SK Telecom (SKM) Q2 2016 Results - Earnings Call Transcript

| About: SK Telecom (SKM)

SK Telecom Co Ltd (ADR) (NYSE:SKM)

Q2 2016 Earnings Conference Call

July 28, 2016 02:00 ET

Executives

Jeong Hwan Choi - IR

Keun-Joo Hwang - CFO & EVP, Strategy & Planning Division

Pak Kan Shu - CFO, SK Planet

Gwang-Seok Shin - IoT Solution Division

Analysts

Chu Nam-gon - UMT Securities

Yang Jongin - Korea Investments & Securities

Ahn Jae-Min - NH Investments & Securities

Josh Bae - UBS

Dan Kong - Deutsche Bank

Moon Jee-Hyun - Mirae Asset Daewoo Securities

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 Q2 of 2016 and the future management plans and strategic direction by Keun-Joo Hwang, CFO and Executive Vice President of the Strategy and Planning Division, followed by a Q&A session. To help your understanding we have here with us relevant executive.

[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 of Strategy and Planning Division at SK Telecom.

[Foreign Language]

Let me first discuss the consolidated earnings highlights for Q2 2016.

[Foreign Language]

Revenue recorded KRW4 trillion to KRW167.3 billion, due to revenue growth rate of subsidiaries including SK Broadband, it increased by 0.3%, year-on-year and 0.9% quarter-on-quarter.

[Foreign Language]

Operating income recorded KRW407.4 billion, down 1.3% year-on-year and up 1.3% quarter-on-quarter. Although non-consolidated operating income recorded KRW478.2 billion, up 20.7% year-on-year.

[Foreign Language]

First of all, this past May we acquired a total of 60 Megahertz in the 2.6 Gigahertz stand by participating in the spectrum auction. Through a well-planned bidding strategy based on our past successes, we won the bid at a lower costs compared to previous auctions. Considering the investment for the newly acquired spectrum, we expect this year's CapEx to be approximately KRW2.1 trillion, slightly exceeding the guidance provided early this year.

[Foreign Language]

The M&L business maintained a stabilizing trend in the second quarter, despite the continued launchings of iconic devices, the market size remained at similar level to the previous quarter at 790,000 subscribers per month and there were no signs of excessive competition triggered by M&P. Handset upgrades continue to represent more than half of the market and the portion of high ARPU customers is continuing to rise through our efforts to grow the top line even in a stable market environment.

[Foreign Language]

SK Telecom is also continuing to lead the second device market, recognized as a successful model of new market development. Now over 890,000 second device users are enjoying various services such as the T Outdoor and the Kids Phone service, which was recently rebranded as Ku Kids. Reaching beyond subscriber additions, we expect the service to grow into a platform that is extended to related services including field trip programs and games.

[Foreign Language]

Our efforts to achieve tangible results in the platform business, our new growth engine, also continue. As partnerships grow in the Smart Home arena, we are strengthening our business momentum through projects that include providing built-in Smart Home solutions in Dongtan New Town through joint efforts with major players in the industry such as Hyundai Engineering and Construction. Going beyond simple device control, we will upgrade Smart Home functions to provide customized service that cater to the different lifestyles of residence.

[Foreign Language]

In early July we became the first company in the world to commercialize a hybrid network dedicated exclusively to IoT. Remote reading of gas and electricity meters, lighting management and emergency notification services for schools and manhole control are areas that will be commercialized first, and we plan to reach 4 million IoT accounts by the end of 2017. Furthermore, we plan to induce a boom in new IoT businesses through efforts such as offering partner programs and distributing 100,000 free LPWA exclusive modules thereby reorganizing the overall environment for partner companies to propose and commercialize ideas more easily.

[Foreign Language]

SK Broadband's IPTV business, the heart of our media platform strategy has enhanced its fundamental competitiveness and is producing stronger results. During the first half of this year, it acquired 280,000 new subscribers in net terms, the highest in the market. The mobile media service, Oksusu, is seeing more unique visitors and longer usage hours thereby contributing to the revenue growth. Through stronger content and mobile competitiveness the company will continue to further expand the foundation for business as a media platform company.

