returns that you could share with us?

(Interpreted). To first answer your first question, aside from the sign-up fee and the interconnection rate that you mentioned, we do see effects of the monthly discount price plans that have led to the decrease of MNO revenue.

But even so, we do see some positive trends. I believe that what triggers the MNO growth most of all is the changes that we see in our customers' lifestyles and their usage patterns.

Let me answer your question in quantitative and qualitative terms. First, in quantitative sense, currently, we still have a relatively larger pool for growth in terms of LTE penetration of our total subscriber base. And secondly, we are seeing very rapid growth of the second device market due to the changes in our customers' lifestyles. And thirdly, we believe that the IoT environment will contribute to positive changes in the future.

And as for the qualitative part, I believe that it can be summarized with our statement that we wish to achieve our growth into a next generation platform player through a complete transition of our traditional MNO business. I believe that what brought about this change in our strategy was, first of all, a deep review as to the actual meaning of the value that our customers receive and feel through our MNO services.

And what this means is that among the three platforms that we are pursuing when it comes to lifestyle enhancement platform, we believe that the three Cs, content, community and commerce, are the specific areas in which we can provide perfectly personalized and customized services to our users.

So we believe that the actual value will be renewed in terms of what our users receive from the services that we offer through changes in the data usage pattern. Through the evolution of our MNO business, through this complete transition of the business itself, as I described, we believe that our consumers will be able to receive greater added value through the innovative products and services that we offer them, and that again will lead to the future growth of our MNO business.

And in this process, as for the cost-cutting that you mentioned, as of course we all know that it is one of the primary factors that can lead to future growth of the MNO business, it is something that must be done and is something that we are doing as of now.

In a nutshell, in the context of quantitative and qualitative growth, we want to say again that growth for the MNO business in the future is valid and is something that is happening right now. And also, as for the cost efficiency, it is a factor that we are fully taking into consideration throughout our businesses.

Let me now answer your question regarding the shareholder return. First of all, our basic shareholder return policy is maintaining the balance between investment and shareholder return. And we believe that compared to any other Korean companies, we have been relatively providing a stable dividend.

With the arrival of the new CEO early this year, we spoke about taking a more flexible approach to our shareholder return policy. And what this means is that on top of the stable shareholder return that we have been maintaining in the past, we would like to approach it in a more flexible manner in order to maximize shareholder value in link with our actual earnings performance, and this is still a valid approach.

And regarding the recent acquisition of the CJ Hellovision shares and its impact on the year-end dividend, I want to state clearly that this acquisition is completely separate from our shareholder return policy. And as was announced today, we will be paying for the acquisition costs over two rounds of payments, which means that it has minimized the cash outflow of the short term.

And I also think you should consider the fact that when looking at CJ Hellovision itself, it has a very sound financial structure.

As for the annual dividend, while there are various factors that need to be considered, we are again reviewing various options, which include an increase of the dividend. And regarding this manner, we will communicate with the market as soon as details are confirmed.

And in terms of the mid to long-term shareholder return policy, as I mentioned before, we are in the process of writing a three-year business plan for the next three years, and at the end of the year, we will go through another meeting of the Board of Directors. So after that, we should be able to communicate details with the market.

(Interpreted). Hoi Jae Kim, Daishin Securities.

(Interpreted). I have two questions. The first has to do with your decision to acquire CJ Hellovision. There could be some talk in the market about whether your acquisition cost was adequate. I believe that it holds more meaning than just acquiring subscribers to their TV and Internet services. This is something that you could directly apply to your giga Internet and UHD services, as well. So if these were taken into consideration in evaluating the acquisition cost, is it safe to think that you will be focusing on these areas in terms of your future business strategy? And so I'd like to ask you, between the subscriber base and utilization of the networks, on which part did you place more value in terms of evaluating the acquisition cost?

