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Press Release
Good evening. My name is Shin Bae Kim, the CEO of SK Telecom. I would like to thank all the analysts and investors for taking part in today’s Earning’s Conference Call for Q2 of 2006 despite your busy schedules. Let me begin with the earnings highlights for the Second Quarter 2006. Firstly, the Second Quarter Revenue for 2006 recorded 2 trillion 638.3 billion won, up 4% on a QoQ and a YoY basis, supported by the continuous growth in subscriber base. In the meantime, the legalized operator subsidy to long-time customers has pushed up the retention related expenses significantly, while the heated market competition of May and June resulted in increase in subscriber acquisition cost over the period driving up the overall marketing expenses. Against this backdrop, the Marketing Expenses rose 5.4% compared to the previous quarter, and 5.2% versus the same period 2005 to take up 22.7% of the Revenue. Affected by the Marketing Expense increase, the Operating Income decreased 7% QoQ and 13% YoY to 619.3 billion won.
The EBITDA came down 3% compared to Q1 and 10% compared to Q2 of 2005 to 997.3 billion won. The Second Quarter Net Income went up 11% compared to Q1 which was affected by the one-off Non-Operating Expense increase due to the change of Severance System. However, on a YoY basis, the Net Income came down 20% to 373.3 billion won due to the Operating Expense increase. That was a brief overview of the Earnings Results. Now I would like to move on to the major business initiatives being pursued by SKT and other current issues. First of all, let me share with you the current competitive landscape for mobile operators as well as the outlook for marketing expenses going forward. At the outset of the legalization of the limited handset subsidy, SKT has anticipated a shrinking market for the new acquisitions, including MNP, while the market for handset replacement by current subscribers to grow more actively. In fact, the market appeared to go in that direction until April when the new handset subsidy rule came into effect.
However, the aggressive marketing by competitors during the May-June period has heated up the competition, resulting in substantial growth of the new acquisition market. Since the government penalty on operators in June, the over-heated competition seems to be cooling down. However, there still exists a possibility that aggressive marketing by competitors targeting SKT’s customers would pick up again during the Second Half, resulting in heightened level of competition. SKT will continue to engage in market stabilization effort, but in order to safeguard mid-to-long term profitability, maintaining a market leadership is vital to company’s long term future. Therefore it may be unavoidable for the company but to react to heightened level of competition caused by our competitors. In order to reflect such structural changes in the market landscape and the impact from change in handset subsidy practice, we decided to change some of the annual guidance figures. Firstly, the annual Marketing Expense guidance is changed from 17.5% to 20.5% of the Revenue. Accordingly, the EBITDA guidance is adjusted down to 4 trillion won from 4.4 trillion won. However, we will do our best to achieve all the remaining items in our original annual guidance, such as Revenue and CAPEX.
We ask for your thoughtful understanding on the need to change some of our original annual guidance. Next, let me move on to Global Businesses. As you are well aware, SKT acquired China Unicom’s CBs on July 5th. This investment is extremely meaningful in providing us an opportunity to test the viability of mobile telephony business in China, and in securing a bridgehead into a market with great potential but limited entry opportunities. S-Fone in Vietnam has acquired about 750,000 subscribers as of the end of July helped by the successful branding and differentiated service offerings. We anticipate the emergence of S-Fone as a major player in the ever growing Vietnamese market through the national network roll-out to be completed this year and the effective marketing activities. HELIO, which launched services at the end of May, has been quite successful in drawing interest and response in the US market through new services such as Mobile Blog and Korean SMS, together with Star Marketing. During the Second Half, we plan to reflect the market insight gained during the initial marketing efforts, while targeting a wider audience through national media advertisements, in order to further grow the subscriber base. Following the entry into the markets in Vietnam and the US, a bridgehead in China has been secured enabling SKT to conduct global business at a meaningful scale.
SKT’s management is fully aware that the success in these markets is critical in securing the growth and profitability of the company into the future. Therefore, we will concentrate all our efforts and resources into getting the existing global businesses on track for the time being. Next, let me briefly comment on HSDPA and WiBro. SKT has launched the commercial service for HSDPA in May, but we are still in a process of improving the handset line up as well as the coverage. Once the network rollout in 84 cities around the country is completed at the year-end and other necessary conditions are met, we will launch active marketing to build up the subscriber base. WiBro commercial services were also launched in June around Hot Zones with high data demand. During the Second Half, we plan to strengthen the Business Model by assessing the marketability of WiBro to enhance complementary functions with existing services rather than pursuing immediate Mass Marketing. Lastly, let me address the Shareholder Return policy. The BOD held on July 28th resolved on the buy back of treasury shares worth 100 billion won for the purpose of share cancellation.