[Foreign Language]

With T-Map now offered free to all users since July 19, new profit models will be discovered through location based Big Data with a larger user base. It has already branched out into services such as T-Map Taxi and T-Map Public Transportation as well as car insurance premium discount services based on driving patterns. Going forward, we plan to focus on finding new business models in the connected car business and other similar areas through partnerships with auto companies.

[Foreign Language]

Along with T-Map, our decision on the complete openness of services including T-Phone, Oksusu, the mobile media service launched early this year and car products which will be newly organized conveys SK Telecoms determination to transform into a platform company. Rather than resting on achieving the short-term goal of acquiring users, we will focus on fostering each service so that they grow into core assets of our lifestyle enhancement platform that meets the different needs and various lifestyles of users.

[Foreign Language]

So we move on SK Planets commerce business. 11th Street's total unique visitors of the application and the website is the highest in the market. With the transaction volume also on the rise, we believe that 11th Street will continue to fully demonstrate its capabilities including its mobile strength.

[Foreign Language]

As per SK Planet, while we expect a certain level of cost to be inevitable in reaching the management plan, it will continue to -- it will contribute to the consolidated profit in the future through continued efforts to strengthen the competitiveness and manage costs efficiently.

[Foreign Language]

Lastly, regarding shareholder return, the interim dividend for 2016 was decided at KRW1,001 at today's meeting of the Board of Directors, the same amount as the previous year.

[Foreign Language]

We truly appreciate the investors and allies for your support, and the Company will do its utmost to continue to grow. Thank you.

[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 Mr. Chu Nam-gon from UMT Securities. The next question will be given by Mr. Yang Jongin from Korea Investments and Securities. Mr. Chu Nam-gon, please go ahead sir.

Chu Nam-gon

[Foreign Language]

Thank you for the opportunity. I have the following two questions. The first has to do with the recently rejected CJ HelloVision M&A deal. I think that the market had expected this to be a very critical deal for the current CEO, so I'd like to hear about what the company thinks of the current status. And also if you have contingency strategies for growth, it could be about the media business or it could be a bigger picture. My second question has to do with the commerce business area. Many investors today are interested in external funding or external investment plans for this particular business area, so if you could give us an update on that issue, please.

Keun-Joo Hwang

[Foreign Language]

Thank you, for your question. Let me address your question on the CJ deal first.

[Foreign Language]

Today the Ministry of Science, ICP and Future Planning made it public that the overall review process regarding this particularly M&A deal is now closed.

[Foreign Language]

And until now, SK Telecom has done everything in its power to emphasize the legitimacy of the M&A deal and we have continued to perceive and request the approval of this deal from the government side. However, it is quite a surprise and also unfortunate that the SPC finally disapproved the deal.

[Foreign Language]

However, we do fully accept the results and we stand by our plans in the future to continue to contribute to the growth and development of the domestic media industry.

[Foreign Language]

We also standby our plans to transform into a next-generation platform player that were announced beginning last year.

[Foreign Language]

And we will see to it that we achieved the strategy to become a platform player that encompasses various platforms including lifestyle, media, IoT and transportation.

[Foreign Language]

Especially regarding the media business, we will focus on growing the top line of SK Broadband, as well as enhancing the content competitiveness in order to enhance fundamental competitiveness.

[Foreign Language]

During the first half of this year SK Broadband ranked No.1 in terms of net subscriber additions for IPTV and as for the accumulated total number of subscribers it stands at 3.76 million.

[Foreign Language]

And as for the mobile media service, Oksusu, we currently as of the end of June there are 3.1 million unique visitors, as well as -- for the usage time on average per month it's 206 minutes.

[Foreign Language]

Based on such achievements, we will continue to strengthen our media platform and also we will look at various options and review them and be sure to communicate with you when it becomes more concrete.

[Foreign Language]

Let me know address your second question which had to do with the funding for SK Planet.

[Foreign Language]

I know that recently there was some coverage in the media regarding our failure to attract Chinese investment. However, I want to say that this is not true and that current discussions are ongoing.

