SK Telecom (SKM) on Q1 2016 Results - Earnings Call Transcript

| About: SK Telecom (SKM)
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SK Telecom Co Ltd (ADR) (NYSE:SKM) Q1 2016 Earnings Conference Call April 28, 2016 2:00 AM ET

Executives

Jeong Hwan Choi - IR

Keun-Joo Hwang - EVP, Strategy and Planning Division

Pak Kan Shu - CFO, SK Planet

Gwang-Seok Shin - IoT Solution Division

Analysts

Josh Bae - UBS

Jongin Yang - Korea Investments and Securities

Jae-Min Ahn - NH Investments and Securities

Hang Wu Lee - USS Securities

Jee-Hyun Moon - Mirae Asset Daewoo Securities

In-yong Jeong - Goldman Sachs

Stanley Yang - JPMorgan

Nam-gon Chu - UMT Securities

Neil Anderson - HSBC

Dan Kong - Deutsche Bank

Jeong Hwan Choi

[Foreign Language]

Good afternoon, I am Jeong Hwan Choi, the IRO of SK Telecom. Today’s conference call will consist of the presentation on the earnings results for Q1 of 2016 and the future management plans and strategic direction by Executive Vice President, Strategy and Planning Division, Keun-Joo Hwang, followed by a Q&A session. Today we have here with us relevant executives from each business division.

[Foreign Language]

Today’s call will provide consecutive interpretation. We want to remind you that all the forward-looking statements are subject to change, depending on the macro-economic and market situations.

Let me now present Mr. Keun-Joo Hwang.

Keun-Joo Hwang

[Foreign Language]

Good afternoon, this is Keun-Joo Hwang, Executive Vice President, Strategy and Planning Division at SK Telecom.

[Foreign Language]

In March this year, SK Telecom was ranked number one in mobile telecommunication for 19 consecutive years in the survey conducted by the National Customer Satisfaction Index. SK Broadband maintained its leading position for six consecutive years in high-speed Internet and IPTV, while SK Telink was linked first place for the third year in a row in international telephone service. Going forward, SK Telecom will continue to do its utmost to achieve optimal results in all areas of growth, such as lifestyle enhancement, advanced media and IoT platform. We ask for the continued interest and support of our investors and analysts in the future.

[Foreign Language]

Let me first discuss the consolidated earnings highlights for Q1 2016.

[Foreign Language]

Revenues recorded KRW4.2285 trillion, similar to that of last year. Quarter-on-quarter, it decreased by 3.4%, due to the seasonality of the first quarter.

[Foreign Language]

Operating income recorded KRW402.1 billion, down 0.1% year-on-year and up 0.1% quarter-on-quarter. Costs increased slightly along with growth of the commerce business, but the total operating income remained at a similar level due to a more stable cost structure of the mobile service business.

[Foreign Language]

EBITDA increased by 1.7% year-on-year and fell by 1.8% quarter-on-quarter, recording KRW1.151 trillion. Despite the smaller equity method income on SK Hynix, net income recorded KRW572.3 billion, a 29.3% increase year-on-year and 95% increase quarter-on-quarter, due to gains on the divestiture of SK Planet shares of LOEN Entertainment.

[Foreign Language]

With that, I will now move on to major achievements per business area and the strategic direction of the company.

[Foreign Language]

With a more stable mobile telecom business, the market size for Q1 shrunk by 6% at around 790,000 subscribers per month, despite the seasonality of the first quarter, which includes the start of the new year, the new school year. The M&P market size shrunk, while handset upgrades grew, which led to a stable churn rate of around mid-1% levels.

[Foreign Language]

SK Telecom will not remain complacent with the current trends of a more stable market and cost structure, but push forth with our efforts to strengthen the fundamentals of our business by continuing to develop differentiated products and services that enhance customer value. As part of such efforts, we are actively developing new market opportunities, namely the second device market. According to recent statistics published by the Ministry of Science, ICT and Future Planning, SKT accounts for 87% of the entire wearable device market, which goes to show how the company is leading a new path. Second device users increased by 170,000 in just the first quarter this year, exceeding 770,000 in total. It was the result of targeting hidden customer needs by offering exclusive devices, such as the Luna Watch, bundled with specialized price plans.

[Foreign Language]

Along with the stable results of the telco business, our efforts to achieve pre-emptive change and innovation in preparing for the IoT era continues. In the smart home arena, the company is focusing on expanding the ecosystem that major home electronics companies are a part of. Recently, by entering the apartment construction market and offering built-in smart home systems, by including it in the construction process, we are strengthening our partnership with top players of the industry.

