SK Telecom (SKM) Q2 2014 Results - Earnings Call Transcript

| About: SK Telecom (SKM)

SK Telecom Co., LTD. (NYSE:SKM)

Q2 2014 Earnings Conference Call

August 1, 2014 02:00 AM ET


Hong-Kyu Park – IR Officer

Soo-Cheol Hwang – Chief Financial Officer

Sun-Jung Kim – Head, Marketing Strategy


Jong-in Yang – Korea Investment & Securities

Mi-Song Kim – Hyundai Securities Co., Ltd.

Hong-Seek Kim – Hana Daetoo Securities Co., Ltd

Hoi-Jae Kim – Daishin Securities Co., Ltd.

Jee-Hyun Moon – KDB Daewoo Securities

Sean Oh – Bank of America Merrill Lynch

Josh Bae – UBS Securities

Sam Min – Morgan Stanley & Co. International Plc

John Kim – Deutsche Bank Securities, Inc.


[Foreign Language] Good afternoon. Welcome to the Conference Call for the Fiscal Year 2014 Second 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 2014 second quarter earnings results by SK Telecom.

Hong-Kyu Park

[Foreign Language] Good afternoon. And my name is Hong-Kyu Park, the IRO of SK Telecom. Today’s earnings conference call will consist of the earnings presentation by our CFO, Soo-Cheol Hwang, on the earnings highlights of Q2 2014, as well as the business plans and strategic direction followed by a Q&A session. To help deepen your understanding, we have with us executives from relevant business units.

We will provide consecutive interpretation for our international audience. Let me also remind you that all the forward-looking statements are subject to change depending upon the macroeconomic and market situations. Let me now invite our CFO.

Soo-Cheol Hwang

[Foreign Language] Good afternoon. This is Soo-Cheol Hwang, the CFO of SK Telecom. Let me start with the consolidated financial results for the second quarter 2014.

Revenue posted KRW 4,305.4 billion, up 4.6% year-on-year and 2.5% quarter-on-quarter supported by the rollout of the LTE services and the increasing top line of our solutions business and subsidiary, despite the growth limitations imposed by the 45-day operational suspension during Q2.

EBITDA rose 0.9% year-on-year and 32.2% quarter-on-quarter to KRW 1,263.5 billion affected by the reduced marketing expenditure. Operating income marked KRW 546.1 billion. Net income reached KRW 497.6 billion, boosted by the resilient results of SK Hynix. That was the brief overview of the Q2 2014 financial highlights. I would like to now turn to our strategic direction and performance of each business lines.

The upward trend ARPU through the wider adoption of LTE and the growing share of the high-end price plan subscribers is ongoing. The number of LTE subscribers recorded 15.38 million, the LTE unlimited price plan, which was launched in April gained 1.5 million subscribers as of the end of June, contributing to the enhancement of the consumer data usage environment, as well as our ARPU growth. Boosted by the qualitative and quantitative expansion of the LTE subscriber base, our Q2 billing ARPU stood at KRW 36,013 moving up 5.9% year-on-year and 2% quarter-on-quarter.

The data usage volume per LTE subscriber posted 2.6 gigabyte supported by the World Cup effect and the wide LTE unlimited price plan adoption. We anticipate such trends to propel ARPU growth going forward. In order to meet the increasing data usage needs of our customers, SKT launched the world's first Wideband LTE-Advanced service and is providing the service with the largest coverage area.

Leveraging our advanced technological leadership and the capacity to offer highly efficient high quality services, we expect to sufficiently accommodate the increasing data demand with the existing network resources. As such, we plan to expand CapEx within the annual guidance of KRW 2.1 trillion.

As for T-Phone, the number of users at July end came in at 2 million, receiving positive response from the market. We will continue to broaden the subscriber base by enabling OS upgrades of existing devices, while increasing the number of preloaded devices. Considering the average handset replacement cycles of our customers, we anticipate most smartphone users to own T-Phone enabled devices by 2015.

During second-half, we will focus on product enhancements and user base expansion, while creating a platform ecosystem together with partners and third-party players.