[Foreign Language]

Again, I reiterate that active discussions are taking place as we speak and as for the actual timeline, the size and the conditions for the investment, we will be sure to communicate back with you when they become fixed.

[Foreign Language]

And because as of the end of June, SK Planet has about KRW401.1 billion versus cashable asset, operations for 11th Street is completely manageable.

[Foreign Language]

And adding to that, I want to tell you that options for SK Telecom investing or funding this is not an option currently under review.

Operator

[Foreign Language]

Next question will be given by Mr. Yang Jongin from Korea Investments and Securities. The following question will be given by Mr. Sing-Joe [ph]. Mr. Yang Jongin.

Yang Jongin

[Foreign Language]

Thank you, I have the following two questions. The first question has to do with the ARPU outlook for the second half of this year despite growing portion of monthly discount price band users and second device account; we are seeing a growth in user's option for a limited data price band, as well as per capita data usage. And so I'd like to hear about the ARPU outlook for the second half. And my second question has to do with SK Planets competitive edge compared to its competitors, is it the ability to gain more resources or would it be their Big Data asset? So I'd like to hear about that.

Keun-Joo Hwang

[Foreign Language]

Let me first address your questions regarding the second half ARPU outlook.

[Foreign Language]

Let me first brief you on the more positive factors.

[Foreign Language]

Currently, we exceeded the 10 million number for users option, users on the band data price plan and as for user data usage of LTE subscribers, it increased dramatically to reach 4.6K [ph] right now.

[Foreign Language]

And another positive aspect for ARPU outlook is that subscribers subscribed two price bands above the 59 data plan are continuing to grow.

[Foreign Language]

However, as has been discussed quite number of times before with the growing number of second device accounts, as well as a larger discount provided for the monthly discount price band, as well as the growing number of IoT accounts, there are negative factors that will impact the ARPU.

[Foreign Language]

Currently, when you compare the average ARPU of 36,000, the ARPU of second devices are at around 9,500 which is very small. So although growing second devices, few indeed contribute to their revenue, it does have a negative impact on the ARPU itself.

[Foreign Language]

And according to the growing IoT business area which is of course on of the core business areas that we plan to focus on, it indeed has a rather negative impact on the ARPU. However, because of that SK Telecom believes that the ARPU number or the ARPU growth is not indicator -- an exact indicator, therefore we want to focus more on the growth of the total revenue and the profitability improvement, and these two are the areas that we will focus more on.

[Foreign Language]

And secondly, answering your question about SK Planets competitive edge compared to its competitors.

[Foreign Language]

First, we will focus on increasing our competitiveness in the mobile arena.

[Foreign Language]

The strongest driver of the e-commerce market as of now is the mobile commerce area.

[Foreign Language]

Currently 11th Street is an undisputed leader in terms of mobile and it also will continue to increase that power going forward.

[Foreign Language]

So when we integrate the powers of mobile power that 11th Street has with SK Telecom's core competitiveness, we believe that we can continue to strengthen the mobile presence of 11th Street.

[Foreign Language]

We will also increase and maximize the synergy by connecting the service to various O2O businesses that SK Planet has.

[Foreign Language]

We have very strong O2O services such as OK, Cashback, Gift-continue [ph] which can be utilized and also within SK Planet over 100 people are dedicated in organizations for the Big Data. So this is another asset that can well be utilized.

[Foreign Language]

And lastly, we will fully utilize the membership system that we have.

[Foreign Language]

We have various assets that we can use in terms of membership programs including the new membership program that began in July, as well as our various coupon related policy which will all contribute to greater loyalty and retention of our customers.

[Foreign Language]

We will continue to do our utmost to make sure that 11th Street becomes an undisputed leader in the market through transaction volume growth as well as confirmed purchases growth focusing on its mobile presence.

[Foreign Language]

That concludes my answer to your question.

Operator

[Foreign Language]

Next question will be presented by Mr. Sing-Joe [ph]. The following question will be provided by Mr. Ahn Jae-Min from NH Investments and Securities. Mr. Sing-Joe, please go ahead sir.

