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Edited Transcript of 017670.KS earnings conference call or presentation 7-May-20 6:00am GMT

Q1 2020 SK Telecom Co Ltd Earnings Call

Seoul Jun 16, 2020 (Thomson StreetEvents) -- Edited Transcript of SK Telecom Co Ltd earnings conference call or presentation Thursday, May 7, 2020 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hyung-il Ha

SK Telecom Co.,Ltd - VP & Head of Corporate Center 2

* Jeong Hwan Choi

SK Telecom Co.,Ltd - Head of IR Office 2

* Poong Young Yoon

SK Telecom Co.,Ltd - CFO & Head of Corporate Center 1

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Conference Call Participants

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* Hoi Jae Kim

Daishin Securities Co. Ltd., Research Division - Analyst

* Hong-sik Kim

Hana Financial Investment Co., Ltd., Research Division - Analyst

* Sean Lee

Citigroup Inc, Research Division - Director

* Sunyoung Hong

Nomura Securities Co. Ltd., Research Division - Executive Director & Korea Autos, Internet and Telecom Analyst

* Taewon Kim

UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming

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Presentation

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Operator [1]

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[Interpreted] Good afternoon. First of all, thank you all for joining this conference call. And now we will begin the conference call by the fiscal year 2020 first quarter earnings results by SK Telecom. (Operator Instructions) Now we shall commence the presentation by SK Telecom.

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Jeong Hwan Choi, SK Telecom Co.,Ltd - Head of IR Office 2 [2]

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[Interpreted] 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 2020 and the future management plans and strategic direction by Poong-Young Yoon, CFO and Head of Corporate Center I; and Hyung-il Ha, Head of Corporate Center II, followed by a Q&A session.

Under the dual operating system, which the company adopted late last year, the MNO business is headed by Poong Young Yoon, Head of Corporate Center I, and new businesses are headed by Hyung-il Ha, Head of Corporate Center II. Much like last quarter, they will be presenting the achievements and strategic plans of their respective divisions for today's conference call.

Today's conference call will provide consecutive interpretation, and we have also here with us executives from relevant business divisions to help deepen your understanding. Before we begin, we want to remind you that all forward-looking statements are subject to change depending on the macroeconomic and market situations.

Let me now present our CFO.

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Poong Young Yoon, SK Telecom Co.,Ltd - CFO & Head of Corporate Center 1 [3]

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[Interpreted] Good afternoon. This is Poong Young Yoon, CFO of SK Telecom. Let me first discuss the consolidated earnings highlights for Q1 of 2020.

Consolidated revenue for Q1 2020 recorded KRW 4,450.4 billion, thanks to the growth in MNO revenue led by the increase of 5G subscribers as well as new businesses, it rose by 2.7% year-on-year and by 0.9% quarter-on-quarter.

Operating income recorded KRW 302 billion, While our profit from the new business grew, the MNO operating income fell, leading to a 6.4% year-on-year fall and due to reduction of the seasonal costs in Q4, it increased by 85.9% quarter-on-quarter.

Net income decreased by 17.9% year-on-year due to the effect of the equity method income on SK Hynix and turn to profit quarter-on-quarter.

Let me now move on to major business achievements and strategic plans for each business division.

Nonconsolidated MNO revenue for Q1 recorded KRW 2,922.8 billion, up 3.9% year-on-year and 2.7% quarter-on-quarter. Despite COVID-19 limiting international travel, leading to a decline in roaming revenue as well as a slower rate of 5G subscriber base growth, an overall year-on-year revenue growth was achieved, thanks to 5G contributing more to the total revenue.

MNO operating income recorded KRW 257.9 billion. While it recorded a 15.7% year-on-year increase due to the marketing as well as depreciation and amortization costs, the number improved by 121.6% quarter-on-quarter. With the recent trend of stabilizing competition continuing forward, we will do our best to minimize the negative impact such as decline in roaming revenue through efficient cost management.

April 3 of this year marked SK Telecom's 1-year anniversary of the world's first commercial 5G service launch. As of the end of Q1 of 2020, we have acquired 2.65 million subscribers, attesting to our solid MNO leadership in the 5G era. Thanks to the growing subscriber base, MNO revenue has been continuing its growth since Q2 of last year. This year, our MNO business aims to not only continue to grow the 5G subscriber base, but also discover new services that will allow us to push forth with 5G in full scale.