I will now touch upon our growth strategies for the new growth areas. On May 29, SKT announced ICT-nomics as the vision of ICT's future for the next three decades. ICT-nomics refers to the unfolding of a completely different feature stimulated by the transformational changes in our life triggered by the technological convergence between big data infrastructure, Internet of things, and artificial intelligence.

SK Telecom is pursuing future growth businesses to keep abreast with these changes, especially the business areas SKT is spearheading such as safety, IoT solutions, including accessory and healthcare business, will play pivotal roles in crystallizing our ICT-nomics as core businesses leading future growth.

In the safety arena, the security company NSOK, which we be acquired in February to reinforce our safety business more than doubled its new customers after the acquisition. Passing into SKT's ICT capabilities, we introduced Korea's first LTE-based wireless CCTV/surveillance cameras and achieved both subscriber base expansion and capacity enhancement.

In the healthcare area, we achieved meaningful results in the global market in consortium with Seoul National University Hospital of Bundang, we concluded the Saudi hospital information system export contract, which includes KRW 70 billion worth of software alone. We expect to generate over KRW 300 billion in revenue during the coming five years by expanding our footprint in Saudi Arabia and the rest of the Middle East.

The newly opened Medical Center in Shenzhen in China will serve as the breached to seek business expansion in the healthcare sector in China, anchoring on the synergies created between our own ICT technologies and our invested company such as NanoenTek and (inaudible) is expected to open up new business opportunities going forward.

The recently acquired iRiver is expected to help boost our competitive edge in the service convergence device market, where robust growth is predicted. To-date, we have launched various convergent devices, including Smart Beam and education-purpose robot. With the acquisition of iRiver, we believe our product development and market readiness will be significantly heightened.

In the short-term, we will discover new products and related services in the audio device category, where iRiver has strengthened and lead to long run, we will explore diverse areas to integrate with our ICT capabilities such as wellness and education among others.

In June, SK Planet introduced Syrup, which is a solution offering customized location-based information to our customers for enhanced shopping experience, while providing an integrated marketing solution to the merchant. Syrup is leading in the online to offline service market, which is emerging at the high potential area recently. We are also conducting beta test for smart shopping services by incrementally pursing geographical expansion and service innovation, we will grow into a leader in NEXT Commerce in Korea, as well as in the global market.

SK Hynix is sustaining solid growth. Thanks to the stable supply-demand dynamics, streamlined portfolio, process migration and cost saving efforts. In line with the trend of device diversification and extending connectivity products we plan to position SK Hynix as an integrated ICT company by tapping into the synergy with SK Telecom.

Dear investors and analysts, in the near term we anticipate regulatory changes during the second-half from changes such as the Handset Distribution Act. In the mid to long term perspective we are about to witness a transformation of the ICT ecosystem comprising IoT, artificial intelligence and big data.

SK Telecom will refrain from subsidy based competition in the telecom market and lead the paradigm shift towards product and service centric competition. As we usher in the data era we will spearhead the ICT-nomics by continuously discovering new growth businesses that cater to diverse customer needs.

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

Hong-Kyu Park

[Foreign Language] We will now begin the Q&A session. Please go ahead with questions.

Question-and-Answer Session


[Foreign Language] Now Q&A session will begin. (Operator Instructions) In order to allow as many questions [ph] as possible within the restricted time we would appreciate only two questions per each participant.

The first question will be provided by Jong-in Yang from Korea Investment Securities. And the next question will be provided by Mi-Song Kim from Hyundai Securities. Mr. Jong-in Yang, please go ahead sir.

Jong-in Yang – Korea Investment & Securities

[Foreign Language] I have the following two questions. My first question has to do with your shareholder return policy as the company. I believe that once the Handset Distribution Act comes into effect, your profitability is bound to improve going forward. So I was wondering whether we could anticipate any expanded dividend pay-out or share buyback policies from the company within this year or next year. This is my first question.

And secondly, you have recently launched the Wideband LTE-A services with the speed of 225 mega-bps in the month of June. So I was wondering what is your initial assessment of the results to-date. Are there any particular volume differences of data usage or any data usage pattern that are different from the existing customers coming from the Wide LTE-A subscribers?