Unidentified Analyst

[Foreign Language]

I have two questions. The first has to do with T-Map. I'd like to hear more about that although it was briefly mentioned to be four. You opened the service free-of-charge to everyone beginning on July 19, and by doing so you acquired 430,000 new subscribers within the week. I believe that this is part of your efforts to grow into a platform player, so I'd like to hear about the bigger strategy including that. And my second question has to do with the low end phone. Recently the Ministry of Science, ICT and Future Planning announced a plan for policies on telecom market competition. So I'd like to hear your thoughts on how it could impact SK Telecom.

Keun-Joo Hwang

[Foreign Language]

Thank you. Let me first address your question regarding T-Map and the overall strategy regarding our platform.

[Foreign Language]

As was mentioned during my opening speech, when it comes to platform services including T-Map, T-Phone and T-Cloud among others, SK Telecom will completely open our services.

[Foreign Language]

Going forward, we will promote and open them as completely open business open to all of our users when it comes to SK Telecom's platform business. However, we will put more thought into how we can better benefit SK Telecom subscribers.

[Foreign Language]

And in this context, we have decided to completely open the T-Map service free-of-charge to users regardless of their mobile carriers beginning from the 19th of this month, and unfortunately we were able to acquire around 500,000 users coming in from different carriers.

[Foreign Language]

Regarding our overall strategies, after the opening of the T-Map service, I will hand the mike over to the relevant executive to answer that.

Unidentified Company Representative

[Foreign Language]

Hello, I'm the Head of the T-Map business division.

[Foreign Language]

I think I could explain to you the platformization so to speak of T-Map in two branches.

[Foreign Language]

The first is to make sure that a large base of subscribers or users use it daily and use it often. Those are the basics of a platform business.

[Foreign Language]

In order to have a large user base use this service daily, it is most important for a navigation system to provide transportation, information more fastly and very accurately. So SK -- we have continued to invest in making sure to do so. And going forward based on large scale of information collected through the platform business, we will continue our efforts to invest in enhancing the core competitiveness, the quality of our service.

[Foreign Language]

And the second strategy has to do with the word expandability because I believe this is a very important key word when it comes to platform business.

[Foreign Language]

And not only just focusing on the critical factors in the T-Map in terms of its service and providing the data, we also plan to strengthen partnerships with third-party companies in the fields of auto companies, driving, transportation, insurance, car management, and parking.

[Foreign Language]

We will do our best to make sure that return T-Map into an effective platform as soon as possible and we will do our best in doing so. Thank you.

Keun-Joo Hwang

[Foreign Language]

Let me now address your second question regarding the plan for policies on Telecom market competition which was announced by the Ministry of Science, ICT and Future Planning on the 25th.

[Foreign Language]

The policy includes various details including lowering the wholesale price and also extending the usage of the spectrum fees among others.

[Foreign Language]

And as we understand it, we believe that at the core of the policy rather than focusing on creating an environment for a fourth player to enter the market, we believe that it is focusing more on supporting the low end phones.

[Foreign Language]

Going forward, we will meet the policies of course and make sure that we create a mutually beneficial relationship with the MVNOs.

[Foreign Language]

And as for how such policies will impact SK Telecom, I will have the relevant executive answer that for you.

Unidentified Company Representative

[Foreign Language]

Hello, I'm Pung Ko [ph], Head of the Life Value Strategy Division.

[Foreign Language]

I think through the recent line of policies there is definitely a positive change in the low end phone market.

[Foreign Language]

However, I think it would be difficult to tell you exactly how it will be impacting the market.

[Foreign Language]

And I think that the impact it will have one the market will depend on how the low end phone companies utilize the recent policies to enhance their core competitiveness.

[Foreign Language]

Going forward, again, as was mentioned before; SK Telecom will make sure to maintain a mutually beneficial relationship with the MVNOs and as for our own M&L business through our offering of very competitive products and services, we will do our best to maintain the current place in our market.

Keun-Joo Hwang

[Foreign Language]

We will hear from the next person.