[Foreign Language]

Following the MoU signing in the new energy industry with KEPCO last year, and the opening of the SK Telecom-KEPCO Collaboration Center in April in Naju, energy-related business models will become more concrete. Beginning with the Center, the two companies plan to create communication infrastructure for future cars, wireless charging facilities for electric cars, and specific services in the smart grid sphere. These models for IoT collaboration are occurring simultaneously in various fields for potential ICT technology application, such as department stores and universities.

[Foreign Language]

As for media, we have already announced our future direction of evolving into an advanced media platform company. The company will also continue efforts to promote growth of the domestic content industry, as well as create an ecosystem, while enhancing the competitiveness of the mobile media business, centered on the Oksusu service launched this past January. Regarding the merger of SK Broadband and CJ HelloVision, we will be sure to communicate with the market once the necessary procedures regarding the approval are concluded.

[Foreign Language]

We are expecting the LBS business division that was merged into SK Telecom on April 5th, to yield great synergy with our accumulated ICT technologies and lifestyle enhancement platform capability. With over 18 million users, the nation’s most used navigation service, T-map, is now expanding into various business areas, including T-map Taxi and T-map Public Transportation through advanced location based services and big data technologies. It will continue to create new value and contribute to profit in the future through various services, including a driving pattern analysis service, and discounts on car insurance premiums based on individual driving records.

[Foreign Language]

As for the innovative communication platform, the T-phone, new business opportunities will be discovered as we expand partnerships to cover travel, lodging, shipping, and call taxi, among others. By utilizing the using screens during calls service, we have already launched various services connected to real estate transactions, food delivery, and taxi services, and we'll continue to find new business models in the O2O area.

[Foreign Language]

Moving on to the commerce business carried out by SK Planet, with its open market platform 11th Street, O2O marketing platforms, such as OK Cashbag and Syrup, as well as data analysis infrastructure, SK Planet is a commerce company with differentiated capabilities that is ready to proactively respond to an ever-changing e-commerce environment.

[Foreign Language]

While focusing its efforts on strengthening the mobile leadership, the company will continue to discover new competitive products, increase direct purchasing of strategic products, improve the logistics infrastructure, and provide advanced suggestions for customers based on data analysis, thereby continuing to innovate the commerce industry. The company will also continue to strengthen its position in global markets that include Turkey, Indonesia and Malaysia, laying the foundation for a new success story in the field of next commerce.

[Foreign Language]

Pioneering beyond telecommunications and finding a new growth engine is indeed a challenging task. However, just as SK Telecom has overcome many difficulties in the past, every member of management and staff will do our utmost to make sure to achieve that growth. We ask for the continued interest and support of investors and analysts. Thank you very much.

Jeong Hwan Choi

[Foreign Language]

We will now begin the Q&A session.

Question-and-Answer Session

Operator

[Foreign Language]

Now Q&A session will begin. [Operator Instructions].

[Foreign Language]

The first question will be provided by Josh Bae, UBS. And the next question will be provided by Jongin Yang from Korea Investments and Securities. Mr. Bae, please go ahead sir.

Josh Bae

Hi, thank you for the opportunity. I have two questions. First is on the wireless ARPU and the wireless service revenue trend. I see your billing ARPU was largely flat in the first quarter. One of your competitors mentioned yesterday that they think it'll be difficult for the wireless ARPU to grow from here onwards. Could you please share your thoughts, if you have a similar view? Also, related to this, your mobile service revenue continues to decline. When do you think this trend could stop?

My second question is on the spectrum auction, which I believe starts tomorrow. I understand that you can't share your bidding strategy details, but if you could share with us any general ideas, for example, do you prefer to get as much spectrum as possible during this auction, considering the increasing demand for data? Any thoughts you may have would be much appreciated. Thank you.

Keun-Joo Hwang

[Foreign Language]

I thank you for your question. Regarding your question about the billing ARPU outlook, first of all, our traditional M&O business is no longer going to stay just within the area of providing connectivity, but growth rate transition in that we want to provide added value based on our network.

[Foreign Language]

And in this process, we are seeing more and more convergence devices, including wearable devices and IoT machines that are becoming the focus of the market.

[Foreign Language]

Going forward, rather than focusing on the traditional M&O business centered ARPU numbers, we wish to provide added value in connection with these various devices, the convergence devices that I mentioned, and also increase our subscriber base, based on that. And we want to focus more on the revenue growth by providing a differentiated level of products and services.

[Foreign Language]

And when we look at just the telco business, there are positive factors for ARPU growth, including the growing LTE subscriber base as well as growing data usage volume. I’m sure this is something that we will have to see in about three to four years into the future. But once the fifth generation network arrives, based on its unrivalled speed in terms of data, we believe we will be able to provide more value added services regarding this fast data and that, in return, can contribute to ARPU growth.

