SK Telecom Corp. Ltd. (SKM), a leading South Korean telecom operator, declared depressed financial results for third quarter 2010. Net income plunged 13% year over year to KRW 364 billion ($309 million) due to higher investment in network as well as increased marketing campaign costs.
Revenues upped 4% to KRW 3.181 trillion ($2.70 billion) boosted by solid smartphone growth and record-breaking wireless Internet revenue. Total cellular service revenue grew 3% year over year to KRW 2.843 trillion ($2.42 billion) and interconnection revenue increased 8% from the year-ago quarter reaching KRW 338 billion ($287 million).
Wireless Internet achieved record revenues of KRW 768 billion ($653 million), up 16% year over year, fuelled by an increase in flat-rate data plan subscribers. Wireless Internet accounted for 27% of overall cellular revenues. Flat-rate data plan subscriber base jumped 77.8% year over year to reach 5.43 million in the third quarter, owing to the introduction of the unlimited data service.
Operating Income & Expenses
Operating income dropped 16% year over year to KRW 519 billion ($441 million) due to higher investment to build Wi-Fi networks and expand HSPA+ network as well as high marketing expenses during the reported quarter. Operating margin contracted to 16.3% from 20.2% in the year-ago quarter.
Total operating expense increased 9% year over year to KRW 2.661 trillion ($2.26 billion). Marketing expenses dipped 1.5% year over year to KRW 750.6 billion ($638 million). Marketing to sales ratio was 26.7% in the reported quarter, compared with 27.3% in the year-ago quarter.
Subscriber, ARPU & Churn
Total subscribers grew 5% year over year to 25.4 million with a net addition of 299,000 customers. ARPU (average revenue per user) fell 1% year over year to KRW 41,923 ($35.63) and churn rate was 3.1% compared with 2.7% in the year-ago quarter.
Liquidity
At the end of the third quarter, SK Telecom had KRW 5.652 trillion ($4.8 billion) of cash and marketable securities on its balance sheet. Debt-to-equity ratio improved to 39.4% from 54.6% in the year-ago quarter.
Capital expenditure was KRW 487 billion ($414 million), up 69% year over year from the year-ago quarter. Network investment grew a whopping 94.2% to KRW 385 billion ($327 million) compared with the year-ago level.
Our Analysis
The company is pursuing business opportunities in emerging markets given limited growth prospects in the highly matured domestic wireless market. Other prospects for growth include 3G network expansion, mobile banking, IPTV and smartphone offerings.
Despite being the leader in the domestic wireless market with a 50.5% share, SK Telecom is facing greater challenges in retaining its market position. SK Telecom continues to spend heavily as the carrier is boosting its promotional efforts to contain customer churn amid stiff competition from rival KT Corp. (KT), which is aggressively marketing Apple’s (AAPL) iPhone since November 2009.
We are currently maintaining our Neutral recommendation on SK Telecom with the Zacks Rank of #3 (Hold).
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