Operator

[Foreign Language]

Next question will be given by Mr. Ahn Jae-Min from NH Investments and Securities. And the following question will be presented by Mr. Josh Bae from UBS. Mr. Ahn Jae-Min, please go ahead sir.

Ahn Jae-Min

[Foreign Language]

Thank you for the opportunity, I have two questions. My questions have to do first, with the marketing cost and your earnings. We are seeing a more stable marketing cost expenditure beginning from after the second quarter last year. I'd like to hear the outlook for the second half of this year. And along with the please I'd like to hear about your earnings outlook as well. My second question is, there was a lot of talk regarding the IoT business; so I'd like to hear more about that in terms of your strategic direction going forward.

Keun-Joo Hwang

[Foreign Language]

Thank you for your questions.

[Foreign Language]

Let me first address your question regarding the market costs and earnings expected for the second half of the year.

[Foreign Language]

Last year, during the second quarter, our marketing costs was about KRW750.1 billion.

[Foreign Language]

And during the first quarter and the second quarter of this year, that number came down to a stable KRW720.1 billion.

[Foreign Language]

And these transact continued from the second quarter of last year and with a more stable market and less market mobility, we believe that this trend will continue going forward.

[Foreign Language]

We are very active in leading the overall market stabilization efforts.

[Foreign Language]

Also the LTE migration is slowing and there are less needs for device upgrades and there are more users opting for mid to low and devices. So I believe that as of now we do not see any critical factors for the market situation to change.

[Foreign Language]

Of course in the second half we do expect our launchings of various iconic devices including the Note 7, therefore there could be a temporary fluctuation in the market. However, overall we believe that reasonable competition will continue and the market will be stable. Therefore we do not see any critical changes to the current marketing cost levels which should be positive factor for our earnings.

[Foreign Language]

And next let me briefly answer your question regarding the IoT business strategy direction.

[Foreign Language]

Gwang-Seok Shin

[Foreign Language]

Hello, I'm the Head of the IoT Solution Division.

[Foreign Language]

First of all, we expect the domestic IoT market size to grow upto KRW14.1 trillion by the year 2020.

[Foreign Language]

We will be focusing on the following four areas; the first is energy, the second is public services, third is manufacturing, and fourth is car.

[Foreign Language]

And secondly, we also wish to lead the market by offering various products and services in the smart home area in partnership with various companies including those in the construction industry.

[Foreign Language]

And by through our hybrid network we will be providing various networks and expanding the service into B2B, B2C and B2B2C. And also by sharing our revenue, we will focus on making a truly open platform.

[Foreign Language]

And if I may add on to that, the overall IoT strategy direction for SK Telecom would be rather than focusing on securing short-term revenue, we want to utilize the IoT business so that we can first of all secure greater data, and secondly develop and attempt various business models related to the IoT business and thirdly create an ecosystem in partnership with various third-parties which will enable us to achieve the first and second gold. And by doing so we will focus on creating actual business models and monetization after that.

[Foreign Language]

We will now move on to the next question.

Operator

Next question will be presented by Mr. Josh Bae from UBS and the following question by Mr. Sam-Min [ph] from Morgan Stanley. Mr. Josh Bae, Please go ahead sir.

Josh Bae

Thank you for the quarter. I have two questions. First is on the earnings outlook for the second half and for next year. There is some concern about the additional spectrum amortization that will kick in from late this year. And I think the depreciation could increase in the second half as well. If you could share with us what are the positive factors that could help offset these cost increases? And what's the management's view on when we could see a rebound in the earnings. Second question is regarding SK Planet, I think SK Planet getting external funding could help give us some comfort that there wouldn't be any further capital injection from SKT.

If we look beyond this, could you share with us your view on how SK Planet will eventually benefit SKT and the SKT shareholders? Should we wait for the time when SK Planet can contribute meaningfully to SKT's earnings or could SKT crystallize the value in SK Planet through the sale of its existing shares? If you could give us a roadmap on how you expect SK Planet to benefit SKT that would be very helpful.

