SK Telecom Corp Ltd (SKM), a leading South Korean telecom operator, has reported third quarter net income of KRW $384 billion ($346 million), down 18.5% year over year. The downfall was due to increased investments in advanced wireless networks and software services.
Revenues grew 1.9% year over year to KRW 4.065 trillion ($3.65 billion) on increased wireless Internet usage and new business models. Mobile service revenue slipped 1.1% year over year to KRW 2.71 trillion ($2.44 billion) on discounts and tariff cuts, and interconnection revenue dropped 11.5% to KRW 299 billion ($269 million). New business and other revenue shot up 55% to KRW 200 billion ($18 million) from the year-ago quarter.
Operating Income & Expenses
Operating income declined 17.3% to KRW 531 billion ($478 million) from the year-ago quarter, resulting in operating margin of 13.1%, down 300 basis points. Despite the lower marketing expenses and increased smartphone activations, operating income showed lackluster performance due to the spin-off cost of SK Planet, spectrum reallocation and higher investment.
Marketing expenses fell 8.1% year over year to KRW 781 billion ($703 million) because of market stabilization efforts. Marketing to sales ratio improved to 24.3% from 26.5% in the year-ago quarter.
Subscriber, ARPU & Churn
For the third quarter, subscribers increased 3.8% year over year to 26.42 million with a net addition of 152,000 customers.
ARPU (average revenue per user) dipped 0.8% year over year to KRW 40,622 ($36.60) and the churn rate improved slightly to 2.9% from 3.1% in the year-ago quarter.
Liquidity
SK Telecom exited the third quarter with KRW 2.76 trillion ($2.48 billion) of cash and marketable securities on its balance sheet. Debt-to-equity ratio improved to 46.7% from 54.4% in the year-ago quarter.
Capital expenditure increased to KRW 552 billion ($497 million) from KRW 487 billion in the year-ago quarter.
Our Analysis
SK Telecom continues to lead the domestic wireless market through continuous success in smartphone offerings as well as expansion of its 4G Long Term Evolution service. In addition, 3G network expansions, Apple Inc.‘s (AAPL) iPhone offerings, cloud computing and mobile software businesses should boost the company’s long-term prospects.
While the company’s aggressive smartphone strategy will open up opportunities in wireless data, associated promotional expenses and heavy handset subsidies may drag its earnings in the near future. Further, SK Telecom is continuously investing to improve its network visibility that would restrict its future earnings. We remain cautious on tariff reductions, intense competition from its major rival KT Corp.(KT) and heavy regulation by the Korean ministry.
We are currently maintaining our long-term Neutral recommendation on SK Telecom. For the short term (1-3 months), the stock retains a Zacks #3 (Hold) Rank.