Soo-Cheol Hwang

[Foreign Language] Let me address your first question regarding the shareholder return policy of the company. As was communicated through the annual guidance in the beginning of this year, our plan is to maintain the same cash dividend policy as the previous year, which stands at about KRW 9,400 per share.

To-date, as you are well aware, we have made extensive investment in the growth areas while striking the right balance with the shareholder return policy. And going forward as we mentioned numerous times we will maintain the same policies.

By making the preemptive investments for the overall future growth and by enhancing the enterprise value as the result of such investment we will do our utmost to maximize the total shareholder return

With regards to the possibility of the repurchase of treasury shares we will look closely at the cash flow situations as well as the stock price trend and other financial aspect of the company in order to come to right decisions if such opportunities arise.

As you are well aware you asked about the 225 mega-bps service status and as you know we have a commercialized the world's first Wideband LTE-Advanced services on the June 19 this year and as of the July 1 we have rolled out such service throughout the country.

As you are well aware our competitors are just about to roll out their nationwide services for Wideband LTE services, so at this juncture we are providing the first Wideband LTE-Advanced Services for the nationwide audience. Therefore in terms of the network capabilities I believe that we are already quite differentiated.

Although it is too early for us to give you some specific results numbers because we are in an infant stage of the service provision, what I could say is that most of the Wideband LTE-A subscribers are opting for the higher-end price plans such as LTE 80 or above. Therefore, we expect such customers and subscribers to further propel ARPU growth going forward.

To elaborate, currently over 70% of our subscribers opting for Wideband LTE-Advanced services are choosing the unlimited LTE data price plan. Therefore, we believe that such wider adoption of the high-end price plan will further act as a momentum to boost the ARPU in the future. In terms of the data volume usage difference compared to the existing LTE subscribers so far we are seeing about 1 gigabyte higher average data usage.

Currently, we have two handset types that had been launched to support Wideband LTE-A but we will be launching additional pipeline of new handsets including Note 4.


[Foreign Language] The next question will be presented by Mi-Song Kim from Hyundai Securities. And the following question will be presented by Hong-Seek Kim from Hana Daetoo Securities. Ms. Mi-Song Kim, please go ahead Ma'am.

Mi-Song Kim – Hyundai Securities Co., Ltd.

[Foreign Language] I also have the following two questions, during the second quarter, your ARPU has gone up by 5.9% and so I was wondering whether you could give us some color as to your expectations for ARPU growth for the second-half of this year, as well as next year.

My second question has to do with your proportion of LTE unlimited price plan adoption rate. Out of your total net addition in terms of new customers, how much of that new customer group is opting for that plan at the moment?

Soo-Cheol Hwang

[Foreign Language] Let me address your first question regarding the ARPU. Although we do not provide separate guidance on the ARPU numbers per se, what I could tell you is the following. If you look at the entire 2014 on a year-on-year basis, we believe that the speed with which ARPU growth takes place would be quicker and faster.

For instance, last year, on a yearly average compared to 2012 the ARPU growth was about 4.6% year-on-year, but if you look at 2014 Q1 and Q2 alone we have seen 5% and 5.9% growth year-on-year respectively. So we have high hopes about a further accelerated ARPU growth in the future. So if you look at the entire year of 2014 we believe that ARPU growth will be higher than that of the previous year.

To address your second question, looking into the end of 2014, the share of LTE subscribers I believe will be up to 60% by the year end, although the market will be stabilizing quite a bit in the meantime and we are also planning in the pipeline various LTE-A related services. Therefore, we believe that data centered growth on the LTE subscriber side will persist in the future.

To answer your question I believe that the people who are opting for LTE price plan above KRW 80,000 is actually increasing quite a bit. So the total number of the subscribers opting for this particular plan above KRW 80,000 as of the end of Q4 stands at 1.5 million. So out of the new handset upgrading customers about 60% are opting for this plan.

For your information, those people who are opting for the data unlimited price plan they tend to be high ARPU subscribers and they have very high data required needs and so we are providing very competitive product capabilities that are quite compelling to these customers. So through the launching of this unlimited data price plan we are having the effect of securing the high-end price plan subscribers while further boosting our retention ratio. And also when it comes to those low ARPU subscribers who has the burden of paying too high of a price in terms of the price on the data plan we are providing various TPO, time-place-occasion, related price plans so that we could provide opportunities to generate additional revenue on those low ARPU customers as well.