My second question has to do with your Luna phone. It's been very popular these days, and I believe that mid to lower-end smartphones like this is helpful to the carriers themselves, because it lessens the burden of marketing cost. So can we see more phones like the Luna phone coming in the future?

(Interpreted). Hello, this is Kyung-Il Park, Head of the Strategy and Planning Office, and let me address your first question, regarding the acquisition of CJ Hellovision. You had a question about whether the price is adequate, and as you know, for the first phase of our acquisition process, we will be acquiring 30% of CJ Hellovision shares at KRW500b, and as for the remaining 23.9% of the shares, after the first phase deal is concluded, which should be next April, after the merger, we now have three to five years to exercise our option. So that would begin from April of 2019, and so we have another five years after the deal is closed.

When we look at the overall acquisition process, it will require about KRW1 trillion over the next three years. Whether or not the put or call options will be exercised, however, has not been concluded as of yet.

Again, for the first phase, we'll be acquiring 30% of the shares at KRW500b, which translates into KRW1.94 trillion in terms of enterprise value and KRW450,000 per subscriber, and the EBITDA multiple calculates to 4.8 times.

So when we take into consideration recent M&A deals among similar SOs and other cases in the industry, we believe that the acquisition cost is in fact adequate.

After April of 2019, CJ O Shopping will decide whether or not they will exercise their put option regarding the remaining shares, and so if that is exercised, it will be KRW500b that is paid after April of 2019. So when you count the current value, it actually translates into KRW400b, so we believe that as of now, when we look at the current value, it is a KRW900b deal, and this again we believe is an adequate price.

And to go a little bit more into more detail, we do see, of course, the very high merit of the network of CJ Hellovision, which can be used for the giga Internet and UHD services, as well as the subscriber base, which is the 4.15m subscribers to the media services, 4.8m high-speed Internet subscribers, as well as 880,000 MVNO subscribers.

Especially when we look at the 4.15m media subscribers, this is the largest subscriber base of all the nation's cable operators. And when we look at the last couple of years, we have focused on IPTV and the overall media business as one of the next growth engines.

But when you look at year 2011, while KT, our competitor, had acquired 5m subscribers, we were 4m behind, with just 1m subscribers. And when we look at more recent numbers, although we did manage to increase this subscriber number to 3.3m, we were still far behind KT by around 5m subscribers.

And in this context, we also boast a 70% rate in terms of the bundled subscription to our media services with the high speed Internet that we offer here under the SK umbrella. We believe that the 4.15m media subscribers that CJ Hellovision is an invaluable asset to our future growth in terms of the media business.

(Interpreted). Hello. This is Lim Bong Ho. I'm Head of the Marketing Strategy Office and let me address your second question regarding the Luna phone.

The Luna phone completely reflected our customer needs in that our customers wanting more features and more functions compared -- relative to the price. And it has also widened the range from which our customers can choose from in terms of devices and it has also triggered a lower prices of the domestic device manufacturers. So in a nutshell, we believe that this has contributed to lowering the household communication fees.

Also it has provided an opportunity to change the overall customer perception of mid to lower end smartphones. And in the longer term we believe it will also contribute to lower our marketing costs.

And therefore in the future we will be reinforcing -- we will be widening the overall line-up of our mid to lower end phones like the Luna phone. And to do so we will be -- we will look at a variety of devices provided by a variety of different manufacturers to enhance the level of customer satisfaction as well as widen and strengthen our product line-up.

(Interpreted). Hong Sik Kim, Hana Financial Investment.

(Interpreted). Thank you. I have the following questions. The first has to do with your operating profit in the third quarter. Compared to your competitors, you did not do very well so I want to know is it because of the revenue or is it because of the cost?

And also I would like to ask if you believe you will be able to generate an operating profit of around the level of last year. And I ask this question only because I think that is what you guided at the beginning of the year.

My second question has to do with your, again, flexible approach to shareholder return and your dividend policy. You said that you will think of it in link with the actual performance of the Company. So I want to ask you how much, in terms of your non-consolidated net profit would you have to achieve this year in order for you to consider increasing the dividend?

