SK Telecom Corp Ltd (SKM), a leading South Korean telecom operator, reported first quarter 2011 net income of KRW $561 billion ($505 million), up 35.8% year over year, attributable to a healthy growth in smartphone subscribers.
Revenues
Revenues rose 2.7% year over year to KRW 3.132 trillion ($2.82 billion) in the reported quarter. Mobile service revenue inched up 1.1% year over year to KRW 2.68 trillion ($2.41 billion) and interconnection revenue fell 2% to KRW 298 billion ($268 million). New business and other revenue shot up 59.6% to KRW 158 billion ($142 million) from the year-ago quarter.
Operating Income & Expenses
Operating income climbed 16% to KRW 598 billion ($538 million) from the year-ago quarter, resulting in operating margin of 19.1%, up 220 basis points year over year. Higher operating income was supported by lower marketing expenses and increased smartphone activations.
Marketing expenses fell 7% year over year to KRW 785 billion ($707 million). Marketing to sales ratio was 25.1% in the reported quarter, compared with 27.7% in the year-ago quarter.
Subscriber, ARPU & Churn
For the first quarter, subscribers grew 4.7% year over year to 25.99 million with a net addition of 283,000 customers. ARPU (average revenue per user) fell 2.5% year over year to KRW 40,393 ($36.35) and the churn rate was flat year over year at 2.5%.
Liquidity
SK Telecom exited the first quarter with KRW 1.48 trillion ($1.3 billion) of cash and marketable securities on its balance sheet. Debt-to-equity ratio improved to 32.2% from 45.5% in the year-ago quarter.
Capital expenditure increased to KRW 300 billion ($270 million) from KRW 76 billion in the year-ago quarter.
SK Telecom raised its capital expenditure guidance to KRW 2.3 trillion from KRW 2 trillion for fiscal 2011 owing to increased investments in 3G and LTE networks.
Our Analysis
SK Telecom continues to be the leader in the domestic wireless market by further investing in wireless Wi-Finetworks, 3G network expansion, introduction of 4G Long Term Evolution networks, advanced mobile network services and mobile software business.
Additionally, SK Telecom started offering Apple Inc.’s (AAPL) iPhone from March 16 and iPad from April 29, ending the exclusive hold that its major rival, KT Corp. (KT) enjoyed since late 2009. This move will allow the company to make up for lost revenues and profits, as the strong adoption of smartphones will boost its growth in the wireless market. Further, the new regulation imposed by the Korea Communications Commission (KCC) in 2010 is expected to reduce competition and marketing expenses going forward.
While the company’s aggressive smartphone strategy will boost opportunities in wireless data, associated promotional expenses and heavy handset subsidies may drag earnings in the near future. Further, the company is continuously investing to improve its network visibility, which is increasing its cost of operation. We remain cautious on tariff reductions that are hurting revenues, intense competition and heavy regulation by the Korean ministry.
Consequently, we are currently maintaining our long-term Neutral recommendation on SK Telecom. For the short term (1–3 months), we have a Sell rating with the Zacks #4 Rank.
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