And we believe that by launching continuously new different price plans that could cater to different needs of the customers we could help boost the data usage pattern of the data focused customers and also against the backdrop of the changing network environment by offering the high quality product services continuously we will be able to deliver better value to our customers and at the same time the company as a whole will be able to enjoy higher profitability.


The next question will be presented by Hong-Seek Kim from Hana Daetoo Securities and the following question will be presented by Hoi-Jae Kim from Daishin Securities. Mr. Hong-Seek Kim, please go ahead sir.

Hong-Seek Kim – Hana Daetoo Securities Co., Ltd

[Foreign Language] I have the following two questions. Your Q2 earnings has gone up quite a bit but most people seem to think that it is mainly because of the suspension of the operation that led to higher earnings on your part. So once the operations of the sales activities normalize in the second-half many analysts on the street is feeling that your earnings would be not as high as the first-half during the second-half.

So my question is do you think that the Q2 sound and solid results will persist going forward. And my second question has to deal with your subsidiary values. I believe that the market is having higher expectations about the growth of our subsidiary especially thanks to the robust growth of SK Hynix. And you earlier mentioned in the previous conference call that you have plans to grow SK Planet as a KRW 5 trillion worth of company. Do you think that, that's still feasible and are you also looking at various options to achieve this goal through options such as overseas IPO or possible sale of this company possibly?

Soo-Cheol Hwang

[Foreign Language] I need to mention that right around the timing of the operation suspension that is before and after the suspension, there has been heated competition in the market to regain or pre-gain their subscriber base. And it actually stemmed from one of our competitors and it is true that because of such heated competition our Q2 results was not as high as we anticipated.

However, from the mid-June period, the market is very quickly stabilizing so obviously compared to Q2 we believe that Q3 and Q4 results are bound to rebound and we will do our very best to make sure that the happens.

As mentioned earlier many times before SK Telecom is extremely committed to leading the market stabilization efforts.

And your second question has to do with the value of SK Planet in the future. As you are well aware we spun-off SK Planet back in October of 2011 and after that SK Planet has been focusing on various efforts to conduct a select-and-focus approach and they have been reviewing various business models to-date. And recently as the result of such review process of based on select-and-focus they came to the conclusion that commerce is one of those areas where they have competitive edge. So going forward we believe that we will be very much focused on generating future profit out of the commerce arena.

And obviously in the background of the data centric LTE landscape where we are operating in we believe that SK Telecom and Planet will be generating a lot of synergies in the future as well. Of course, in order to further enhance the value of the company we could discuss various options such as IPO or sale of some equity shares. However, at this particular juncture we don’t think that this is an option that is visible and implementable in the near future.


[Foreign Language] The next question will be presented by Hoi-Jae Kim from Daishin Securities. And the following question will be presented by Jee-Hyun Moon from KDB Daewoo Securities. Mr. Hoi-Jae Kim, please go ahead, sir.

Hoi-Jae Kim – Daishin Securities Co., Ltd.

[Foreign Language] The Vision recently is attesting to the fact that you are quite committed to enhancing your accessory-related business position. I believe that such an approach in and of itself is quite encouraging. However, I was wondering whether you were also thinking about content sourcing along the way or whether simply you are focusing on the device provision so that you could actually enhance the traffic relying on the device part of it alone, because if you don't have the backup content supply you might be misperceived by the market as providing yet another dumb pipe in the process.

So I was wondering what is your smartphone related strategy going forward? Does it also entail content reinforcement or is it only relying on the device expansion so that you could facilitate network related traffic increase only?

My second question has to do with your market share related stance. Today, you have been maintaining at least 50% in the mobile telephony market, so going forward I was wondering whether this stance would not be changing at any cost, in other words, even if it entails exorbitant amount of expenses and even if the market perceives it as something negative, do you – are you going to be sticking with the 50% or more market share stance?