And thirdly, I want to ask about your dividend gains from SK Hynix. I think I heard that it could be returned to shareholders of SK Telecom. So will that be the case that we can see happening at the end of this year?

And recently, I believe that you no longer mention any positive possibilities in terms of increasing your dividend. So when do you think you will be able to communicate with the market?

(Interpreted). Let me first address your first question regarding the operating profit. When we look at the revenue year on year, of course, there was the impact of the lower interconnection rate as well as the signup fee impact. So that was a significant factor. And also we did see an impact of the monthly discount price plans. However, what is positive is that we saw a turnaround in the mobile service revenue this quarter, albeit quite moderate.

When it comes to the cost however, we do expect a more stable marketing cost trend in the future and this also has to do with the government's very strong will to maintain it that way as well as our own determination to keep it so.

When you compare ourselves to competitors, I believe that these are the factors that might have impacted the numbers. So quarter on quarter, there was the impact of a higher depreciation cost and we also had a slight uptick -- we had a slight increase in terms of costs related to our new businesses.

So, in a nutshell, we believe that as the mobile service revenue has been turned around this quarter and as we do not see any factors or concern in terms of marketing cost, it will signal a positive trend.

And on top of that because there still are various factors that can impact our performance during the fourth quarter, I believe that now is not the right time for us to communicate the exact operating profit guidance for the whole year.

Then to answer some of the questions you have regarding our shareholder return policy, as for the Hynix dividend gains that we have, this is completely separate from our reviewing of our current shareholder return policy.

And this has been communicated several times in the past, but if Hynix continues to pay out a significant level of the dividend in the future, it is something that we will take into consideration in the future.

And as for your question regarding the net income, as we do not run on a payout ratio basis, we will focus on the free cash flow and make sure to maintain a balance between growth and shareholder return.

Lastly, you asked about when we will be able to communicate our decision regarding the dividend. Again, I have to repeat myself in that we are in the process of establishing our three-year strategies as well as business plans for the next three years and this is a matter that is intricately related to the overall financial structure and strategy of the Company. So at this time, all I can say is that we plan to communicate regarding this matter before this year is over.

(Interpreted). Jee-Hyun Moon, KDB Securities.

(Interpreted). I have the following two questions. The first is you are focusing a lot of your efforts on the media business going forward and I believe that the acquisition of CJ Hellovision will bring you greater bargaining power and these are all positive.

However, because the industry structure will change as a result of your acquisition it will lead -- I'm afraid that it may lead to greater competition in terms of securing greater and better content. So this naturally leads to the market worries over your cost issue. I'd like to hear your thoughts on that.

And my second question has to do with your MVNO business stance. You have been pursuing your MVNO business through SK Telink, but now we are seeing KT's M Mobile doing very well and other MVNO players doing quite well. So I'd like to hear about your future stance and also if you will maintain multi-brand in terms of MVNO business after the acquisition and merger?

(Interpreted). Hello, this is Kyung-Il Park of the Strategy and Planning Office. Let me address your first question. You asked about the restructuring and the reorganizing of the overall media industry and some concerns of the market regarding increased competition.

In the case of the United States with the transition to the digital broadcasting system, over 30 cable TV operators in the United States also experienced reorganization in terms of the market structure.

Although right now immediately after our merger and acquisition there will be two definite dominant players in the market, although we don't know what will happen to the industry in the longer term, we believe that it will be more focused on competition to create and generate higher quality contents hand in hand with the digital operator rather than remaining the traditional analog operator.

And through the effect of the economy of scale and as well as cost efficiency and also sophistication of our services, we believe that all of these can contribute to further sophistication and development of our media platform business.

And what we want is to refrain from destructive competition to acquire more subscribers. And once we acquire the 7.4m subscribers after the M&A is concluded, we will again refrain from a customer acquisition focused competition to one that focuses more on higher quality content as well as more sophisticated platform services.