[Foreign Language]

As was mentioned in the conference call of LG Uplus yesterday, we believe that for the time being, it would be difficult to expect a dramatic ARPU growth.

[Foreign Language]

However, overall we see a growing number of people opting for higher ARPU price plans according to the growth in data volume. So it is not to say that ARPU numbers will fall, but I believe that it will maintain flat.

[Foreign Language]

And your second question had to do with SK Telecom’s stance regarding the spectrum auction.

[Foreign Language]

As you know, as you said in your question, it does begin tomorrow. And because each strategic details of all three operators will become more concrete, beginning tomorrow, I first of all want to say I apologize for not being able to provide too many details at this time.

[Foreign Language]

But I do want to say that we will, our two main goals is to meet the demand of the growing data usage of our customers, and also to achieve cost efficiency. So I'd like to answer your question with that.

Josh Bae

Just as a follow-up, if the focus now is more on revenue growth rather than ARPU, when do you think your mobile service revenue could turn around?

Keun-Joo Hwang

[Foreign Language]

I will hand the mike over to the executive in charge of our marketing revenue.

Unidentified Company Representative

[Foreign Language]

I believe that as was mentioned before, the ARPU numbers will be maintained at the current level, and regarding revenue, due to factors including a proliferation of second devices and revenues from new businesses as well as the platform businesses that we are pursuing, I believe that the M&O revenue could turn around during the fourth quarter of this year.

Josh Bae

Thank you.

Operator

[Foreign Language]

The next question will be presented by Jongin Yang from Korea Investments and Securities. And the follow-up question will be presented by Jae-Min Ahn from NH Investments and Securities. Mr. Yang, please go ahead, sir.

Jongin Yang

[Foreign Language]

Thank you for the opportunity. I have the following two questions. The first has to do with the commerce, with your strategies relating to the commerce business of your subsidiaries. I’d like to know about your investment direction as well as expected investment volume throughout this year. And secondly, I’d like an update on the numbers for the first quarter regarding how SK Planet performed. And thirdly, I’d like to ask about the 20% monthly discount plans and ARPU. I’d like to know the accumulative number of subscribers subscribing to the monthly discount plans up-to-date, as well as what percentage of your new adds is opting for these monthly discount plans. And lastly, I’d like to know how these numbers are impacting your ARPU.

Keun-Joo Hwang

[Foreign Language]

Thank you for your questions. I’d like to first address your question regarding the monthly discount plans, and then move on to the performance of SK Planet.

[Foreign Language]

First of all, during the first quarter, many high-end devices were launched, so about 30% of our new subscribers and handset upgrading subscribers opted for the monthly discount plans.

[Foreign Language]

And as a result, the number of, the percentage of those opting for the monthly discount plans did increase slightly. However, beginning from the second quarter, we believe that it will be stabilized at about 20%.

[Foreign Language]

And speaking of the cumulative numbers, about 10% of our entire subscriber base has opted for the monthly discount plans.

[Foreign Language]

And as you can imagine, these growing subscribers opting for the discount plans does have a negative impact on the ARPU numbers. However, when you look at the data usage growth for subscribers on SK Telecom only, the per user data volume has increased by 30%. So more and more subscribers are choosing to subscribe to a higher price plan. I believe these are some of the positive factors that can help offset the negative ARPU impact.

[Foreign Language]

Let me now address your question regarding the commerce business of SK Planet.

[Foreign Language]

By early April this year, the restructuring of SK Planet and the commerce business had been completed.

[Foreign Language]

Through, by doing so, SK Planet will be able to focus 100% of their capabilities in the commerce business division. And anything else that they used to do aside from the commerce business will be resources that SK Telecom will be able to utilize in creating our platform business. Such examples include the SK techx, as well as the OneStore, and our LBS business, namely T-map. And all of these will be applied to creating a wider lifestyle enhancement platform of SK Telecom.

[Foreign Language]

And as of early February, SK Planet had internalized completely 11th Street as well as OCB and Syrup.

[Foreign Language]

As for 11th Street going forward, by focusing their capabilities in strengthening their mobile presence they will become a leader in the commerce area.

[Foreign Language]

And as for the O2O area, based on our unique competitive edge including OCB and Syrup, and also through the synergy created with 11th Street, we will make sure to have a strong upper hand compared to our competitors.

[Foreign Language]

And as for some of the details regarding SK Planet’s performance during the first quarter regarding the overall transaction volume as well as the UV, I will hand the mike over to our CFO from SK Planet.