Media business based on consolidated revenue of SK Broadband recorded KRW 823.5 billion. With IPTV continuing to grow, it increased by 8.2% year-on-year and 0.3% quarter-on-quarter. Operating income recorded KRW 37.4 billion while the numbers fell quarter-on-quarter due to the home shopping transmission fee income being reflected in Q4, the revenue growth and efficient marketing cost management led to a 90.8% increase year-on-year.

Security business revenue, including ADT Caps and SK Infosec, recorded KRW 291.4 billion. While it fell slightly quarter-on-quarter due to seasonal factors, it increased by 5.4% year-on-year, thanks to ADT Caps' net subscriber additions and new business performance as well as SK Infosec recording a higher solution revenue. Operating income recorded KRW 31.2 billion, down 4.9% year-on-year due to higher costs related to new businesses.

Commerce business revenue recorded KRW 190.3 billion. Due to the membership point-related revenue deduction that began to take effect in Q4, it fell 4.4% year-on-year and rose by 31.3% quarter-on-quarter. Operating income maintained last year's trend and nears the BEP.

And now the Head of Corporate Center II, Mr. Ha, will walk you through the achievements and plans for the new businesses.

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Hyung-il Ha, SK Telecom Co.,Ltd - VP & Head of Corporate Center 2 [4]

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[Interpreted] Good afternoon. I am Hyung-il Ha, Head of Corporate Center II.

Let me now discuss the achievements for the new business division for Q1 2020 as well as our strategies.

First, the Media business. With the social climate of refraining from outdoor activities, at-home media consumption is growing. To respond to the new environment, SK Broadband is doing its best, including acquiring quality content, to translate the growing trend of media consumption into revenue growth by adding high-quality and diverse content while also strengthening direct channel competitiveness and non face-to-face marketing efforts.

Finally, on April 30, the merged entity of SK Broadband and t-broad was launched. With over 8.2 million paying subscribers, the new entity will aim to strengthen the competitiveness of both IPTV and cable TV through an advanced media platform and a wider reaching business model. To do so, it plans to strengthen its content competitiveness, offer bundled services with cable TV, utilize wavve's original content and offer partnership-based products.

To strengthen content competitiveness, wavve has significantly expanded the movie content library available to existing wavve users early April of this year. It will also secure quality original content by investing KRW 60 billion within the year and has established a partnership with NBC Universal to export wavve original content as well as expand the service's global content ecosystem. With a more solid investment foundation for content as well as global market expansion, wavve will increase significantly in value going forward.

Moving on to Security business. While subscriber acquisition through marketing efforts have experienced difficulties due to COVID-19, demand for Security solutions has seen a rise with more people working from home as has demand for home security services due to the increased usage of parcel and food delivery services. There is also growing demand for new products such as thermal imaging cameras.

ADT Caps and SK Infosec are strengthening non face-to-face and contactless marketing efforts while actively responding to new demand. As our security business continues to solidify its leadership in the CMS market, it is also proactively expanding its tech-based new business portfolio, such as unmanned parking, home security and personal care and will put in its utmost efforts to achieve the KRW 1.3 trillion annual revenue target set early this year.

Let me now discuss achievements of the Commerce business. With non face-to-face consumption becoming a major trend, the growth potential of overall e-commerce market has been gradually growing. 11ST saw a 9% year-on-year increase in transaction volume and that of food and necessary goods increased by over 30%. To further accelerate the GMV growth, 11ST strengthened the grocery section. On top of Homeplus and GS fresh, the nation's #1 retailer, E-Mart, recently joined as a partner seller in late April, allowing 11ST customers to enjoy the wide variety of products provided by these major retailers and have them delivered to their door on the day of purchase. Going forward, 11ST will continue efforts to strengthen its fundamental competitiveness through partnerships with various external companies.

The t-commerce company SK Stoa's revenue grew by 44% year-on-year, thanks to the effect of widening its sales channels to include PC and mobile. SK Stoa will continue to strengthen its PC and mobile channel sales through enhanced product sourcing capabilities and offer a wider range of its own brand, thereby maintaining the strong growth trends and becoming the leader of the t-commerce industry.