And to address your second question regarding the MVNO, this recent acquisition deal was made to aim strengthening of the media platform business.

While we do carry out our MVNO services through SK Telink, it is not adequate at this time to say that they can survive on their own.

While this acquisition of CJ Hellovision's shares can lead to synergy in terms of the MVNO business, again because our goal of the acquisition deal was not focused on the MVNO business, as of now we do not have any detailed plans for our MVNO business after the merger. Once such details have been made concrete, we should be able to communicate with you as soon as possible.

(Interpreted). Stanley Yang, JP Morgan.

(Interpreted). I have the following two questions regarding the CJ acquisition. You mentioned -- you have been constantly mentioning your target of the KRW55 trillion enterprise value. And my question is was this particular acquisition decided in line with your enterprise value maximization direction. Considering the call option that you have, you are in fact paying greater than 100% in the premium alone. So I'd like to hear your thoughts on how you justify this premium.

In the markets it's not showing very positive feedback. We have seen a lot of selling on the foreign investor's side and your share price in fact has fallen. So, again, in terms of the enterprise value target, we were not given any specific financial targets including EBITDA number or any other number for that matter. So do you have any guidances that you can give us in terms of how you made the valuation?

And secondly, I would like to know what you estimate the enterprise value to be of the merged entity.

(Interpreted). To answer the first question, in the process of achieving the KRW55 trillion enterprise value target we have been focusing on three major platforms. Lifestyle enhancement, advanced media and IoT. And this particular acquisition was decided to really reinforce our media platform business and to completely maximize its competitiveness in the future.

Therefore, I can say with confidence that this acquisition was 100% aligned with our direction in terms of reaching our enterprise value target.

And when you look at the customer base of the entire CJ Group, we are also expecting great synergies to occur between the two entities in terms of our lifestyle enhancement platform and the overall direction of the home and IoT platform business strategy. Therefore, again, we believe that this deal will in fact contribute to reaching our enterprise value target.

And if I may add on to that. You asked about justification of the premium and if we go through the KRW500b to acquire the first round of CJ Hellovision shares of 30%, the trading has been suspended as of now, but as of last Friday, the equity amounted to KRW840b. And we paid a premium of KRW250b. So we have to take into consideration not only the management premium but also the Company's assets and value. So I think that's the approach that we will have to take.

And, as I said before, this translates into KRW450,000 per subscriber. So again I believe this is an adequate price.

Although it is difficult for us to provide you with certain financial targets at this time of the merged entity, when you look at the M&A itself, SK Broadband's equity value is valued at KRW1.5 trillion and CJ Hellovision's market cap is again at KRW440b. So added together that makes KRW2.3 trillion and then taking into consideration the borrowings of both companies, that will lead to a total of KRW5 trillion.

What we are expecting is that although we did pay about KRW21,521 per share for the first round of acquisition of the 30% shares of CJ Hellovision, which translates into twice in terms of premium. However, after the merged entity is successfully concluded, the revenue will be about KRW4 trillion. And it will also have an EBITDA about KRW1 trillion. And it is also going to be accompanied with around 7.4m subscribers. So we believe that once the merger is successfully concluded what we have used in terms of acquisition costs will be more than realized.

(Interpreted). Neale Anderson, HSBC.

Hi. Good afternoon. I'd like to focus on cash flow, particularly the balance between the growth and the shareholder return you discussed earlier. So particularly on CapEx, you've outlined plans for more than 50 new initiatives for product launches in, I think, the lifestyle and the media areas. Can you indicate how you evaluate the cash flow impact of these launches? How might that change from recent trends? It seems to be a significant step-up in terms of new launches. That's my first question.

The second one relates to CapEx in the core wireless business over the next three years. So, I think you guided for less than KRW2 trillion for this year. Do you think you'll come in below that in 2015? And over the next two years do you think it will increase or decrease meaningfully, or do you expect it to be fairly flat? Thank you.

