SK Telecom Corp Ltd (SKM), a leading South Korean telecom operator, has reported second quarter net income of KRW $465 billion ($418 million), up 3.6% year over year, attributable to healthy growth in smartphone subscribers.
Revenues
Revenues rose 5.7% year over year to KRW 4.04 trillion ($3.64 billion) in the reported quarter. Mobile service revenue inched up 1.6% year over year to KRW 2.72 trillion ($2.44 billion) and interconnection revenue dipped 2.3% to KRW 299 billion ($269 million). New business and other revenue shot up 84.9% to KRW 172 billion ($155 million) from the year-ago quarter.
Operating Income & Expenses
Operating income grew 2% to KRW 660 billion ($594 million) from the year-ago quarter, resulting in operating margin of 16.3%, up 60 basis points year over year. Higher operating income was backed by lower marketing expenses and increased smartphone activations.
Marketing expenses fell 7.8% year over year to KRW 819 billion ($737 million). Marketing to sales ratio improved to 25.6% from 28.9% in the year-ago quarter.
Subscriber, ARPU & Churn
For the second quarter, subscribers increased 4.5% year over year to 26.27 million with a net addition of 280,000 customers. Smartphone subscribers were 7.5 million at the end of the reported quarter.
ARPU (average revenue per user) dipped 0.8% year over year to KRW 40,738 ($36.67) and the churn rate increased slightly to 2.7% from 2.6% in the year-ago quarter.
Liquidity
SK Telecom exited the second quarter with KRW 1.79 trillion ($1.61 billion) of cash and marketable securities on its balance sheet. Debt-to-equity ratio improved to 41.4% from 56.8% in the year-ago quarter.
Capital expenditure increased to KRW 559 billion ($503 million) from KRW 297 billion in the year-ago quarter.
Our Analysis
SK Telecom continues to be the leader in the domestic wireless market. We believe strong smartphone offerings, 3G network expansions, the launch of 4G networks and the cloud computing business will fuel the company’s future growth. SK Telecom expects to exceed its 10 million smartphone subscriber target by the end of the year. Further, the sale of Apple Inc.’s (AAPL) iPhone and iPad would boost its revenue and profits.
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. Additionally, SK Telecom is continuously investing to improve its network visibility, which is increasing its cost of operation. 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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