[Foreign Language]

Keun-Joo Hwang

[Foreign Language]

Thank you for your questions. Let me address your first question regarding the depreciation cost related to the newly acquired spectrum.

[Foreign Language]

Although we are content with the results of the spectrum auction, it is true that inevitable increase in network CapEx and depreciation costs will incur.

[Foreign Language]

However, regarding our investments needed in the newly acquired spectrum, we have various technology development through our past experiences and through cost cutting efforts. We will manage the CapEx so that it does not exceed too much what we had in plan originally.

[Foreign Language]

And as I have emphasized quite a number of times before with a larger base of high ARPU customers and second device accounts and greater data usage including multi-media and the ARPU growth as a result of that we believe that we will be able to accommodate the investments needed.

[Foreign Language]

And secondly, addressing your question on how SK Planet will contribute to SK Telecom.

[Foreign Language]

SK Planet will focus on the e-commerce business area and e-commerce business area exclusively.

[Foreign Language]

Especially we'll focus on strengthening its mobile competitiveness and it will also be focusing on 11th Street's global market presence.

[Foreign Language]

Already in Turkey 11th Street is number one in terms of transaction volume and it is the second largest player in countries including Indonesia and Malaysia.

[Foreign Language]

The target for 11th Street is to become the number one player in the domestic market in terms of volume by the end of this year. And as a result in order to meet that target, a certain level of cost expenditure will be inevitable. However, once the market position is secured through various things that will happen as a result of that which includes a lower transaction commission, we believe that the business will break even within about two to three years.

[Foreign Language]

Of course, this could depend on various factors including the funding plans and 11th Street's market position in the future. However, I want to emphasize that all options including an IPO or anything else will put our maximizing shareholder value first. Again, I want to say that that will be the number one priority when it comes to us reviewing various options.

[Foreign Language]

Operator

[Foreign Language]

Next question will be given by Mr. Sam-Min [ph] from Morgan Stanley. Then the following question will be presented by Mr. Dan Kong from Deutsche Bank. Mr. Sam Min, please go ahead sir.

Unidentified Analyst

Hi, I have three questions. My first question is on dividends, and given that now SKT will not be merging with CJ HelloVision or acquiring CJ HelloVision; would management and Board of Directors consider increasing dividends this year considering that there is ample cash in the balance sheet? And then my second question is on your cash management for this year. And obviously, there is KRW2 trillion in cash and cash equivalents as of the end of second quarter. You repeat that as KRW1 trillion per quarter. And capital expenditure should be quite low at KRW2 trillion levels. So what do you plan on doing with that cash? If you could kind of expand on that. And then my third question is on 11th Street and SK Planet, can you give us more color on the profit or loss outlook for 11th Street as well as SK Planet for this year, as well as maybe next year as well. That's it, thank you.

[Foreign Language]

Keun-Joo Hwang

[Foreign Language]

I will be answering the first and second question, and the third question will be answered by executive from SK Planet.

[Foreign Language]

First of all, regarding possibilities of increasing the dividend as a result of us not going through with the M&A deal with CJ HelloVision, we believe that these two are separate issues.

[Foreign Language]

Of course, because we have to take into consideration various factors when it comes to increasing the dividend that it would be difficult for me to give you a definite answer at this particular time. However, we do need -- we are planning to transform into a next-generation platform company, and accordingly investment will be inevitable. So considering all of these factors, I think that it is true that an increase of dividend within the short-term would be difficult.

[Foreign Language]

However, the management will do everything that it can to maintain the current level of the dividend at least, and when our growth and profitability become more improved and that becomes more concrete, we will review this again.

[Foreign Language]

And secondly, I will answer your question regarding the cash management for this year.

[Foreign Language]

In the beginning of the year, we began from KRW600.001 billion and now our cash flow assets stand at KRW1.031 trillion.

[Foreign Language]

Indeed, if the CJ deal had went through, we did have plans to pay for that with this cash, as well as some limited borrowings. However, as we all know there is no longer a need for that.