(Interpreted). First, I'd like to note that I will be answering your first question regarding the lifestyle enhancement platform related CapEx and the second part regarding media will be answered another executive.

When it comes to our lifestyle enhancement platform business it is not something that requires a significant amount of CapEx. Rather than investing in tangible assets including the network and such, we will have to take an approach similar to that of start-ups.

And as for your question regarding the CapEx trend for the next three years, we have guided KRW2 trillion for this year, and we believe that this will be met. And, also, in the longer term, until the full-fledged rollout of the 5G network, we believe that CapEx will take on a downward stabilizing trend.

And I would just like to go ahead and answer the question regarding the media business CapEx. As of now we believe that after the merger of SK Broadband and CJ Hellovision, the merged entity will be able to fully take care of their own CapEx.

(Interpreted). In Young Chung, Goldman Sachs.

(Interpreted). I have two questions. The first has to do with the data volume and your network. In the third quarter I'd like to know the number in terms of your LTE subscribers as well their data usage volume. When you look at your competitors they saw a more rapid growth in terms of data usage volume in the third quarter compared to the second quarter. So under this -- at this rate, do you believe that you're current network infrastructure is enough to accommodate the growth expected by the end of next year?

And my second question has to do with the CJ Hellovision merger and your MVNO strategy. When you look at the current picture the number one MNO operator has acquired the number MVNO operator. And although I know that you mentioned before in one of the questions that this is not your -- one of the core, the targets of your acquisitions this is in fact going against what the government originally had in terms of wanting to vitalize the MVNO market. So what are your thoughts in terms of the government approval of this merger?

(Interpreted). Hello. This is Jong-bong Lee. I'm the Head of the Network Strategy Office. And let me address the first question.

We currently have 81.46m LTE subscribers. When you look at the per capita data traffic, at the end of last year the number stood at 3 gigs, and this has been increased to 3.7 gigabytes. So therefore, accommodating the rapid and explosive growth of data traffic is very important and is one of our main concerns at the Network Strategy Office.

Now we have transitioned our 3G network that we had previously been using for our 3G users, the 2.1 gigahertz, to LTE. It was approved in August and we have been using it to provide LTE services to our customers. And as of now we do not see any problems in terms of accommodating data traffic.

And we believe that the per capital data increase is closely related to the data price plans as well. And it also has to do, of course, with the penetration rate of our LTE subscriber transition. So taking all of these factors into consideration at this time we do believe that our current network infrastructure is enough to accommodate the growing data traffic.

And because a question was asked regarding the CapEx I'd like to add on that now all of the entire industry as a whole has shifted from the paradigm of focusing on competition through investment in our network. The three companies are all focusing on increasing the level of quality of services that are provided to our customers, and also investing in areas that have higher data traffic. Therefore, I can say with confidence that CapEx will take on a downward trend.

(Interpreted). This is Lee Sang Heon, Head of the CR Strategy. And let me address your second question regarding the MVNOs.

Regarding the MVNO business, even after the merger the subscribers subscribed to CJ Hellovision's MVNO service will continue to use the KT network. However, -- therefore, we believe that in the short-term it will not have any significant impact in the MVNO market. However, in the future of course new subscribers to SK Hellovision MVNO services can opt their network, so there will be a natural churn in and churn out.

And in terms of regulation we expect that the government will review it taking into consideration the current market environment. And as for the MVNO's there is a regulatory system put in place in which MNOs cannot own more than 50% of the entire MVNO subscriber share, so that is a pre-condition. And as this particular deal is not violating that restriction, we see no problems in that area.

(Inaudible). Seyon Park, Barclays.

(Interpreted). I have two questions. My first has to do with the acquisition of CJ Hellovision. After the merger with SK Broadband, what are some of the synergies we can expect in terms of revenue and costs? I would like to -- I'd be very grateful if you could provide some details related to this.

