The South Korean telecom giant SK Telecom Corp Ltd (SKM) revealed its plan to spin off its platform business unit, which includes mobile content and applications.
SK Telecom will split the unit on October 1, pending approval from its board members, and will create a separate entity, which will be its wholly owned company. The platform business provides services including video phone calls, mobile advertisements and other content for devices such as smartphones, tablets and televisions. Thus, the business is considered to be the next-generation growth driver.
Competition has increased in the South Korean mobile market and has reached a saturation point. Despite the surging demand for smartphones, Apple Inc.'s (AAPL) iPhone and Samsung Electronics' Galaxy S are struggling with stagnating sales in the saturated domestic market.
SK Telecom is the leader in the Korean wireless market, enjoying approximately 51% market share. The company also grabbed the biggest share in quarterly new subscriber additions in the domestic wireless market. SK Telecom reported strong results in the recently concluded first quarter.
Operating income and net income improved on the back of lower marketing expenses and increased smartphone activations. Revenue also remained healthy due to growing mobile services as well as new business and other revenues.
Given the high level of wireless penetration in the Korean market, SK Telecom is pursuing advanced technologies that will enable the delivery of new value-added services. Post separation, the company will tap the growing popularity of smartphones in the mature South Korean markets.
In addition to the vast handset offerings, the company is investing heavily in high-speed Wi-Fi and data femtocell to boost network capacity in small areas. Further, SK Telecom plans to roll out more advanced mobile network services — Long Term Evolution (LTE) services also known as 4G networks — in order to meet the growing demand for high-speed data services.
SK Telecom plans to invest KRW 1 trillion ($890 million) over three years in smartphone services and mobile software business (i.e. to upgrade Facebook, Google (GOOG) Maps, and Apple's iTunes in handsets). This will further boost SK Telecom’s presence in the software sector and drive smartphone sales higher. The investments should augur well for the company’s future growth.
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, the company is continuously investing to improve its network visibility. We also remain cautious on intense competition, regulations by the Korean ministry and tariff reductions, which are hurting revenues.
We are currently maintaining our long-term Neutral recommendation on SK Telecom with the Zacks #3 (Hold) Rank.
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