[Foreign Language]

Now when we look at the recent results of the spectrum auction, we have to pay the KRW1.414 trillion the newly allocated spectrum. There is also KRW570.1 billion due to the reallocation of the 2.1 Gigahertz band, and so considering the fact that we have to pay this by the end of this year, pay the 25% of that by the end of this year; that amounts to about KRW470.1 billion, and I think that that is in the similar range of what we had originally planned to be using when and if the CJ deal had gone through.

[Foreign Language]

In a nutshell, within the $1 trillion of cash that we currently have, we will be paying the fee for the allocation of the newly acquired spectrum within the second half and we will efficiently manage what is left from that.

[Foreign Language]

And to answer your third question regarding the more detailed outlook in terms of SK Planets earnings. I will hand the mike over the our executive from SK Planet.

Pak Kan Shu

So I'm the CFO of the SK Planet.

[Foreign Language]

Let me briefly give you the overall numbers of 11th Street and SK Planet.

[Foreign Language]

First, when you look at the operating profit of the SK Planet for 2Q. It may seem that the -- it looks quite back compared to the previous quarter. However, when we consider the illusion effect of the business split -- the illusion effect of the deficit quarter-on-quarter was around EUR 7.01 billion which is not that bad when comparing to market expectations.

[Foreign Language]

Although I know that it will be very helpful, and we also hope that we wish that we could give you more detailed numbers regarding the marketing cost. But as you know, it is directly related to the actual marketing cost expenditure. So I cannot help but ask for your understanding. And in that fact I cannot give you detailed outlook.

[Foreign Language]

However, what I can tell you is that again, as was mentioned by CFO of SK Telecom, we do target to become the number one company within a short-term and obviously, we believe that certain level of loss is inevitable in the process. However, with greater transaction value, we are seeking greater revenue streams including commissions on sales and advertisements and we're also putting in very cost cutting and to make our cost expenditure more efficient including marketing costs, expanded differently per product category, as well as a differentiated offering of different coupons according to the membership programs that we have and these efforts will lead to a stronger loyalty and retention from the customer side, and overall it will contribute to a strong business. Again, we want to tell you that we will do everything that we can in order to minimize the losses in the short-term.

Operator

[Foreign Language]

Next question will be presented by Mr. Dan Kong from Deutsche Bank. And the following question will be presented by Ms. Moon Jee-Hyun from Mirae Asset Daewoo. Mr. Dan Kong, please go ahead sir.

Dan Kong

[Foreign Language]

I know that a lot has been discussed regarding SK Planet but I have just two more questions on that. First, I want to ask what are some of the indicators that you are looking at specifically in order for you to say that SK Planet has finally succeeded. And I ask this because when we look at various data, including the data put forth by the FTC you have already become the number one player in the industry in terms of transaction volume in 2015 and you were also the number one company in terms of monthly users. So I want to ask just how much or how big of a success are you thinking about?

And my second question is, I believe that there is a lot of interest in SK Telecom in the market because of SK Planet. However, and speaking from an analyst, it is very difficult for us to project an adequate valuation for SK Planet because of lack of data. So I want to ask you how many plans to maybe help us do that? So if you can provide us some data in order for the market to accurately evaluate the value of SK planet.

Keun-Joo Hwang

[Foreign Language]

Thank you for your two questions. I will make my answers to think.

[Foreign Language]

In fact, according to what specific data you are looking at the rankings of companies within the e-commerce industry is actually quite fluctuating.

[Foreign Language]

I think that what we can say is what SK Planet is aiming to become is an undisputed leader in the market, in other words, to become a leader, no matter what data you look at.

[Foreign Language]

And what I explain is the -- our short-term target is to become the number one e-commerce player in the domestic market, and when it comes to the mid-to-longer term target, so we do not know how long this will take but our ultimate goal is to make 11th Street one of the top three retailers in Korea.

[Foreign Language]

And as for relevance indicators, there are two things. The first is the size and the percentage of confirmed failed volume, and the second would be under our current trends, how well we do in the mobile side.

[Foreign Language]

And secondly, I'd like to address your question on how we could further support you or the market to adequately evaluate SK Planet.