Pak Kan Shu

[Foreign Language]

Hello, this is Pak Kan Shu, the CFO of SK Planet. I’d like to briefly go over some of the details of the performance of SK Planet during the first quarter. I first want to remind you that because, due to the characteristics of our business, it depends highly, it has a lot to do with the seasonality of each quarter, so I think it would be more adequate to look at it from a year-on-year perspective.

[Foreign Language]

As for the revenue, as all of you may be aware, many business divisions that SK Planet used to have either was spun off to become separate entities, or have been internalized within SK Telecom. So obviously there was a revenue drop due to that. However, the overall transaction volume increased greatly on 11th Street. So our entire revenue grew by KRW5 billion to achieve KRW350 billion.

[Foreign Language]

And as for our income before taxes, it recorded KRW330 billion, and this mainly was due to our divestiture gains of LOEN Entertainment.

[Foreign Language]

And if I may add onto that, I know that many in the market want to know what the actual losses we have due to aggressive marketing amounted to. However, I would like to remind you that it is difficult for us to give you such details due to competition related issues. However, what I can say is that as of now, within such a fierce, competitive market of the commerce industry, our goal is to become the unrivalled leader in this market, and therefore we are allocating resources accordingly. And in the short-term, although operating losses are inevitable, I believe that is within two to three years, we will be able to turn around the numbers and hit the EP.

[Foreign Language]

Let me briefly explain to you regarding the transaction volume.

[Foreign Language]

During the first quarter our transaction volume increased by over KRW500 billion year-on-year, and 80% of that increase was responsible, had to do with our mobile presence. Out of the entire transaction volume of the numbers, 50% is accountable for the mobile service.

Operator

[Foreign Language]

The next question will be presented by Jae-Min Ahn from NH Investments and Securities. And follow-up question will be presented by Hang Wu Lee from USS Securities. Mr. Ahn, please go ahead, sir.

Jae-Min Ahn

[Foreign Language]

Thank you for the opportunity. I have two questions. The first has to do with your dividend. We know that last year you increased your dividend. So I’d like to know what your outlook is beginning from next year. And the second question has to do with 5G network. I’d like to know about when you plan to commercialize 5G as well as the related CapEx amount, and how you believe the introduction of 5G network may change your business?

Keun-Joo Hwang

[Foreign Language]

Let me first answer your question regarding the dividend policy.

[Foreign Language]

First of all, our dividend policy will be decided taking into consideration the overall market environment as well as the company’s financial structure.

[Foreign Language]

However, I want to remind you that as we transform ourselves into a next-generation platform company and try to lay the foundation for new growth, there will be a certain level of investment inevitable in that process. We also have to think about the spectrum auction, as well as the CJ acquisition deal. So we believe that investments regarding these matters are inevitable.

[Foreign Language]

And as a result, we believe that within the time being, within the short term, there is not a high possibility of another dividend increase.

[Foreign Language]

However, management at SK Telecom will do their best to maintain the current level of dividend. And in the future, when we have secured the necessary growth and profitability, then we will be sure to review our payout policy again.

[Foreign Language]

Let me now address your question regarding 5G.

[Foreign Language]

Currently our goals are to conclude standardization by 2018 and commercialization by 2020.

[Foreign Language]

And in order to do so by 2017 we wish to lay out the testbed in certain areas for the 5G network, and to finish the nationwide roll-out by 2020.

[Foreign Language]

However, at this time we believe that it is quite too early to discuss the more detailed investment amount as well as timing or different strategies regarding 5G.

[Foreign Language]

However, I think that we have about two major upper hands or competitive edge compared to our competitors.

[Foreign Language]

Currently, we are the chair company of the domestic 5G forum, and we’ve also established the 5G Tech Lab under the supervision of our NIC Lab. And we have been pursuing actively standardization efforts with various equipment companies, including Ericsson and Nokia.

[Foreign Language]

And on top of that, we believe that when it comes to tech leadership, we have the unrivalled upper hand compared to our competitors, as we have various partnerships with Deutsche Telekom and other European or global M&O players and companies like Intel, as well.

[Foreign Language]

And we will continue to communicate with the market regarding the details on the investment size or the CapEx plans regarding the 5G network.

[Foreign Language]

Thank you.

Operator

[Foreign Language]

The next question will be presented by Hang Wu Lee from USS Securities. And the following question will be presented by Jee-Hyun Moon from Mirae Asset Daewoo Securities. Mr. Lee, please go ahead, sir.