Lastly, we have also seen notable achievements in the game business, one of the major so-called untapped businesses that have been garnering attention. This past March, we established a joint venture with Singtel and AIS, the leading telecom operators of Singapore and Thailand, and are in preparation process to create a network platform for the over 800 million gamers in the Southeast Asian region for game-specific networking and game media content. Also, T1, our joint venture with Comcast, became the first Korean sports team to sign a sponsorship with the BMW Group to create new content. As such, we have discovered new growth potential in various game-related fields.

Going forward, we will continue to show how SK Telecom creates various opportunities for growth in the ICT field.

I will now hand it back to the CFO. Thank you.

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Poong Young Yoon, SK Telecom Co.,Ltd - CFO & Head of Corporate Center 1 [5]

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[Interpreted] This year, the world has been faced with an unprecedented challenge of the COVID-19 pandemic, and this has indeed had an effect on our plans and targets set early this year. However, because we have diversified our portfolio with MNO, Media, Security and Commerce businesses in the last 3 years, we believe that we are better equipped than ever to overcome the current situation in a flexible manner. We will stand strong and carry on our efforts to grow our diverse portfolio to create synergy, encourage and complement one another and achieve growth in our enterprise value.

We ask for the continued interest and support from investors and analysts. Thank you.

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Questions and Answers

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Operator [1]

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[Interpreted] The first question will be provided by Sean Lee from Citigroup.

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Sean Lee, Citigroup Inc, Research Division - Director [2]

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[Interpreted] I have 2 questions. My 2 questions are about the dividend policy and CapEx. The first question is regarding your dividend policy. I remember, last quarter, you said that you were -- that the company was reviewing various options. And in particular, will you be able to provide us an update as to whether or not you will indeed be linking the performances of your subsidiary companies to the dividend policy?

And also, if you are opting for a new dividend policy, does this mean that we can expect the actual EPS amount to be lower?

My second question has to do with the recent announcement by the Ministry of Science and ICT on the early spending of 5G CapEx. What kind of effect has that had in terms -- in relation to what was actually guided early this year? And also, does this include the investment that will go into the 28 gigahertz spectrum at all? So I'd like to hear about your plans for CapEx.

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Poong Young Yoon, SK Telecom Co.,Ltd - CFO & Head of Corporate Center 1 [3]

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[Interpreted] Thank you, Mr. Lee, for your question. Let me first address your question regarding our dividend policy. So first of all, as I have mentioned before, the decision to review our current dividend policy started from questioning ourselves whether or not the current dividend policy is in line with our current business structure in which we have a variety -- or in which we have a more diversified portfolio.

And I think that especially as recent times in which the environment is such that our stock prices are extremely undervalued, we have seen a difference of opinion among our shareholders. For example, some currently -- some prefer the current fixed EPS payout policy, while some others prefer a different method of shareholder return. So I know that there are different preferences among our different shareholders. And in that aspect, we are reviewing all possible options, which include share buyback, linking our subsidiaries' performances as well as our earnings improvement and the current fixed EPS.

And so as for the details, we will have to go through an in-depth internal discussion as well as with the Board of Directors and be able to share that with you by the time when we announce our interim dividend. But if we were to opt for a different payout or dividend policy, I can say that it will gear toward a direction where the overall shareholder return volume will be greater than that of now.

And let me now move on to address your question on CapEx in regards to the Ministry's announcement.

In order to overcome the current COVID-19-affected situation, SK Telecom is indeed also actively reviewing early spending of CapEx during the first half of the year. However, while we are indeed reviewing that option, because it is going to be discussed in link with the demand as well as the overall investment volume, we do not see the overall CapEx being increased due to early spending. By that, I mean during the first half of the year.

And lastly, to address your question regarding investment into the 28 gigahertz spectrum. As for the 28 gigahertz spectrum, because the ecosystem, including the equipment and service is not yet complete, the schedule will be in line -- and the schedule, by that, I mean the official commercialization, will be in line with the completion of the ecosystem. The 28 gigahertz service will be provided centering on B2B accounts. And in linked with the demand, we believe that we will be able to see a very efficient rollout. Thank you.

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Operator [4]

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[Interpreted] The next question will be presented by Kim Hoi Jae from Daishin Securities.

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Hoi Jae Kim, Daishin Securities Co. Ltd., Research Division - Analyst [5]

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[Interpreted] My first question is regarding the recent launch of the new models, including S20, late May -- or early May. We are seeing a little increase in the competition in the market. And so there is concern in the market about possible overheated competition taking place during Q2. So I'd like to hear about a possibility of that happening.