Of the planned treasury share buy back for 2006 in the amount of 200 billion won, the remaining 100 billion won worth of shares will be acquired as soon as the first batch of share buy back and cancellation is completed. SKT has opted for such a multi-step approach since the proposed share retirement directly affects the foreign ownership ratio. In light of such uncertain circumstances, we felt that a phased approach would be more appropriate. I would also like to remind you again that the Payout Ratio of 40% will be executed this year, including the 1,000 won Interim Dividend. This concludes the overview of the Earnings Results and other major issues. Thank you.
The EBITDA came down 3% compared to Q1 and 10% compared to Q2 of 2005 to 997.3 billion won. The Second Quarter Net Income went up 11% compared to Q1 which was affected by the one-off Non-Operating Expense increase due to the change of Severance System. However, on a YoY basis, the Net Income came down 20% to 373.3 billion won due to the Operating Expense increase. That was a brief overview of the Earnings Results. Now I would like to move on to the major business initiatives being pursued by SKT and other current issues. First of all, let me share with you the current competitive landscape for mobile operators as well as the outlook for marketing expenses going forward. At the outset of the legalization of the limited handset subsidy, SKT has anticipated a shrinking market for the new acquisitions, including MNP, while the market for handset replacement by current subscribers to grow more actively. In fact, the market appeared to go in that direction until April when the new handset subsidy rule came into effect.
However, the aggressive marketing by competitors during the May-June period has heated up the competition, resulting in substantial growth of the new acquisition market. Since the government penalty on operators in June, the over-heated competition seems to be cooling down. However, there still exists a possibility that aggressive marketing by competitors targeting SKT’s customers would pick up again during the Second Half, resulting in heightened level of competition. SKT will continue to engage in market stabilization effort, but in order to safeguard mid-to-long term profitability, maintaining a market leadership is vital to company’s long term future. Therefore it may be unavoidable for the company but to react to heightened level of competition caused by our competitors. In order to reflect such structural changes in the market landscape and the impact from change in handset subsidy practice, we decided to change some of the annual guidance figures. Firstly, the annual Marketing Expense guidance is changed from 17.5% to 20.5% of the Revenue. Accordingly, the EBITDA guidance is adjusted down to 4 trillion won from 4.4 trillion won. However, we will do our best to achieve all the remaining items in our original annual guidance, such as Revenue and CAPEX.
We ask for your thoughtful understanding on the need to change some of our original annual guidance. Next, let me move on to Global Businesses. As you are well aware, SKT acquired China Unicom’s CBs on July 5th. This investment is extremely meaningful in providing us an opportunity to test the viability of mobile telephony business in China, and in securing a bridgehead into a market with great potential but limited entry opportunities. S-Fone in Vietnam has acquired about 750,000 subscribers as of the end of July helped by the successful branding and differentiated service offerings. We anticipate the emergence of S-Fone as a major player in the ever growing Vietnamese market through the national network roll-out to be completed this year and the effective marketing activities. HELIO, which launched services at the end of May, has been quite successful in drawing interest and response in the US market through new services such as Mobile Blog and Korean SMS, together with Star Marketing. During the Second Half, we plan to reflect the market insight gained during the initial marketing efforts, while targeting a wider audience through national media advertisements, in order to further grow the subscriber base. Following the entry into the markets in Vietnam and the US, a bridgehead in China has been secured enabling SKT to conduct global business at a meaningful scale.
SKT’s management is fully aware that the success in these markets is critical in securing the growth and profitability of the company into the future. Therefore, we will concentrate all our efforts and resources into getting the existing global businesses on track for the time being. Next, let me briefly comment on HSDPA and WiBro. SKT has launched the commercial service for HSDPA in May, but we are still in a process of improving the handset line up as well as the coverage. Once the network rollout in 84 cities around the country is completed at the year-end and other necessary conditions are met, we will launch active marketing to build up the subscriber base. WiBro commercial services were also launched in June around Hot Zones with high data demand. During the Second Half, we plan to strengthen the Business Model by assessing the marketability of WiBro to enhance complementary functions with existing services rather than pursuing immediate Mass Marketing. Lastly, let me address the Shareholder Return policy. The BOD held on July 28th resolved on the buy back of treasury shares worth 100 billion won for the purpose of share cancellation.
Of the planned treasury share buy back for 2006 in the amount of 200 billion won, the remaining 100 billion won worth of shares will be acquired as soon as the first batch of share buy back and cancellation is completed. SKT has opted for such a multi-step approach since the proposed share retirement directly affects the foreign ownership ratio. In light of such uncertain circumstances, we felt that a phased approach would be more appropriate. I would also like to remind you again that the Payout Ratio of 40% will be executed this year, including the 1,000 won Interim Dividend. This concludes the overview of the Earnings Results and other major issues. Thank you.