Soo-Cheol Hwang

Let me address your question regarding our recent acquisition of iRiver. Currently, we are in the process of coming up with mid to long term strategic directions for iRiver as well as setting the necessary milestones as we speak. What I could tell you is that leveraging our own ICT capabilities we are trying to gain an upper hand in the service convergence device market that is newly been created. We believe that such a positioning could help us boost our competitiveness and growth in the future.

It is a little bit similar to Smart Beam project that we have pursued and it is slightly similar to the MNO model as well. In that this is a strategy that combines software/hardware development, as well as the network traffic enhancement related strategy combined together.

Let me address your second question regarding our market share related stance of maintaining 50% or higher. I believe that your question is more like is it chicken or the egg, which comes first. In other words market share above 50% and our earnings at the end of the day, these are two targets that we cannot give up. Those are quite critical to our company. So we believe that considering the fact that we will be very much focused on further enhancing our competitiveness on the fundamental side and also keeping in mind the changing external regulatory environment, I believe that the subsidy related competition is bound to decline quite naturally.

As a result we believe that the maintenance of 50% or higher market share would also take place quite naturally.

So to conclude we believe that both market share and profitability are both quite critical to our company. In other words, by maintaining 50% or higher market share it could ultimately lead to earnings enhancement of the company as well.


[Foreign Language] The next question will be presented by Jee-Hyun Moon from KDB Daewoo Securities. And the following question will be presented by Sean Oh from Merrill Lynch. Ms. Jee-Hyun Moon, please go ahead, ma'am.

Jee-Hyun Moon – KDB Daewoo Securities

[Foreign Language] I have the following two questions. First of all, my question is directed to the new product that you have launched actually today, which is called Club T. And I believe that the gist of this program has to do with providing the opportunity for the users to change and upgrade their handset every year.

Against the backdrop of the recent mobile telephony focused competition in the market and also considering the timing of the enactment of the Handset Distribution Act, I was wondering how this new type of product will possibly impact your business going forward and how it will impact your financial structure as well.

My second question has to do with your corporate mobile related information. In other words, my question is directed to the sponsored data service where you are leading at the moment. So what is the initial feedback from the market from the distribution side as well as your partners' satisfaction? And how do you plan to further expand the corporate mobile sponsored data related programs?

Soo-Cheol Hwang

[Foreign Language] To answer your question about Club T's launching we have with us the head of the Marketing Strategy and he will address your question.

Sun-Jung Kim

[Foreign Language] My name is Sun-Jung Kim and I'm the head of the Marketing Strategy of SK Telecom. You asked about the launching of Club T and to give you some background of our program this is a program which is mixing the existing price plans of SK telecom together with particular needs and the value demand on the part of the customers.

And to elaborate on this particular program, this has the gist of offering the opportunity for the subscribers to change and upgrade their handsets around every 12 months to 8 month period and we are basically targeting the existing subscribers that are opting for unlimited data price plan and who tend to have penchant for using iconic handsets. So I think that those values for those particular segments of the customers would fit right in with this particular program. So we believe that this program will be well received in the market.

In terms of its impact on the financial aspect because this is a program combining existing price plans and different services offered together, so it is too early for us to tell the definite results yet, so we will have to wait and see how it evolves. But we believe that the retention ratio of the high-end price plans will be definitely significantly improved because of this program.

Regarding your questions about sponsored data plan and the satisfaction level and the performance and with whom we are collaborating with, on that particular issue we have another BU Head who is in charge of this sponsored data plan program. So I will not be able to answer all your detailed questions at this point. So if you require further details we will make sure that we provide written comments and answer to this question later on. But one thing that I do remember from previous discussion with the relevant parties, we believe that one of our collaborating partners includes the 11th Street and I believe that we are quite on track according to our plan and it is particularly well received by housewives who are the users of this program.


[Foreign Language] The next question will be presented by Sean Oh from Merrill Lynch and the following question will be presented by Josh Bae from UBS. Mr. Sean Oh, please go ahead, sir.

Sean Oh – Bank of America Merrill Lynch

[Foreign Language] Two questions for me. I believe that you have recorded a very low 1.9% churn rate for the first time, since the second quarter of 2006. So I was wondering what your outlook as a company, regarding the Churn rate outlook for Q3 and Q4. Do you think that the same level of churn can be maintained in the future? Or do you think that you could even afford to lower it even further.