Hang Wu Lee

[Foreign Language]

Thank you. I have two questions regarding your growth business in the future. First of all, recently KEPCO has announced their grand plans and visions regarding investing in the new energy industry. And I believe that in that aspect partnering with telco companies is inevitable. I know that you already have partnerships with KEPCO in your smart city technology and efforts. So I’d like to know about SK Telecom strategies in that area. And secondly, regarding the IoT, I’d like to hear about SK Telecom’s unique strategies in comparison to your competitors, and especially I am curious about the era of self-driving cars. I’d like to know about whether you have any plans to establish the necessary infrastructure regarding that area.

Keun-Joo Hwang

[Foreign Language]

Thank you for your insightful questions.

[Foreign Language]

As you mentioned, SK Telecom and KEPCO has a partnership that lasts until 2020 to invest KRW500 billion in various technologies, including smart city and, regarding smart city and the new energy sector.

[Foreign Language]

And in March this year, the two companies both participated in the Electricity Expo held in Jeju Island, and in April, as was mentioned in the opening speech, we have both, we both were there at the opening ceremony for the Collaboration Center in Naju. I believe that this shows our commitment to our partnership, and we have also formed the necessary organizations for that.

[Foreign Language]

And as for the business models, we are looking at energy related new industries as well as developing new technology related products and services, and also creating infrastructure for electric cars and fourth, creating smart city related businesses with various local governments.

[Foreign Language]

And on a more detailed note, we have three major areas in terms of these business models. The first has to do with the driving infrastructure for electric cars, the second has to do with the charging infrastructure, and the third has to do with smart grid based smart city capability.

[Foreign Language]

And as was covered in the media recently, we have laid out the IoT test bed in Daegu, and we have an unmanned vehicle business as well as developing various new energy industries and our partnership states that we will make the details of these business more concrete as we go on and we have the very, determination to do so.

[Foreign Language]

And to answer your question about SK Telecom’s overall IoT strategy – I will hand the mike over to the executive in charge of IoT solution strategy.

Gwang-Seok Shin

[Foreign Language]

Hello, this is Shin Gwang-Seok of the IoT Solution Division. We believe we are already a member of the LoRa Alliance which we believe is the crucial organization to create the necessary business ecosystem. And we are planning to commercialize by the second half of 2016, and we are focusing on rolling out the nationwide network as we speak. Regarding these matters, we will be investing about KRW100 billion over the next two years, and this amount has been reflected in the CapEx strategy.

[Foreign Language]

Through the IoT exclusive network, we will create test services within the year for IoT services and a part of that will actually see commercialization from LTM to LoRa devices to lettering services and tracking services, all of these various services will go through the testing phase during the first half of this year.

[Foreign Language]

To go into a little bit more detail, coming up with measuring devices for this in connection with the smart homes or our location tracking services and big data analysis based IoT services are some of the examples.

[Foreign Language]

That answers the question, thank you very much.

Operator

[Foreign Language]

The next question will be presented by Jee-Hyun Moon from Mirae Asset Daewoo Securities. And the follow-up question will be presented by In-yong Jeong from Goldman Sachs. Ms. Moon, please go ahead, ma’am.

Jee-Hyun Moon

[Foreign Language]

I have the following two questions. The first has to do with your cost execution of this year, when we look at it on a consolidated basis, your cost increased a little bit and on telecoms, separate, it either decreased or was quite controlled. Can we see this trend to continue? And I ask this because I believe that for 11 Street, their direct purchasing begins from the second quarter, so obviously the cost is going to increase regarding that. And also I believe SK Telecom will begin to execute the CapEx amount beginning in the second quarter. So I’d like to hear about your perspective, taking these matters into account. And my second question has to do with the approval of the merger with CJ HelloVision. It is being talked of as a complete game changer of the industry and we are seeing the procedures being quite a bit delayed. Rather than just a repeated answer that we have heard from you before, I’d like to know about the current stance of SK Telecom and what is happening recently.

Keun-Joo Hwang

[Foreign Language]

Thank you for your questions.

[Foreign Language]

Let me address the first part of your question.

[Foreign Language]

First of all, I’m sure you know that when we look at SKT separately, the domestic market has been more stabilized as it has been focusing on handset upgrades.

[Foreign Language]

Although there can be some heated competition on a local scale, I believe that overall marketing will be able to remain stable this year as well.

[Foreign Language]

So in other words, when you look at just SK Telecom, the marketing cost execution will become more stable and with the growing data usage as well as launching of various segment products and services, we will see a growth in revenue.

[Foreign Language]

As for the commerce business ran by SK Planet, because we will, we have gone through the restructuring process to really focus and concentrate on our necessary businesses, we will go through an active or aggressive marketing effort for the commerce business. And that means that certain level of marketing cost increase for the second quarter seems inevitable.

[Foreign Language]

And to, on that note, we believe that there shouldn’t be any problems in terms of funding because their existing cash as well as the divestiture gains of LOEN Entertainment.