And my second question is finally the merged entity of SK Broadband and t-broad. You started out as the #3 player in the market. And you've also, of course, disclosed your revenue target. So do you have any other specific plans in terms of your strategy to become #2 in the market, including M&As? So I'd just like to hear about your overall strategies regarding subscriber acquisition of the merged entity.

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Poong Young Yoon, SK Telecom Co.,Ltd - CFO & Head of Corporate Center 1 [6]

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[Interpreted] Thank you, Mr. Kim, for your questions. I will be answering the first question, and I will hand over the mic to Mr. Ha to answer your second question.

So regarding the possibility of a market -- or market overheating in terms of marketing. First of all, we have seen the market stabilize beginning from Q4 of last year, and that trend has indeed continued. However, COVID-19 did have an effect that -- by that, I mean it led to lower demand for devices. So there were some promotional activities on particular devices to sort of push forth with the marketing activities. However, when you look at the overall subsidy level as well as MNP numbers, this does not indicate an overheated market competition. And the current promotional activities will not lead to cost increase. And so it will not be a structural change.

Going forward, SK Telecom will try its best to continue with the current stabilizing trend for the market, focusing the competition on service and customer benefits.

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Hyung-il Ha, SK Telecom Co.,Ltd - VP & Head of Corporate Center 2 [7]

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[Interpreted] Let me -- allow me to answer your second question regarding the merged entity, the possible synergies and any possible M&As going forward.

SK Broadband and t-broad launched as a merged entity on 30th of April. With 8.21 pay TV subscribers -- 8.21 million pay TV subscribers and 6.48 million Broadband subscribers, SK Broadband will achieve KRW 4 trillion in revenue this year. We are expecting not just an acceleration of the subscriber base growth. But through an advanced media platform as well as an expanded business model, we believe that both IPTV and cable TV service competitiveness will grow hand in hand. And to achieve this, we plan to provide various new services, such as big data and AI-based personalized service, as well as a much stronger content competitiveness.

Also, for the cable TV service provided by t-broad, we plan to provide bundled products with SK Broadband Internet. And by utilizing wavve's original content as well as providing partnered products, we are expecting, and we will do our best, to generate as much synergy within the SK ICT Family Group.

As for the more detailed strategies for the merged SK Broadband, before the next earnings release conference call, we will make -- we will have an opportunity to communicate them to you in the form of, hopefully, a press conference.

And to answer your question regarding any possible M&As going forward, what I can say is that SK Broadband is currently focusing all of its resources in generating the merged entities' synergy with t-broad. Thank you.

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Operator [8]

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[Interpreted] The next question will be presented by Kim Taewon from UBS Securities.

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Taewon Kim, UBS Investment Bank, Research Division - Director and Research Analyst of Internet and Gaming [9]

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[Interpreted] So I know that you just mentioned the marketing situation as well as your marketing cost outlook, but I just wanted to add on to that. Can you provide us with a guidance for nonconsolidated operating income for the year? And also, regarding your 5G subscriber accounts by the year-end, have there been any changes to that?

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Poong Young Yoon, SK Telecom Co.,Ltd - CFO & Head of Corporate Center 1 [10]

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[Interpreted] Thank you, Mr. Kim, for your question. I think that I can approach your -- both of your questions, beginning with our strategies regarding the 5G subscriber target. So I will begin with that.

So due to the social distancing persisting, there are less customers coming into our off-line shops. So during Q1, the 5G subscriber net additions amounted to 570,000, putting us at 2.65 million total 5G subscribers as of Q1. And in fact, this is about 10% to 20% lower than what we had originally expected. And while there are uncertainties as to how long COVID-19 -- the effect of COVID-19 will persist, given the current subscriber migration trends, I think that the year-end 5G subscriber total count will be about 10% to 15% lower than the 6 million to 7 million that was guided early this year.

And regarding the -- our operating income outlook for our MNO business, because of the growing uncertainties, we are in the process of revisiting our strategies and management plans that were set early this year. As I just mentioned, due to the slowing increase of 5G subscriber base as well as the decrease of roaming revenue, and of course, we don't know how long this will persist, but it's very difficult for us to predict when these can turn around.

