SK Telecom Exits '11 with Y/Y Fall - Analyst Blog

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SK Telecom Corp Ltd ( SKM ),a leading South Korean telecom operator, has reported fiscal 2011 earnings results with net income dropping 10.4% year over year to KRW 1.583 trillion ($1.4 billion).

The fourth quarter net income plunged 61% year over year to KRW 196 billion ($176 million). Increased investments in advanced wireless networks and mobile tariff cuts were largely responsible for the downfall in both the quarter and the year.

Revenues

In fiscal 2011, revenues grew 2.2% year over year to KRW 15.945 trillion ($14.3 billion) on increased wireless Internet usage and new business models. Mobile service revenue was flat year over year at KRW 10.799 trillion ($9.72 billion). Interconnection revenue dropped 6.7% to KRW 1.149 trillion ($1.03 billion) while new business and other revenue shot up 44.8% to KRW 756 billion ($68 million) from the prior year.

Revenue for the fourth quarter was KRW 3.930 trillion ($3.54 billion), down 2.3% year over year.

Operating Income & Expenses

Operating income slipped 6.3% to KRW 2.135 trillion ($1.92 billion) in 2011 from the prior year, resulting in operating margin of 13.4%, down 120 basis points. Operating profit fell 35.7% year over year to KRW 329.4 billion ($30 million) from KRW 512.2 billion. Despite lower marketing expenses and increased smartphone activations, operating income lacked luster due to spectrum reallocation and higher investment.

Marketing expenses fell 2.1% year over year to KRW 3.255 trillion ($2.9 billion) for full-year 2011 because of market stabilization efforts. Marketing to sales ratio improved to 25.6% from 26.5% in the prior year.

Subscriber, ARPU & Churn

For 2011, subscribers increased 3.3% year over year to 26.55 million with a net addition of 848,000 customers.

ARPU (average revenue per user) dipped 2.4% year over year to KRW 40,374 ($36.60) while the churn rate remained stable at 2.7%.

Liquidity

SK Telecom exited fiscal 2011 with KRW 2.705 trillion ($2.43 billion) of cash and marketable securities on its balance sheet. Debt-to-equity ratio improved to 45.7% from 47.2% in 2010.

Capital expenditure increased to KRW 2.277 trillion ($2.04 billion) in 2011 from KRW 1.845 trillion in 2010.

Our Take

SK Telecom continues to lead the Korean wireless market owing to its diverse offerings. We believe strong smartphone penetration, Apple Inc. 's ( AAPL ) iPhone offerings, 3G network, advanced 4G Long Term Evolution expansions, cloud computing business, and growing Wi-Fi and data femtocell service will fuel growth at SK Telecom. Moreover, the company is poised to benefit from the spin-off of SK Planet and acquisition of Hynix Semiconductor Inc.

Nevertheless, increased promotional expenses and heavy handset subsidies may drag the company's earnings in the near future. SK Telecom is continuously investing to improve its network visibility that would restrict its future earnings. Further, 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.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AAPL , KT , SKM

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