And my second question has to do with the wireless service revenue. In the third quarter we saw that all three carriers showed quite unimpressive ARPU numbers not growing as much. Do you think that this is temporary? And do you think once the monthly discount plans, the impact of the monthly discount plans have been set in place, that there is still room for ARPU growth?

(Interpreted). Let me address your first question regarding expected synergies in terms of revenue. We believe that first of all you can see the bundled, the ratio of subscribers opting for bundled services. As of now, CJ Hellovision, although they have 4.15m subscribers for their cable service, when it comes to their high-speed Internet they have only 880,000 subscribers which is relatively low. So we believe that by converging the high-speed competitiveness and the media competitiveness we can see an increase in terms of the overall subscriber number to high-speed Internet services.

And, secondly, with a wider coverage as a result of a merger between the two entities, we believe that we can expect lower churn out numbers. In the past there were cases where users had to choose another operator because they were moving to a place where the particular network did not provide them service. But these things will be resolved after the merger.

And when you look at the revenue generation stream a little bit more detailed, the SK Broadband has a relatively higher portion in terms of revenue on their VOD services while CJ Hellovision generates greater revenue from their advertising and home shopping services rather than their VOD service. So again you see that the detailed structure in terms of their revenue generation is quite different. And I believe that this is the very area where we can expect synergy.

And next in terms of the cost, we believe that we will be able to decrease our cost in areas that overlap in terms of cost expenditure, including network and DNC related costs.

And secondly, regarding the question on the ARPU, when you look at just us, again, I think I said this before, there are pluses and minus effects. On the plus side we see that the LTE subscriber ratio is continuing to grow and also the data usage traffic of these LTE users is also continuing to grow. However, on the other side, we are seeing further proliferation of second device users, and obviously this has a rather negative impact on our ARPU numbers. And also, as you mentioned, we are seeing impact of the monthly discount plans as well.

And in the longer term on the qualitative side again we are seeing greater number of LTE users as well as a growing data traffic per capita. And, on the qualitative side, we are pursuing, of course, the next generation platform businesses, all of which will result in greater customer value.

However, we are expecting explosive growth in terms of accounts subscribed as second devices. And in fact this is aligned with the Company's marketing strategy in the future as well. And also on top of that, the IoT area is another business area that the Company is focusing on. So taking all of this into consideration, the Company is reviewing whether the ARPU is an adequate indicator of the actual reality.

Now we don't think that now is the right time for us to come up with a completely new indicator such as the ARPA given through Verizon, but once we reach a certain point in time, after thorough communication with the market, we will consider trying to provide our analysts with a new type of index that can better reflect the reality.

(Interpreted). Sean Oh, Merrill Lynch.

(Interpreted). I just have one question. In the past, when you acquired Hanaro Telecom to become SK Broadband I know that you went through quite a lot of difficulty. So I'd like to ask in what way are you better prepared for the acquisition of CJ Hellovision. And what is different from when you acquired Hanaro Telecom in the past?

(Interpreted). I think I can answer that with two aspects. The first is that at the time of the acquisition of Hanaro Telecom our Company only had experience in the wireless business side so we lacked any experience in terms of fixed line services. However, this particular -- when it comes to this particular acquisition, CJ Hellovision's business is in fact almost similar if not the same as what SK Broadband has been doing. So, although it is true that we did experience quite some difficulties after the acquisition of Hanaro Telecom, that will not be the case for this merger.

And secondly, one of the biggest problems that we had after the merger of Hanaro Telecom was a large customer outflow due to our leaking of personal information of our customers after the merger. However, when it comes to this acquisition we are partnering with the CJ Group and there will be a variety of areas that we can seek further alliance and partnership even after this particular deal with CJ Group. Therefore, again we believe that this acquisition and merger of CJ Hellovision is completely different from the acquisition of Hanaro Telecom.

(Interpreted). This concludes the earnings conference call for Q3 2015. Thank you.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.