The leading provider of wireless communication services in
SK Telecom Corp.
) has reported third quarter 2012 results. Quarterly consolidated
net income plunged 54% year over year to KRW 175.6 billion
(approximately $158 million).
Increased investments in advanced wireless networks, marketing
expenses and tariff cuts were largely responsible for the decline
Driven by higher smartphone penetration and rising LTE
subscriber base, consolidated operating revenue inched up 2% to
KRW 4,126 billion ($3.7 billion).
Mobile service revenue dropped 1% year over year to KRW 2,689
billion (approximately $2.4 billion). Interconnection revenue
declined 16% to KRW 252 billion ($226 million) while new business
and other revenue was down 17.4% at KRW 157 billion ($141
million) from the year-ago quarter.
Operating Income & Expenses
Operating income fell 46% to KRW 301 billion (approximately
$271 million) in the third quarter, resulting in operating margin
of 7.3%, down 660 basis points. The decline was mainly due to
higher marketing expenses and investments in LTE networks.
Operating expenses rose 9.8% year over year to KRW 3,825
billion (approximately $3.4 billion). Marketing expenses rose
32.5% year over year to KRW 1,035 billion ($931 million).
Marketing to sales ratio increased to 33.4% from 24.4% in the
Subscriber, ARPU & Churn
During the third quarter, subscribers increased 1.3% year over
year to 26.78 million with a net addition of 357 customers.
Average revenue per user (ARPU) fell 0.6% year over year to
KRW 40,265 (approximately $36.24) owing to cuts in monthly mobile
service rates while the churn rates increased to 3.0% from 2.9%
in the year-ago quarter.
SK Telecom exited the third quarter with KRW 1,688 billion
(approximately $1.5 billion) of cash and marketable securities on
its balance sheet compared with KRW 2,758 billion (approximately
$2.5 million) in the year-ago quarter. Debt-to-equity ratio was
60.7% compared with 46.7% a year ago. Capital expenditure
increased to KRW 788 billion (approximately $709 million) from
KRW 552 billion (approximately $497 million) in the prior-year
The company targets to achieve 7 million subscribers under its
LTE network coverage. In addition, the company expects to achieve
80% or more growth in its B2B business, which is one of its
primary growth drivers.
SK Telecom continues to lead the domestic wireless market
through successful smartphone offerings as well as the expansion
of its 4G LTE service. Moreover, 3G network expansion,
's (AAPL) iPhone offerings, cloud computing and mobile software
businesses should boost the company's long-term prospects.
However, increased promotional expenses and heavy
handset subsidies may hurt the company's earnings in the near
future. SK Telecom is continuously investing to improve its
network visibility that would also restrict its future earnings.
Further, we remain cautious on tariff reductions, intense
competition from its biggest rival
) 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 #1 Rank (Strong Buy).
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