[Foreign Language]

First of all, I believe that full credit in focusing on how did the value divide the markets. Focusing on the business itself is what should be prioritized.

[Foreign Language]

It is not to say that we do not think about those issues as how better we should be communicating with the market and with what content we should be communicating with the market. However there are some difficulties, realistic difficulties entailed in that process.

[Foreign Language]

And so once we reach certain goals and in due time we will do everything that we can to effectively communicate various numbers and data with the market.

[Foreign Language]

Thank you, I hope that answered your question. And we will hear from the next person.

Operator

[Foreign Language]

Last question will be presented by Ms. Moon Jee-Hyun from Mirae Asset Daewoo. Please go ahead.

Jee-Hyun Moon

[Foreign Language]

Thank you for the last opportunity. I have two questions, the first has to do with users opting for the monthly discount price plans. We are seeing decrease in revenue and marketing costs year-on-year which I believe means that there are more users opting for the monthly discount plan, so I'd like to know -- hear about your outlook regarding that issue. And my second question has to do with investing in spectrum. Various organizations and companies including Telecom [ph] are taking about early adoption of the fifth generation network. I'd like to hear what SK Telecom thinks on that?

Keun-Joo Hwang

[Foreign Language]

Thank you for your questions. I will first address your question regarding the monthly discount plan.

[Foreign Language]

First of all, we do -- we are putting our heads together in terms of what we should do regarding this particular issue.

[Foreign Language]

At the time of the adoption of this new plan which is the second quarter of 2016, about only 10% of new handset upgrades opted for the monthly discounts. However, after a year has passed, as for SK Telecom now 35% of new handset upgrades are opting for the monthly discount plans.

[Foreign Language]

And when you look at the total subscriber base, this number represents 14%.

[Foreign Language]

And because we have in schedule launches of iconic devices during the second half, we do not think that the percentage of subscribers opting for the monthly discounts will decrease greatly.

[Foreign Language]

But although -- more subscribers might opt for the monthly discount plans due to launchings of iconic devices, that also means that they will be opting more for the higher end price plan. So I do not think that this particular phenomenon only has negative impacts for the company.

[Foreign Language]

However, SK Telecom will -- we plan to manage the portion of subscribers on the monthly discount plans to be below the current level.

[Foreign Language]

And as for our thoughts on the adoption of the fifth generation network.

[Foreign Language]

First of all, we expect the standardization process for the technology to be concluded in 2018 and its commercialization by 2020.

[Foreign Language]

By the end of this year we will establish the roll out of the test network in order to actually test the technologies 405J, and we are currently undergoing the technology development process to afford that as we speak. And in July with Eriksson, we have completed the development for the equipment to do that.

[Foreign Language]

I will have the executive from the network strategy to give you a more colorful outlook on what SK Telecom thinks of the adoption of 5G network.

Unidentified Company Representative

[Foreign Language]

Hello, I'm Ji-Sung One [ph], Head of the Network Division.

[Foreign Language]

5G aims a very fast speed of at least 1 Gigabyte per second and I believe that this technology can be applied to various potential businesses, including the unmanned vehicle, artificial intelligence, and sensing technology of space and video.

[Foreign Language]

However, when it comes to the timeline of 5G network rollout, we still standby the plan that it will probably be standardized in 2018 and commercialized in 2020. Last year, we were the first to provide an LTE Service with a speed of 500 MBS and this year we push that up to 1 Giga BPS.

[Foreign Language]

And we also have in preparation -- we have already prepared technologies that will allow for the recently unveiled two-way technology of 60 MBS and this is taking about spectrum bands that are not adjacent to each other, they are separate. So we have this technology already in preparation.

[Foreign Language]

As you can see we are ready in terms of our ability to provide the necessary speed of LTE Service that can maximize the efficiency and effectiveness of the 5G network before it's commercialization, so you could say that we are ready and that we will providing the necessary services in time with the adoption of 5G.

Keun-Joo Hwang

[Foreign Language]

This concludes the earnings conference call for Q2 2016. Thank you.

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