[Foreign Language]

And when it comes to the direct purchasing that begins in April for 11 Street, although it is true that it will see an increase in revenue cost, but the overall loss in gains will be limited.

[Foreign Language]

And to answer your second question about the CJ HelloVision deal, of course, at SK Telecom, we hope that this will be resolved as soon as possible but as you said, it is being a little bit delayed.

[Foreign Language]

Although as you mentioned, it is difficult for us to discuss some of the details as we are currently undergoing the process, I will have the relevant Executive give you an answer regarding that.

Unidentified Company Representative

[Foreign Language]

This is the Executive in charge of the CR strategy. As you may know, as of December 1 last year, we have submitted all relevant documents regarding the 15 items for approval to the Ministry of Science, ICT and Future Planning, the KCC and the FTC.

[Foreign Language]

As for the overall process, first the FTC’s approval will be there and then it will go on to the Ministry of Science, ICT and Future Planning and then move on to the agreement of KCC and then the Ministry of Science, ICT and Future Planning will make the announcement. And we are currently at the very first stage of the review process.

[Foreign Language]

And what remains now is within the first phase of the approval process is FTC’s submitting of the total report, the final report, as well as the final meeting.

[Foreign Language]

And we believe that through this deal, we will be able to increase room for investment based on economy of scale and cost efficiency, thereby increasing the pay broadcasting market and nurturing its growth. And we believe that it is in fact, in line with the government’s directions and policy directions for the industry.

[Foreign Language]

I believe that when a company like SK Telecom with the necessary financials as well as network infrastructure and subscriber base increases its investments in the media industry, it will ultimately contribute to the overall ecosystem of the media industry. Therefore, we look forward to the government making a reasonable and a logical conclusion taking into consideration all the relevant laws and institutional matters.

[Foreign Language]

Thank you, that answers the question.

Operator

[Foreign Language]

The next question will be presented by In-yong Jeong from Goldman Sachs. And the following question will be presented by Stanley Yang from JP Morgan. Mr. Jeong, please go ahead, sir.

In-yong Jeong

[Foreign Language]

Thank you for the opportunity. I have two questions. The first has to do with 11 Street. We have seen media coverage recently saying that 11 Street will fund over KRW1 trillion through a private equity fund, so I would like to know if that is true. And secondly, regarding the IoT business and second device business that you have mentioned as means to achieve future growth, I would like to know what the management thinks in terms of expected revenue over the next two to three years. And also, especially when it comes to the second device market, I’d like to hear the company’s forecast on the total subscribers and the ARPU numbers on second devices.

[Foreign Language]

Keun-Joo Hwang

[Foreign Language]

Thank you for your questions.

[Foreign Language]

Let me answer your question regarding the funding issue with this, as of the first quarter of 2016, SK Planet currently holds over KRW500 billion in cash, so there should be no problems with liquidity.

[Foreign Language]

Despite that fact, as a means to achieve greater competiveness for the company, we are reviewing various options and external funding is one of the options.

[Foreign Language]

However, as the funding process requires extensive negotiations and also achieving a consensus regarding various shareholders’ needs is important, we believe that not only has the timing, the size and conditions not been decided yet, but it is difficult for us to discuss that at this time.

[Foreign Language]

And you also asked about how much impact or increasing effect the IoT and second device market will have on our numbers.

[Foreign Language]

First regarding the IoT business. Currently, we are undergoing laying out the necessary network for that, and because the discussions over the business strategies is in its very initial stages, I regret to tell you that it’s difficult for us to give you exact numbers at this time.

[Foreign Language]

However, when it comes to our revenue target, we plan to establish the IoT ecosystem by the year 2018 and achieve the revenue of the overall platform business at over KRW450 billion.

[Foreign Language]

And as for the smart home division, we have plans to have at least 5 million connected devices by the year 2018.

[Foreign Language]

And as for second device users, at this time, the total number is 770,000 subscribers.

[Foreign Language]

And although it is difficult to foresee the future because of the rapidly changing customer needs, we have 1.4 million users on second devices as our target by the end of this year.

[Foreign Language]

Because it is only in its initial stage, it is of course, comparing to the M&O service, very small when it comes to the revenue size, but what I can say is that we are seeing positive growth trends.

[Foreign Language]

And as for the ARPU on the second devices, although it is relatively small compared to our M&O accounts, the ARPU number stands at about KRW10,000 per device.

[Foreign Language]

Thank you.

Operator

[Foreign Language]

The next question will be provided by Stanley Yang from JP Morgan. And the following question will be presented by Nam-gon Chu from UMT Securities. Mr. Yang, please go ahead, sir.