However, we are continuing to see the data traffic increase. And as I mentioned earlier, we are continuing to see the market stabilization trend as well. And also, company-wide, we are putting in our best efforts to lower any kind of unnecessary costs. And so with the early end to the COVID-19 pandemic, I believe that the overall situation will not have a significant impact on our MNO income.

So the situations are quite difficult. However, based on the more stable market trends, we will continue to maintain the stabilizing trend. And so on an annual basis, the company will do everything we can to generate earnings that are higher than that of last year. Thank you.

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Operator [11]

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[Interpreted] The next question will be presented by Hong Sunyoung from Nomura Financial Investment.

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Sunyoung Hong, Nomura Securities Co. Ltd., Research Division - Executive Director & Korea Autos, Internet and Telecom Analyst [12]

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[Interpreted] I want to ask about wavve. So last year, I remember you telling us that in terms of unique users, your subscriber count was at 2.7 million, but I think we found that, by the end of February, we actually saw the numbers drop quite a bit, down to 2.5 million. And that compared to other OTT services, which have been doing very well in these circumstance, that is quite relatively low. And I think -- the market assumes that it had a lot to do with the strategic partnership between JTBC and Tving. And so I know that you have announced your plans to invest KRW 60 billion in original content, what other kinds of strategies do you have to grow wavve?

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Poong Young Yoon, SK Telecom Co.,Ltd - CFO & Head of Corporate Center 1 [13]

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[Interpreted] First of all, thank you, Ms. Hong, for your question. In fact, wavve is continuing to see a rise in its paying subscriber base, and we stand by our target of reaching 5 million subscribers by the year 2023 as well as a revenue target of KRW 500 billion.

And recently, due to discontinuation of certain contents, we did see a temporary stag in wavve. However, beginning from April, we have significantly increased and strengthened our film content library, and we are also putting in a lot of investment into original content. So we believe that this number will continue to improve.

And as for the amount of investments that we will be putting into original content for wavve, we still stand by the total accumulated amount of KRW 300 billion by 2023.

And as for our film library for wavve, we started from the previous number count of 1,200, we now have 3,300 titles. And we expect this number to soon reach 4,000. And we also have plans to increase its enterprise -- the value of wavve, one of examples of which are our recent partnership signing with NBC Universal. Thank you.

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Operator [14]

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[Interpreted] The next question will be presented by Kim Hong-sik from Hana Financial Investment.

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Hong-sik Kim, Hana Financial Investment Co., Ltd., Research Division - Analyst [15]

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[Interpreted] I first want to start off by saying thank you for mentioning your possible plans to change your dividend policy.

And so the CFO, during the last earnings call, you've mentioned that you expect your earnings to turn around during the second half of the year. I mean I think the reason, of course, as we all know it, that your stock price hasn't been doing so well is because of your dividend and concerns over your earnings in the future. You have talked about the dividend. So I'd like to hear about your plans regarding how to improve your earnings in the second half. Will -- do you still think that it will be able to turn around during the second half of the year?

Recently, we have definitely seen the cost become more stable. However, your revenue has been doing quite poorly. In particular, you have seen -- we have seen a very slowing of the 5G subscriber net additions. So I think in order for us to lessen our worries for the second half, what do you have to say to us?

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Poong Young Yoon, SK Telecom Co.,Ltd - CFO & Head of Corporate Center 1 [16]

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[Interpreted] Thank you, Mr. Kim, for your question. So to address your question regarding the profit turnaround, when -- first of all, talking about the subsidiary companies of SK Telecom, so aside from MNO, of course, COVID-19 crisis will have both a positive and a negative effect in terms of business terms. However, overall, we believe that our subsidiaries' earnings on a year-on-year basis will improve within the year.

And so of course, we have to focus on the operating income outlook for our MNO business. And as we said, there were investments that took place last year regarding investments into the commercialization of 5G with the launch of our 5G service. And of course, there was also the reflection of changes in the accounting -- changes in accounting regarding marketing costs. And so our original business plan was to make up for these changes and these impacts with the growing 5G subscriber base as well as growing roaming revenue. And as we all know, COVID-19 has had an effect on both of these factors. And so there are some uncertainties in the original plan.

Despite these conditions, however, as I just mentioned, based on the growth of our subsidiaries' performances as well as making our investments as efficient as possible, we stand by our outlook that we will do our best to turn our profit around during the second half of this year.

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Operator [17]

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[Interpreted] This concludes the earnings conference call for Q1 2020. Thank you.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]