My second question has to do with your effective corporate tax rate. I believe that, during this quarter it amounted to about 20% or so, this is a little bit lower than anticipated. So what is your outlook for the annual effective corporate rate – tax rate that is?

Hong-Kyu Park

[Foreign Language] Let me answer your first question regarding the churn rate. As you mentioned during the second quarter, our churn rate hovered below the 2% range. Going into the second-half, we believe that there are many other positive aspects that could attribute to maintaining such low churn rate, which include the slowing down of the growth rate of the LTE subscriber base increase.

And secondly, during the second-half, I think that all the players are quite committed to contributing to the market stabilization. And also with the introduction and implementation of the Handset Subsidy Act, we believe that the environment would be changing conducive to the lower churn rate. So as a result, we believe that, we have some room for further edging down of the churn rate in the future.

To answer your second question regarding effective corporate tax rate, during the second quarter, we have made expanded investment on a year-on-year basis, which led to an expanded tax deductions as well. That is why we realized slightly edging down of the effective corporate tax rate. And if you look at the entire 2014 as a whole, again, we believe that slight inching down compared to the previous year is expected on the effective corporate tax rate as well.


[Foreign Language] The next question will be presented by Josh Bae from UBS, and the following question will be presented by Sam Min from Morgan Stanley. Mr. Josh Bae, please go ahead, sir.

Josh Bae – UBS Securities

Yes, hi. Thank you for the call. My question is on your mobile service revenue, looking at the second quarter, mobile service revenue growth seems lackluster about flat year-over-year compared to your mobile ARPU growth about 6% year-over-year. I'm guessing, this is due to the MVNO subscriber portion increase. Could you please share with us your thoughts on what's causing this, also if we should expect this trend of mobile service revenue lacking the mobile ARPU to continue?

Hong-Kyu Park

[Foreign Language]

[Technical Difficulty] Let me repeat the answer. For Q2, it is true that ARPU growth rate was higher than that of the mobile cellular revenue. Yes, the mobile cellular revenue did grow, but then again remained pretty low. And as you recall, last August, we lowered the signup fee and that is – effect is being felt partially right now.

And as you pointed out as well, the MVNO subscribers played some role as well. When we calculate ARPU figures, we do not include the subscriber numbers including the MVNO subscribers. So those factors partially contributed to the growing gap between the ARPU growth and that of the mobile cellular revenue.

For your information, when it comes to MVNO related earnings, we are only reflecting 50% of that revenue or earnings to our overall company's mobile cellular revenue. So that is why we are witnessing certain gap between those two figures. But I don’t think that we will see widening gap per se as a trend, but we will continue to see some gap somewhat between the two numbers.

And so to recap looking at the growing share of the LTE subscribers and wider adoption of the unlimited data price plan on the LTE side, we believe that the ARPU expansion is likely to persist.


[Foreign Language]

The next question will be presented by Sam Min from Morgan Stanley, and the following question will be presented by John Kim from Deutsche Bank. Mr. Sam Min, please go ahead, sir.

Sam Min – Morgan Stanley & Co. International Plc

Yes, hi. Thank you. So my question is on dividends once again. And if I understand kind of the tone, CFO Hwang, it seems as though for next year, most likely SKT will maintain the same dividend policy. And if you can correct me whether I'm right or wrong in thinking that way, I would appreciate that.

And then my question would be what would essentially trigger the Board of Directors to consider a higher dividend policy next year, considering that and we're seeing churn rate fall, marketing appears to be going down because of the Handset Distribution Act. Your ARPU and service revenue appears to be growing at a fairly decent rate. CapEx doesn't appear to be heading higher any time soon.

So what would it take for SKT and the Board of Directors to consider sort of a higher dividend policy, particularly given that dividend yields have – is now trending at 3.5% and with the government encouraging corporations to pay higher dividends? Thank you.

Hong-Kyu Park

[Foreign Language]

Early on I shared with you our basic stance on the shareholder return policy of the company. But please understand the fact that, I cannot give you any confirmed or finalized policy change for next year's dividend policy as to whether we will keep it as same as this year or whether we would raise it next year, we cannot actually give the answer at this point. So please bear with us.