Stanley Yang

[Foreign Language]

I have two questions. The first has to do with funding for SK Planet. I would like to know what are some of the main selling points of SK Planet. As you may know, social commerce arena has been recording very large sums of loss and compared to the social commerce companies, what selling point does 11 Street have, or should the investors be looking be looking at the business potential? So I’d like to know your stance on that. And secondly, you have recorded 295,000 in net adds, which is quite a large number. Why did that happen and can we expect the M&O market share to maintain the current levels going forward?

Keun-Joo Hwang

[Foreign Language]

Thank you for your insightful questions.

[Foreign Language]

In fact, the first question is not an easy question to answer.

[Foreign Language]

At SK Telecom, of course, we believe that there are many selling points for SK Planet.

[Foreign Language]

As for the investors that we are, that, in the communication process, I believe that they are attracted to the company for various reasons, so it would be difficult for us to pinpoint exactly what are some of the main selling points. And of course, I think they are taking into consideration the various selling points, there could be a different mixture of them but that is what is happening.

[Foreign Language]

I will hand the mike over to the executive in charge of our lifestyle enhancement platform to answer your questions on net adds as well as the M&O market share trends.

Unidentified Company Representative

[Foreign Language]

During the first quarter, let me explain to you regarding the relatively larger net adds. The overall market focused on handset upgrades and therefore the market was more stabilized, and that led to a relatively low churn rate.

[Foreign Language]

SK Telecom has often shown its strength when it comes to the launching of iconic devices, that is also what happened in this quarter, the Galaxy S7 was launched in March and SK Telecom accounted for 55% of total sales of S7. And that has mainly affected our large net addition.

[Foreign Language]

As you may know, the first quarter is the season of graduation and beginning of the new school year, so a combination of our strong product line up as well as effective targeting of the younger consumers as well as the foreigner market, I believe that all of those contributed to the overall net addition, and also the second device market.

[Foreign Language]

And moving on to the market share outlook.

[Foreign Language]

When you look at the overall market, the overall ambiance of being focused on handset upgrades above anything else has already set in. So as a result, market mobility decreased and we believe that this kind of stable trend can be continued going forward.

[Foreign Language]

And going forward, our company will continue to refrain from self-destructive market share competition and move on to providing more unique and stronger products and services when it comes to our competition rather than subsidy competition.

[Foreign Language]

We believe that our current M&O market share will be maintained in the future based on the stabilizing market and our unique offering of products and services.

Operator

[Foreign Language]

The next question will be provided by Nam-gon Chu from UMT Securities. And the following question will be presented by Neil Anderson from HSBC. Mr. Chu, please go ahead, sir.

Nam-gon Chu

[Foreign Language]

I thank you for the opportunity. First of all, my question has to do with SK Planet. There are many investors in the market who don’t quite understand why SK had to enter the commerce market that is becoming more fierce in terms of competition beginning last year. So I think we all would like to hear an explanation on that. And secondly, as SK Planet is beginning their direct purchasing, I know that you have opened a logistics center. Will there be more centers that we have to expect in the future and how does this all affect your numbers beginning from the second quarter? And do you also have plans to start direct delivery service like [indiscernible].

Keun-Joo Hwang

[Foreign Language]

I will address your first question and I will hand the mike over to our executive from SK Planet to answer the second part of your question.

[Foreign Language]

There are many organizations that expect a 10%, over 10% growth on average per year for the e-commerce market in the future.

[Foreign Language]

I believe all organizations agree that when it comes to mobile commerce, the growth rate will be even higher.

[Foreign Language]

As was explained before, when it comes to the transaction, out of the total number of transactions, it is over, the mobile transactions account for over 50% already for 11 Street.

[Foreign Language]

SK Planet will focus on increasing its mobile competitiveness based on synergies expected to be created with SK Telecom’s mobile capabilities as well as through utilizing its O2O services such as Syrup.

[Foreign Language]

I would like to make it clear that we want to refrain from, and we are refraining from the chicken gains type of competition in the e-commerce market and our goal is to lead the way to achieving the transformation of the e-commerce market into one that focuses more around the mobility, mobile transactions.

[Foreign Language]

Mr. Pak from SK Planet will answer your second question more in detail.

Pak Kan Shu

[Foreign Language]

To answer your question regarding the direct purchasing, this is not actually anything new for SK Planet, we have been doing this but on a smaller scale. However, going forward, in our efforts to strengthen as well as diversify our product portfolio we are increasing the direct purchasing in some strategic products.

[Foreign Language]

That is true, we have opened the China logistics center and this is not, we didn’t have to acquire any further additional real estate or buildings but it is on a lease and we have partners to take care of the delivery services. So I want to tell you that you do not have to worry about any large scale investments or sunken costs happening due to these changes in our business.

