Higher Costs Hit SK Telecom - Analyst Blog

South Korean wireless kingpin SK Telecom (SKM) has announced first-quarter 2010 results with its net income increasing by a mere 1.6% year over year to KRW322 billion ($283 million). Profit growth was pared by higher marketing expenses as the carrier increased spending to retain customers amid intense domestic competition.

Revenue

SK Telecom posted revenues of KRW3 trillion ($2.66 billion), up 4.9% year over year. Sales were driven by growth in subscriber count, wireless Internet sales and increased market penetration of smartphone and value-added wireless applications.

Wireless Internet revenues grew 6.8% year over year to KRW666 billion ($586 million), fuelled by an increase in flat-rate data plan subscribers. Wireless Internet accounted for 24.5% of overall cellular revenues. Flat-rate data plan subscriber base reached 3.48 million (up 23% year over year) with a target of 5 million customers in 2010.

Total cellular service revenue grew 5% year over year to KRW2.72 trillion ($2.4 billion) while interconnection revenue increased 6% from the year-ago quarter reaching KRW304 billion ($268 million).

Operating Income & Expenses

Marketing expenses leapt 28% year over year to KRW846 billion ($745 million). The high spending level represents a part of the company’s efforts to limit subscriber churn (customer switch) as it faces a significant challenge from rival KT Corp. (KT) which is aggressively marketing Apple’s (AAPL) iPhone since November 2009.

Operating income dipped 14.8% to KRW480 billion ($423 million) on account of higher marketing expenses and depreciation charges.

Subscriber, ARPU & Churn

Total subscribers increased 6% year over year to 24.82 million with a net addition of 555,000 customers. ARPU (average revenue per user) fell 1% year over year to KRW 41,003 ($36.09) due to the recently introduced tariff reduction measures. Churn remained flat sequentially while increasing from the year-ago quarter to 2.5%.

Capital Expenditure

Capital expenditures for the quarter were KRW76 billion ($67 million), down 78% year over year, with 72% of the spending directed towards the WCDMA network upgrade and wireless broadband (WiBro) network expansion.

Outlook

SK Telecom has not released its second quarter guidance. For 2010, the carrier has set a revenue target of KRW13 trillion ($10.3 billion) and expects EBITDA to increase year-over-year. Capital expenditure for the year is projected at KRW1.75 trillion ($1.5 billion).

Despite being the leader in the domestic wireless market with a 50.5% share, SK Telecom is facing greater challenges in retaining market share. Given the high level of wireless penetration in the Korean market, the company is pursuing business opportunities in emerging markets (such as Vietnam and Mongolia) and industrial sectors.

SK Telecom targets selling more than 2 million smartphones in 2010, representing nearly a five-fold year-over-year increase. This represents a part of the company’s effort to boost its presence in the rapidly growing mobile data service market.

SK Telecom plans to introduce 8 handsets based on Google’s (GOOG) Android platform in second-quarter 2010. The company is beefing up its smartphone line-up to take on the iPhone. The entry of iPhone in the Korean wireless market has increased price competition.

To counter competition, SK Telecom has established a retail unit to promote bundled services. The company also launched “T Store”, the first mobile open market in Korea. As part of its customer retention effort, SK Telecom has initiated several measures including discounted tariff plans.

SK Telecom is seeking new avenues for growth as the company has joined forces with International Business Machines (IBM) to operate cloud computing services. Moreover, the company is seeking to enter the mobile credit card market having acquired a 49% stake in Hana Financial Group’s credit card unit Hana Card.

While SK Telecom’s aggressive smartphone strategy will boost opportunities in wireless data, associated promotional expenses and heavily handset subsidies may drag the bottom-line in the forthcoming reporting periods.