However, the BoD and the company's management is always ready to sufficiently renew the dividend policies keeping in mind the surrounding environment changes, as well as the company's profit structures going forward. But I just feel that, it’s a little bit too early for us to discuss next year's dividend policy for sure.


The next question will be presented by John Kim from Deutsche Bank, and there is no following question. Mr. John Kim, please go ahead, sir.

John Kim – Deutsche Bank Securities, Inc.

Yes, thank you for the opportunity. I'd like to ask a question about dividend in a slightly different context looking at tariff and dividends together. As Sam Min just mentioned, it seems that the government wants to see the corporate sector pay higher dividends. But also at the same time, we understand that the government wants to see lower mobile tariffs from the telcos. Does the management have a view on which of these two that the government's placing a higher priority? And also for the management if you're forced to prioritize between the two, what do you believe is more important at the current juncture?

The second question has to do with marketing. On the handset reform law, I understand that the finer points are still being finalized. But can the management share how SKT will be competitively positioned once the law goes into effect? And on the topic of marketing stability, it's not clear that telcos are afraid of marketing suspensions when we consider the heated competition that we saw in late May, early June shortly after the suspensions were served. So in your view, what kind of measures would it take to truly discourage irrational marketing on a sustainable basis? Thanks.

Hong-Kyu Park

[Foreign Language]

You raised the dividend related question once again. And just to remind you compared to other Korean companies in the market, our dividend ratio is relatively higher. Of course, looking at the business landscape changes and if our earnings keep on going up and if our cash also continues to decline, according to our preset dividend policies and principles, we will strike the right balance by reconsidering the shareholder return policy.

So there is always that review possibility. And when it comes to the decisions regarding shareholder policy, we will first and foremost consider the basic principles that we have set aside in the past. And in addition to that, we could consider the asset quality, including the company's financial structure as a whole.

So once again, let me confirm that if and when we witness such structural changes in the market and within the company, we are always open to reviewing such other optionalities. And let me also add that as the enterprise value of our company goes up, our shareholders are bound to experience some capital gain as well. So we should not simply look at the direct shareholder return policy by the company per se, but we should look at the total shareholder return as a whole.

And your second question had to do with the impact that we anticipate on the company coming from the implementation of the Handset Distribution Act. And you asked about the possibilities of easing competition in the market with regards to marketing. The way I look at it, I think that – the – soon to be launched Handset Distribution Act is fundamentally different from the existing regulations in the market.

With the introduction of the Handset Distribution Act, I believe that we could anticipate significant improvement in terms of user discrimination coming from the excessive subsidy provision by different telcos. And, however, we should keep in mind that the final details have not been confirmed yet, including separate disclosure requirements as well as the cap on the subsidy. So we still have to wait and see how it evolves. The reason why I say that this particular new act is quite different from the existing regulations in the market is as follows.

First of all, we have the legal mandatory requirement to disclose the level of subsidy that we provide going forward. And also the regulatory body has the right to impose emergency suspension of certain activities related mandate. So they have certain immediate way to intervene. So such actions going forward, I believe will be assisting in the further stabilization of the market.

And I believe that once the subsidy-based competition eases, I believe that the entire market is bound to turn their attention to the product and service-centric competition more than the current stage of course. Considering the technical, technological prowess and the product and service competitive edge of SK Telecom, I believe that our company would be benefiting the most perhaps with the introduction of the Handset Distribution Act.

Hong-Kyu Park

[Foreign Language] If there are no further questions, we will now invite the CFO's closing remarks.

Soo-Cheol Hwang

Thank you for taking part in SKT's earnings conference call. All of your valuable questions and interest will contribute greatly to our management activities. As mentioned earlier, SK Telecom will further cement its telecom service leadership as the foundation to embrace the ICT-nomics, while creating new IoT based values from the healthcare and B2B arenas where we are laying the steppingstone. Through such efforts we promise to lead innovation on this changing landscape, enhance enterprise value by discovering diverse business opportunities, and leverage various options, so that we could further improve shareholder value.

This concludes the earnings conference call for the second quarter 2014. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!