[Foreign Language]

Thank you.

Operator

[Foreign Language]

The next question will be provided by Neil Anderson from HSBC. And the following question will be presented by Dan Kong from Deutsche Bank. Mr. Anderson, please go ahead, sir.

Neil Anderson

Hi, good afternoon. My question relates to the indication that mobile service revenue growth might return in the fourth quarter, particularly it’s about the different drivers of this. So firstly, does the company expect that the proportion of customers choosing the tariff discount plan will remain roughly a quarter of handset sales, so the total take up will grow steadily, or does it expect this would slow down through this year?

And secondly, does the guidance for a return to service revenue growth in the fourth quarter assume that the impact of customers trading down to cheaper price plans or joining MVNOs will be reduced? Enabling growth from migration to higher value data plans, to offset the growth in tariff discount plans? Sorry, that’s a rather convoluted question but it’s just mainly about the different drivers of growth in the mobile service business. Thank you.

Keun-Joo Hwang

[Foreign Language]

As I mentioned before, during the first quarter we launched many high end devices.

[Foreign Language]

And when we look at past trends, when we sell high end devices they tend to opt more for, relatively more for these monthly discount plans and that number was slightly below 30%.

[Foreign Language]

However, beginning from the second quarter, rather than high end devices launching, we are looking forward to more lower end devices as well as used lower end devices being offered in the market. So we believe that compared to the first quarter, the number of subscribers opting for the monthly discount plans will decrease to about 20% levels.

[Foreign Language]

And in terms of MVNO subscriber increase, what happened was a lot of accounts opened through the post office increased dramatically during the month of January but immediately after the month of January, it fell down to previous levels.

[Foreign Language]

We told you that we expect the numbers to turn around by the fourth quarter this year and this is our target as well.

[Foreign Language]

As was explained during the beginning of the conference, with the growing per user data usage, we will make sure to accommodate that through higher ARPU price plans.

[Foreign Language]

We are currently preparing various price plans that befit the changing paradigm, including some of the more media focused plans and an example of that would be the band data take up plan launched in February, so we are putting in these efforts.

[Foreign Language]

So in a nutshell, we believe that a downward stabilizing trend of subscribers opting for the monthly discount plans as well as the absence of a temporary peak in subscriber adds on the MVNOs. And thirdly, by our efforts to provide higher ARPU price plans in connection with our unique products and services will all be the factors on which we base our assumption, our prediction that the numbers will be able to turn around during the fourth quarter.

[Foreign Language]

Thank you.

Operator

[Foreign Language]

The last question will be presented by Dan Kong from Deutsche Bank. Mr. Kong, please go ahead, sir.

Dan Kong

[Foreign Language]

Thank you for giving me the opportunity to ask the last question. My first question has to do with the dividend. Regarding your divestiture gains on LOEN Entertainment, is there a possibility that this could be paid out as interim dividend? I ask this because you did say that we do not have to anticipate a large scale investment by SK Planet, so I believe there are some people that look forward to that.

And my second question has to do with the regulatory environment. I read [indiscernible] today regarding some possibilities of cancelling your plans for CJ HelloVision, so I’d like to know what sort of changes there were regarding the regulatory environment? I would especially like to ask if you have sensed any changes in the environment after the general election.

Unidentified Company Representative

Let me answer the last question for this conference.

[Foreign Language]

As you know, by divesting our, SK Planet’s shares in LOEN Entertainment, there was a KRW220 billion cash inflow and they have, also now own 2% of Kakao’s stake.

[Foreign Language]

We currently do not have any plans to pay that divestiture gain out as interim dividend but we plan to use it to achieve growth for SK Planet.

[Foreign Language]

And secondly, I did read the article that you mentioned.

[Foreign Language]

To achieve various targets, including the development of the domestic telecommunications industry as well as media and content industries, we at SK Telecom believe that the deal ought to be approved. So at this particular time we are not at all thinking about any possibilities regarding cancelling our move to go through with the deal.

[Foreign Language]

And that concludes my answer. Thank you.

Dan Kong

[Foreign Language]

I did ask in the last part about whether there were any regulatory changes after the general election, so if you could touch upon that, I would appreciate it. Thank you.

Keun-Joo Hwang

[Foreign Language]

I am aware that on the political side we have seen quite a significant change as a result of the general election, but as for the companies and the private sector, I do not think that that has any specific implications.

[Foreign Language]

Thank you.

Keun-Joo Hwang

[Foreign Language]

This concludes the earnings conference call for Q1 2016. We thank you for all of your support. Thank you.

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